Thursday, June 21, 2012

The Debtors and the Savers 2012

Like Dust in the Wind

There are 31,530,000 seconds in a year. A thousand milliseconds in a second. A million microseconds. A billion nanoseconds. And the one constant, connecting nanoseconds to years, is change. The universe, from atom to galaxy, is in a perpetual state of flux. But we humans don't like change. We fight it; it scares us. So we create the illusion of stasis.

We want to believe in a world at rest—the world of right now. Yet our great paradox remains the same. The moment we grasp the now, that now is gone. We cling to snapshots, but life is moving pictures, each nanosecond different than the last. Time forces us to grow, to adapt, because every time we blink our eyes, the world shifts beneath our feet.

Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve.
–Tim Kring

Prices change. Don't they? Yes, of course they do! We don't always like it when prices change, but they do nonetheless. And why do prices change? Because values change! That's right, I'm talking about the way humans value things relative to other things. Relative values change constantly, and because relative value is a subjective choice made by each individual, what actually changes is demand.

I remember back in 2008 BlackBerries were all the rage. First generation iPhones were a little buggy and RIM (the maker of the BlackBerry) was rocketing toward $150. Both RIM and Apple were around $140 at about the same time. Today iPhones are cool, RIM is $10 and Apple is $577. Demand changes, relative values change, prices change. We don't always like it when things change, but they do nonetheless.

So why are some people so stuck on that old objective cost theory of value? One thing I have learned through writing this blog is that these people in particular, when they come across my blog, seem to be the most obsessive about "debunking" me. Yes, I'm talking about our old Marxist frenemy Ash. In the first draft of this post I had links to a couple of others as well, one who wrote something like Debunking FOFOA and another who devoted no less than six posts to the cause. But there's really no need to look any further than everyone's favorite Marxian with his ten posts and counting. He has an ongoing series over at "The Automatic Earth" devoted to debunking Freegold!

Marvin the Marxian

The Marxian View

Ashvin Pandurangi: "This series was a comprehensive attempt to debunk the [Freegold] theory by attacking its foundations, which range from Hegelian idealism to the (more concrete) marginal utility theory of value, and by replacing those foundations with what I believe to be more solid ones. Among these were Marx's theory of capitalism, spanning his concepts of surplus value, rate of exploitation, over-production and realization of value…"

In my 2010 post, The Debtors and the Savers, I explained the "Marxian" view of class struggle like this: "Simply put, Marx says it's the rich versus the poor. According to Marx the rich exploit the poor to get themselves a "labor-free income", which spawns a class struggle." This flawed perspective makes it impossible to understand Freegold, which is perhaps why they are so driven to debunk it.

Hegelian Idealism

With the correct delineation being the debtors and the savers (aka the easy money camp and the hard money camp), Freegold simply explains how, with the termination of the $IMFS, what remains is a system in which these two camps will no longer be in a perpetual state of monetary conflict. This is what Ashvin dubs Hegelian idealism; the idea that mutually beneficial coexistence between those whose innate tendency is to net-produce (produce more than they consume) and those who prefer easy money through borrowing, taxing and printing is even possible. His argument that it is not possible boils down to "they" (the evil ruling elite) will never let it happen.

Marginal Utility Theory of Value

Simply stated, the Marginal Utility Theory of Value which Marxists object to is really just the subjective view of value which I described at the top. They prefer Marx's objective view of value which says that value flows up through the costs embedded in the supply side rather than down from the subjective choice of the end user. And while Marx has been thoroughly discredited in economics, this objective view of value persists because it fits the "exploitation of the workers" theme that is so popular among impressionable young minds and scary doomers with batshit-crazy worldviews.

Which brings us to Ashvin's "more solid" foundations of Marxian "surplus value, rate of exploitation, over-production and realization of value."

Surplus Value

In this view, surplus value comes only from the Capitalist's exploitation of workers, be it from selling goods back to the workers for a price higher than the value (value being the cost of production paid to the workers), or from lending to the workers for interest or rent (labor-free income).

Rate of Exploitation

The rate of exploitation, as you can imagine, is simply the rate of surplus value accumulated by the Capitalists at the workers' expense. So if surplus value is the stock, the rate of exploitation is the flow.


Here's a quick excerpt from on over-production:

The real problem when goods lie on the shelves is that no-one can afford to buy the commodities; in other words “over-production” should really be called “under-consumption”.

In another sense however, the term “overproduction” is valid; but it is not goods and services which have been over-produced, but capital.

During a boom period – the rising phase of a capitalist crisis – profits run high and a mountain of fictitious capital is built-up by speculation and borrowing for unwarranted future expansion. All this fictitious capital has to be fed by the surplus extracted from workers and this grows to be more and more of a burden on the backs of the workers until profitability can no longer be maintained, and slump takes over.

Realization of Value

Again from

Realisation is the transformation of something from an ideal or potential form to an actual or material form. Realisation of value is the conversion of a profit or payment in the form of a surplus product or credit into money form.

Commodity production is based on the production of a product which the producer themself does not need, on the basis that their own need can be met by exchange or sale of the surplus product. In particular capitalist production can only complete the cycle of capitalist reproduction when the labour power is used, the product sold and paid for.

The beginnings of crisis often lie not so much in the failure to produce a surplus as in the failure to realise surplus production.

Are you starting to get the picture? These guys don't like the concept that value is in the eye of the beholder. They need value to be an objective metric in order to explain how the Capitalist exploits the worker. How the rich exploit the poor. How the bourgeoisie exploit the proletariat. From my 2010 post, here are Marx's classes in his version of the class struggle:

Marx's classes were:

1. Labour (the proletariat or workers) - anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) - anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.

And here is my corrected delineation:

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The easy money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.

Some of my readers thought this was my most profound post. Others picked up on my theme and wrote their own articles about "the debtors and the creditors" thinking they had corrected my obvious error. It wasn't an error. It was intentional. The Debtors and the Savers are the two inherent camps. They are not, and should not be, direct counterparties! More on this in a moment.

In Time

In The Debtors and the Savers I posted a very short version of a forgettable movie which helped make the point that individual members of the two camps are not as obvious as the superficially rich and poor. In fact, many in the West who are living like kings are actually up to their eyeballs in debt.

For this post I'd like to direct your attention to the movie In Time starring Justin Timberlake and Amanda Seyfried. It's a much less forgettable movie than Tiger's Tail, so check it out. Here's a two-minute trailer:

The premise of the movie is that time is the currency. And since time passes automatically, that’s like inflation. If you just sit on your currency doing nothing, it will leak away with time. In the movie, when you run out of currency, you run out of time and you drop dead on the spot. Most of the people live in the ghetto and they never have more than a day or two at a time, so they have to keep working just to stay alive.

Then there are the rich people who have eons of time. You can literally live forever in this world if you accumulate enough currency which is also real time. And the rich get richer not by producing lots of good stuff, but by loaning their surplus time to the poor at usurious rates.

The story is told from the perspective of the poor, but from another perspective it really drives home the point that wealth is best kept not mixed in with the transactional currency by relying on debtors' servitude. In the movie the rich could only live forever as long as the poor lived hand to mouth, always working, producing, and never getting ahead to the point where becoming a consumer was an option. So the wealthy relied on the production output of poor debtors for their wealth which, in this world, was an endless life of luxurious consumption.

But as a net-producer (one who produces more than you consume) that’s not the best way to store your purchasing power. If you could pick a counterparty for your future, would it be a debtor who lives hand to mouth always on the precipice of bankruptcy, or a fellow net-producer? How about if you could choose between either all of the debtors as your counterparty, aggregated by a government which has every incentive to debase your savings, or all of the net-producers/savers with a 5,000 year track record of their innate drive to net-produce and save for the future? Which would you choose if such a choice existed?

This film is a classic illustration of the popular "Marxian" view of perpetual class struggle: exploitation of the workers. The wealthy live the good life consuming as much as they want on the backs of the indebted poor who must slave away producing just enough to stay alive, plus some surplus for the wealthy to consume.

But is this reality?

With the proper perspective and a little quiet contemplation it becomes obvious that, today, we highly indebted Westerners have a much higher living standard and luxurious rate of consumption than the net-producers of the world. Those supporting our lifestyle are not indebted to us—it's the other way around. And other things become clear as well. Like that credit (debt) is demanded by the debtors (remember, human demand drives everything), not forced upon them. And that banks, whose job it is to extend credit (aka easy money), are actually in the easy money camp along with the debtors. More on this in a moment.

The Mungerian View

Over on the other side of the coin we have Mungerian paperbug Capitalist and fair-weather friend to the "goldbugs" (a term with which I cannot identify), Izabella Kaminska [1], who, after "enduring" a few tweets from Freegolds among others, thought she schooled her buggy friends with a two-part series creatively titled, Debunking goldbugs.

I say she's the other side of the coin because Izabella thinks the savers owe it to the debtors to be their direct counterparty and earn some labor-free income via interest which the Marxians call exploitation. And I called her a Mungerian paperbug in honor of Charlie Munger because she sounds just like Munger and the Dingbat from my post A Winner Takes the Gold. Remember that Charlie thinks you’re a jerk if you hoard gold? Well Izabella says you're a selfish, anti-social cheat.

She even tries channeling John Locke's reasoning into an argument against hoarding gold with this clever quote from the conveniently titled

Suppose I have twelve loaves of bread, and you are hungry. I cannot eat so much bread before it goes stale, so I am happy to lend some of it to you. “Here, take these six loaves,” I say, “and when you have bread in the future, you can give me six loaves back again.” I give you six fresh loaves now, and you give me six fresh loaves sometime in the future.

In a world where the things we need and use go bad, sharing comes naturally. The hoarder ends up sitting alone atop a pile of stale bread, rusty tools, and spoiled fruit, and no one wants to help him, for he has helped no one.

Here's some John Locke from my post dealing with Munger and the Dingbat:

Furthermore, gold is the most socially responsible valuable good to "hoard" (save), which is another reason it is the focal point. John Locke wrote way back in 1690 that it is "foolish and dishonest" for men to hoard up things of short duration, things that are consumed in the support of life, or any more than one can personally use from the common stock of perishables and truly useful supports of life. This, Locke wrote, is how man came to value durable things of no industrial worth, that "he might heap up as much of these durable things as he pleased… and keep those by him all his life," because "he invaded not the right of others."

Of course you don't want to hoard perishable goods like loaves of bread! That's just silly. But it is an important concept to understand. So why hold someone else in debt rather than simply hoarding a durable thing of no industrial worth, as the real John Locke recommends? Well, Izabella's argument is that you are better off if you lend your surplus to someone so that you can later ask for it back. She calls this the "favour system" and she says that if you hoard gold then you are "opting out" of this "collaborative process".

But how does holding someone else in your debt make it more likely that you'll be able to redeem your six loaves than if you simply sold them and bought a durable thing that is extremely likely to be considered valuable by other savers in the future? In fact, it doesn't! And Izabella addresses this issue.

She says that you're better off not holding a specific person in debt because he might die, but rather holding your government's debt! She says the "sovereign lord" provides the vital service of credit aggregation and central clearing (which is true for the transactional currency) and thereby creates "fungible" and "non-perishable" debts for saving! (At least she didn't go so far as to call government debt infinitely divisible, discreet, transportable and pretty.)

But even though government debt may be relatively fungible and (nominally) non-perishable, you're still at the mercy of the government should it decide to debase your savings. Izabella says this is not only a good thing, but it is your social duty:

Luckily for the system, the sovereign can expand or contract the number of debts that circulate within its community to match the current production/wealth profile of the nation and keep the system in check.


You could say, the sovereign borrowed from the rich (those with surplus wealth which will otherwise perish) and redistributed the wealth according to the needs of the community. Since everybody received something, including the ‘rich’, a tax (cancellation of debts outstanding) kept the system in balance. Very MMT.

What she's saying here is that too much savings is a burden on the system and the government provides the valuable service of debasing burdensome levels of savings down to a socially healthy level. How does that make you feel? And yeah, Izabella is apparently quite fond of MMT, which is why this part reminded me of someone else who once said that savings above "a certain level" are a "burden". I'm talking about our very own MMT Greg:

I don't disagree with your idea of saving but it cannot be done to much of a degree on a macrolevel. There must be someone to consume your oversupply after a certain level. Savings is a burden when excessive. How to predetermine the "right" amount ? Dont know. How to know it when you see it....... right now. We have OVER produced a lot of things.

As Mosler is fond of saying, economics is the opposite of religion, in economics it's better to receive than to give. If you produce extra and [loan] it to me so I don't have to produce it myself .....THANKS is the proper response.

In part 2 of her bug schooling affectionately titled Gold’s Anti-Social Behaviour Order, here is Izabella expressing the same sentiment as MMT Greg regarding excessive savings being a burden on the system (my emphasis):

…there’s no denying a promissory note is a much more practical unit of exchange and store of value than a bar of gold.

The problem with promissory notes from a goldbug’s point of view, however, is that a sovereign always has the means to “manipulate” supply so as to regulate the system’s excesses and deficits for the benefit of the group: bringing their purchasing power of the notes down when there is an abundance of goods to notes “by printing more”, and bringing their purchasing power up when there is a deficit of goods to notes.

This puts the interests of the group above those of the individual, because — in the words of goldbugs — it “steals” wealth from individuals.

These regulative processes of course are necessary. They’re a correcting mechanism that ensure efficiency and curb wasteful production. And, as we’ve stated before, it is anticipated that promissory notes are eventually extinguished via the payment of taxes. In a perfect system the sovereign should provide for you, once you’re no longer productive anyway.

In other words, it is good that the government can reduce "excessive savings" through debasement. In fact it is the government's job to do that, just like it is the government's job to take care of you when you get old according to Izabella. And here is "gold's anti-social behavior" in a nutshell:

What gold thus represents, we would argue, is an opt out, and a cheat, from participation in the group correctional process. Its existence undermines the sovereign’s ability to regulate the supply of debt to match the needs of the system. In a situation where there are too many goods, and too little monetary sovereign debt, the sovereign clearly needs to create more sovereign ‘debt money’ — and debase the store of value — to encourage more of this overproduction to be used and efficiently allocated.

Since gold can’t be “debased”, it begins to attract investment from those who would rather not consume today’s overproduction (and via that sharing wealth and ‘favours’) but continue to hoard these for the purpose of individual wealth accumulation.

In the opposite scenario, when there aren’t enough goods to satisfy sovereign debt claims and the sovereign intervenes by contracting the money supply — by making it extremely expensive to borrow but extremely attractive to invest in the production of goods — gold attracts investment from those who would rather not delay consumption until tomorrow for the benefit of the community.

Gold in this way symbolises humanity’s selfish streak.


So while gold may be a workable underlier for a redemption option, this doesn’t change the fact that at the heart of the system it is faith and faith alone which holds everything together. Whether that faith is reflected in a sovereign’s ability to manage the economy on behalf of the group, in the sovereign’s guarantee to honour a gold option, or faith in the gold god himself… faith is the constant. Not gold.

What’s more, while gold encourages anti-social behaviour and hoarding in individuals, a fiat-based system encourages the very opposite: sharing, distribution, collaboration and cooperation.

And then she concludes with two options:

Which leaves two possible plans out of the crisis:

1) The goldbug plan: based on encouraging everyone to hoard ever greater amounts of natural wealth for themselves and themselves in what is ultimately a commodity you might never be able to eat.

2) The fiat plan: based on encouraging society to trust each other again, and via that storing, redeeming and returning favours until the system’s ails are eliminated.

This is obviously someone with both feet firmly planted in one camp telling the other camp what they should do. Almost reminds me of that famous quote about sharing and unselfishness by… hmm, I forget, was it Jesus? "From each [producer] according to his ability, to each [consumer] according to his needs." Funnily enough, here's what Wikipedia says about that quote:

In the Marxist view, such an arrangement will be made possible by the abundance of goods and services that a developed communist society will produce; the idea is that there will be enough to satisfy everyone's needs.

Now compare that idea with Izabella's post one week later titled The end of artificial scarcity:

It’s an environment that we have argued requires a new paradigm for the world. A transition towards a steady-state where money has no choice but to depreciate because its role as a store of value has been made redundant due to the general abundance of goods in society, brought about by technological innovation and efficiency. In a post-scarcity environment there is no need to delay or hurry purchases, or to even have a store of value. You use only what you need.


And when that happens money itself will die, because who needs to save for their old age, if over the time the system is going to provide ever more “stuff” you need for free or almost for free.

Not convinced?

We’d argue the signs that this is happening are already appearing.

Да здравствует революция indeed!

In truth, Izabella's whole argument in the two goldbug posts was based on a flawed premise considering that they were spawned by her frustration at interaction with "Freegolds" and a few of my other "regulars" on Twitter rather than with true goldbugs. That premise was her assumption that they (we) have, in her words, an "utter and complete hatred of the so-called paper money system."

The truth is that we view the primary and secondary functions of a monetary system separately. Paper money (and electronic currency) is, in fact, the best thing since sliced bread in the transactional role. Here's a quote from our very own Aristotle describing his personal journey and discovery that paper money is not only good, but necessary, back in 2000:

"Going in, I was a charter member of the Goldhearts club [aka a goldbug], and I emerged even more excited about the prospects of Gold than before. The future for Gold is bright, and it is rapidly approaching in the manner I laid out, if I'm reading the signs correctly.

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free."

Freegold is not about making easy money a little bit harder. On the contrary, it is about the debtors and the savers coexisting without the perpetual monetary conflict embedded in all prior systems. (See The Debtors and the Savers 2010 for more about this perpetual conflict.)

Izabella has probably never heard of FOFOA's dilemma. Here it is, from The Return to Honest Money:

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

And from that same post, here's my definition of Honest Money: "My definition is that honest money is simply money that does not purport to be something it is not." As I explained in that post, money's two main functions, medium of exchange and store of value, are actually fulfilled by two different media, even today: a primary and a secondary medium of exchange. Today (and in Izabella's ideal world) that secondary medium of exchange is debt denominated in the primary medium.

The quote at the top of my blog reads: "Everyone knows where we have been. Let's see where we are going!" Well, everyone knows we have been where debt is the systemic store of value, its "tier 1" reserves, and Izabella doesn't seem to be arguing the inevitability that this is also our future. Instead she seems to be arguing that it is simply the better of two choices—the socially responsible and unselfish thing to do with your savings. But is she correct? Is debt really better than gold for the overall society?

In order to answer this question I think we need to look carefully at which one is better from two different perspectives; from the perspective of the savers and from the perspective of society at large. I'm attributing the perspective of society at large to that of the debtors as well. As I pointed out earlier, Izabella is clearly in the debtor camp. This doesn't necessarily mean that she's in debt. It simply means that she's in the easy money camp as opposed to being in the hard money camp—what she thinks of as "the goldbugs".

She may in fact have savings, but as she says, she "puts the interests of the group above those of the individual" and she's happy to do her civic duty of letting the government debase her savings when necessary. This puts her firmly in the debtor camp. And being in the debtor camp, she is obviously arguing for the benefit of the overall society or economy. So that's why I say I'm attributing the perspective of society at large to that of the debtors as well, because they are apparently one and the same.

Now would probably be a good time to restate that "the debtors and the savers" is a dichotomy, not a moral judgment. It is a way of viewing the world in two camps that corrects Karl Marx's most enduring (and harmful) legacy. Neither camp is better than the other any more than women are better than men. It is simply a model for understanding how two groups with apparently different innate tendencies have always been placed in conflict with each other throughout history due to the emergence of monetary systems. If you haven't read The Debtors and the Savers yet, now would be as good a time as any! ;)

From the Viewpoint of the Savers

Is money positive or negative equity? Izabella correctly implies money to be fungible claims on each other's goods. And she goes on to explain that these claims can sometimes be too numerous "when there aren’t enough goods to satisfy" all of the claims. This, she explains, is when the government steps in and makes adjustments to keep the number of claims roughly in line with the number of goods.

So when we look at money (or claims against the physical plane of goods and services) in aggregate, we can clearly see that hypothetically doubling or tripling the number of claims actually reduces the specific amount of equity in the physical plane each fungible claim represents. It is for this reason that I like to think of money in aggregate as negative equity, and also why I like to delineate between the monetary and physical planes.

Being a claim, it is merely one half of a physical plane barter transaction. You sold a good or provided a service in the physical plane and received a claim in the monetary plane. Once you redeem that claim for a good or service in the physical plane you will have completed a full transaction. But until that time, while you are holding money, you are only halfway there. And for as long as you remain in this barter purgatory, you are exposed to the effects of your claim being negative equity which I just described.

(I used the term "money" above because if, hypothetically, the gold stock could be doubled or tripled quickly enough, the same principle would apply to gold.)

Clearly it is the well-known exchange rate between monetary claims and the physical plane—as opposed to some intrinsic or cost-derived value—which gives these claims their value. It is the observed completion of other transactions today, yesterday and last week, which informs us of what we can expect to get for the claims we are holding. But as savers, we intend to hold these claims for a long time, perhaps even decades, so we want some sort of additional reasoning as to why they will hold this present known value for such long periods of time.

Of course very few savers hold the primary medium of exchange for long periods of time. We hold what Mises called secondary media of exchange. And the world is full of things other than "the common stock of perishables and truly useful supports of life" which we can hold (hoard) for this purpose, from stocks to bonds to antiques, classic cars or even baseball cards. Here is Mises from his book Human Action explaining the concept of secondary media:

A first-class bond is more marketable than a house in a city's main street, and an old fur coat is more marketable than an autograph of an eighteenth-century statesman. One no longer compares the marketability of the various vendible goods with the perfect marketability of money. One merely compares the degree of marketability of the various commodities. One may speak of the secondary marketability of the vendible goods.

He who owns a stock of goods of a high degree of secondary marketability is in a position to restrict his cash holding. He can expect that when one day it is necessary for him to increase his cash holding he will be in a position to sell these goods of a high degree of secondary marketability without delay at the highest price attainable at the market.


Consequently there emerges a specific demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specific demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the resultant of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render.


One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them—in a roundabout way—for paying or for increasing cash holdings.

Claims employed as secondary media of exchange have, because of this employment, a broader market and a higher price. The outcome of this is that they yield lower interest than claims of the same kind which are not fit to serve as secondary media of exchange. Government bonds and treasury bills which can be used as secondary media of exchange can be floated on conditions more favorable to the debtor than loans not suitable for this purpose. The debtors concerned are therefore eager to organize the market for their certificates of indebtedness in such a way as to make them attractive for those in search of secondary media of exchange. They are intent upon making it possible for every holder of such securities to sell them or to use them as collateral in borrowing under the most reasonable terms. In advertising their bond issues to the public they stress these opportunities as a special boon.

I included all of that long excerpt so that you could see how he explained, in his own words, the concept of a focal point in this secondary media role. Many items will suffice as a secondary medium of exchange, but the more an item is used in this function, the more value it derives from this particular function, over and above the value from other uses: "…their exchange value is the resultant of two kinds of demand: the demand related to [1] their services as secondary media of exchange, and the demand related to [2] the other services they render."

And then you probably noticed that his search for the focal point led him to government bonds. I figured this would make Izabella smile if she's still with us. So why do you think he didn't mention gold as one of the secondary media of exchange? Perhaps it was because, when he wrote the book in 1940, gold was the primary medium of exchange.

I think I'm now at the point where I can narrow the focus of the discussion substantially. Izabella and I are both talking about government debt versus gold as the two main competitors to becoming the focal point store of value (aka secondary media) of the future. So let's just stipulate that and move on. Also, I think we can both agree that government debt has been the official (and focal point) secondary medium of the recent past. Furthermore, Izabella says that between government debt and gold, gold is the more selfish choice. I'll stipulate to that as well.

In a moment we'll investigate whether the "selfish" choice is the better one for the economy as a whole, but in this section we are looking at it from the "selfish" viewpoint of the savers. Izabella admits that the government debases its own debt, which, taken along with her labeling of gold as the "selfish" choice, leads me to believe that she would be okay stipulating that, at least on the surface, gold appears to be the better choice from a "selfish" saver's perspective. So then the only question remaining is whether or not gold actually is better as it appears to be. Izabella says no.

Izabella warns "us" via Twitter: "The problem with gold (imho) is that it isn't a scarce commodity. You have to physically make it scarce by hoarding it."

The only problem with her tweet is the word "problem". Other than that, she's absolutely right! There are 170,000 tonnes of gold out there somewhere, 60 times annual production—that's a 60 year "supply overhang" in commodity terms—and yet the flow today is barely more than what's coming out of the ground. That's not a problem. That's absolute proof that gold is far more valuable than its commodity price today!

Gold’s value really comes from intergenerational Giants who have no need to ever sell it. They really just net-produce and net-produce and they do it willingly for more and more gold, and then just sit on that gold until they die and pass it on to the next generation. And they will keep doing this no matter what the $PoG does. They're not buying it for its weight, but for proven long run currency exchange value! But if there’s no flow for them to get some, then they have to buy things like extra castles and cars and stuff that drives up prices and drives down everyone else’s purchasing power.

So it’s better for everyone if there’s a steady flow of gold. Remember how Another said they justified the "gold as a commodity" (strong dollar) trade because they thought it would induce the mining industry to produce greater and greater quantities of gold?

Date: Mon Feb 16 1998 14:40

Now, back to gold. The deal: you may stand your army for us, in return, "oil will back the dollar if the dollar is made strong by gold" "in as much as our people may replace the lost value of oil with gold" "in as much as we will produce oil in amounts to equate a gold/oil/dollar ratio close to that which existed at our previous agreement in the 70's" And, pray tell, how does the USA make the dollar strong in gold ? The BIS leads the creation of a paper gold market that will lower the world price of gold to the extent that it remains above "production costs".

Guess what, it worked! Contrary to all expectations of oil shortages, inflation, debt collapse and what have you, It Worked! But, there is one small problem?

The BIS and other various governments that developed this trade (notice I didn't use conspiracy as it was good business, as the world gained a lot), thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? or 5. total default! As the Asians started buying up everything last year ( 97 ) , numbers 5 and 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also.

So it’s good for everyone if there’s a steady flow of gold and a stable price for the Giants. These Giant super-producers (including oil producers) will produce the most stuff and leave it on the economic table for us without running up the prices of things we need to buy as long as gold is flowing unrestricted. And also, when CBs and nation-states start valuing gold the way these Giants do, we won’t have the mines running at full steam trying to add more to the supply. First of all they'll want the price to stay steady for the economic benefit net-producers bring to the table, and second of all they'll want their own treasure to hold its value. And to the nation-state, gold in the ground is a treasured reserve as well as gold in the vault.

It may seem counterintuitive, but the flow of gold from the mines will eventually be controlled or regulated by the government and, in most cases, will be just enough to keep the miners economically viable. This is why I view mining shares as a terrible Freegold play. Today the flow of physical gold is mostly from the mines to the savers. In Freegold, the flow will be almost entirely from the above-ground stock, from one saver to another.

As I wrote about in Glimpsing the Hereafter, gold is like a closed circuit for the savers, isolated from the transactional currency system which is used by everyone, debtors and savers alike. Some might call it selfish. I can live with that. Here's a taste from that post:

I think that if we look closely at how the debtors use the fiat money system with and without the assistance of the savers, it will become clear that we will all be better off with a bifurcated monetary system. And it will certainly be clear that the savers have no business taking debtors on as the counterparty to their savings.


So gold has kind of a double float. It floats with the inflation/deflation of everything else. And then it also floats in a closed circuit consisting only of savers (and their "hoard/dishoard" choices), of whom the majority (measured by value stored) are intergenerational giants.

The way the gold market works today is a little different. It is kind of a flow within a flow. On the surface, anyone can very easily buy exposure to the price of gold. In fact, this "exposure" is all that most Westerners want, including traders, speculators, goldbugs, hedgefunds, anykindafunds, banks, you name it. And most of this group is firmly in the debtors (easy money) camp. But underneath this superficial flow is the physical flow from the miners and physical gold pukers in the West to the true savers like the Giants in the oil-rich Middle East and net-producing Asia.

The key to keeping this gold market humming along, however, is that anyone who asks for physical in any size has to get it. But those who can afford real size also know that hogging the flow and stressing the system is not the best way to get what they want. So here's what we know. In 1997 the LBMA leaked to the Financial Times a paper gold clearing volume far greater than anyone imagined. This was the same time that Another said "the Asians started buying up everything" and that "the CBs started selling into this black hole of demand."

About two years later we heard from the European CBs through the WAG (the Washington Agreement on Gold) also known as the CBGA (the Central Bank Gold Agreement). The agreement came on the heels of the euro launch and, even though it was announced in Washington DC during an IMF meeting with Larry Summers and Alan Greenspan present, it was only between the European central banks. It stated very simply the following:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.

3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

5. This agreement will be reviewed after five years.

Two years later, in 2001, gold began a relentless climb in dollar-denominated price of about 18% per year which continues today:

And then, in 2009, the CBs in aggregate became net-buyers of shiny rocks:

In 2011 the LBMA released a survey revealing not just the clearing volume it began reporting in 1997, but the total daily turnover in LBMA bullion bank gold credits. From my post Once Upon a Time:

And that's because the price of gold today still does not reflect the physical flow of gold that would normally be a function of arbitrage, with speculators transporting gold to where its purchasing power is highest. The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every ounce of gold that has ever been mined in all of history changing hands in just the first three months of 2011. That's what the LBMA members, themselves, voluntarily reported. And that's a lot of paper gold that is still sterilizing the economically beneficial price mechanism that physical gold would otherwise be transmitting.

Yet things are changing, even today. That's what the rising price of gold since 2002 tells me. This is about much more than just a rising price. It's not just about a gold or even a commodity bull market. As FOA said, "it has everything to do with a changing world financial architecture." Gold's function in the monetary system is changing. And as FOA also said, "None of the other metals will play a part in this."

Gold will return to its pre-1922 function, but that does not mean we will return to a pre-1922 gold standard. This post is not about the merits of the gold standard. It is not about praising the hard money camp’s decision in 1445 over the easy money camp’s decision in 1922. It is about the choice of the Superorganism over the management of men. The pre-22 gold standard, although it allowed gold to function, still carried the same flaw I point to so often; that using the same medium for exchange and savings leads to regular recurring conflicts between the two camps.

Then in 2012 (just a couple of days ago actually), the US FDIC announced that gold bullion is up for consideration as an equal to government debt with a zero risk weighting. And just yesterday Ben Bernanke signaled his subconscious support for this measure by choosing to wear a gold tie. ;)

I'm sure this is all very insignificant information to a Mungerian paperbug like Izabella Kaminska, but let's just think about this for a second as it compares to her racehorse: government debt.

From a saver's perspective—one who wants to hold claims for a long but unknown, unspecified amount of time—debt is attractive in a falling interest rate environment. This is because debt usually has a specific maturity date and yet savers can't know precisely when they'll need their money. So debt is appealing as long as there is a liquid secondary market with plenty of upside to run.

This is most obviously true when interest rates are allowed to be set as high as necessary by the unfettered marketplace and then they begin to fall for one reason or another. As interest rates fall, old promissory notes signed when rates were higher become more dear. Debtors seek refinancing while savers can easily unload their saving without losing purchasing power.

This was the case from 1981 to present. Interest rates fell (for one reason or another) from around 20% down to 0%. Today there's not a whole lot of room for them to fall any further except for maybe going negative, and then you're just losing principle. So there's not much upside for debt today like there was in 1981, but with ZIRP there is a whole lotta potential downside.

Not only that, but in this case we're talking specifically about government debt. And what are our choices today? We can choose between almost no interest (actually negative real interest) from a government which is openly debasing its currency and diluting its bond market, or a slightly higher interest rate from a government with serious budget problems and some non-zero likelihood of default. That's quite a choice for a secondary medium with limited upside and unlimited downside!

Then there's gold, with limited downside and lots of upside potential. It's a tough sell to savers who have been swimming in a sea of Mungerian paperbuggerdom their whole lives, but not to the true Giants who already hold 170,000 tonnes and aren't letting it go at today's paper gold prices. As I have already pointed out, the intergenerational Giants who hold a great deal of this physical gold have no need to ever sell it. This is a key concept you might want to stop and ponder.

Lastly, I want to mention the nominal savings argument. Government debt, especially a government like the USG which can print its own currency, is at least nominally safe. If you save a million dollars you'll get a million back at the end of the day. The only question is what will be the purchasing power of those dollars when you need them. Well the same nominal argument applies to gold when applied properly. If you buy 500 ounces of gold you will still have 500 ounces of gold at the end of the day. The only question is what will be the purchasing power of those ounces when you need them. See?

So, not that I think I have convinced Izabella of anything, but just so that we can move on, let's agree that from the viewpoint of the savers—perhaps even a selfish viewpoint if that helps—who want to hold fungible "claims" on goods and services for a long but unknown/unspecified amount of time, gold beats government debt today hands down. If you don't agree then please return to the top of this section and read it again. If you agree, let's move on to the viewpoint of the debtors, aka the viewpoint of the economy as a whole.

From the Viewpoint of the Economy as a Whole

In the simplest terms, I like to refer to the savers as net-producers. All this means is that a saver consumes less than she produces. It's really the simplest way to differentiate the debtors and the savers. In general, the debtors either consume as much or more than they produce by borrowing, taxing or printing money. Of course everyone consumes, and everyone produces to one extent or another. But at the margin, debtors consume and savers produce.

My delineation does go a little deeper than this, though, to include monetary preference. That's why I use "the easy money camp" interchangeably with "the debtors". The easy money camp prefers easy money for various reasons including not just the ease of repaying debts but also that easy money may be how they make a living. And this is why I put the banking industry, including Wall Street, in the easy money camp along with the debtors.

Banks, of course, are often the creditors to the debtors. And that's why it's the debtors and the savers rather than the debtors and the creditors. The debtors and the creditors are in the same camp together! As I said earlier, it's not a good idea for the savers to be counterparty to the debtors. But, of course, Izabella Kaminska disagrees. She thinks it's the savers' civic duty to be the debtors' counterparty.

In thinking through which is best for the economy as a whole, it is important to understand that the excess money earned from net-producing does not disappear no matter how it is saved. It is always passed along to someone. The money remains in the economy. Hoarding gold does not deprive the economy of your excess earnings any more than buying government debt does.

If you choose to save in debt, your money is passed on to a debtor. A debtor's natural inclination is to net-consume (consume at the margin) rather than net-produce (produce at the margin) if at all possible. So by saving in debt you actually encourage a natural predilection to produce less since you enable specifically those people with the tendency to borrow rather than produce. In the long run you end up with high unemployment.

But in Freegold, the money that comes from net-producing is passed on to other net-producers who choose to sell their gold for one reason or another. These "dishoarding" net-producers (savers) are either going to use that money for consumption or they will use it for productive purposes like starting or expanding a business. All of these uses tend to employ someone. And if the easy money camp is managing the currency prudently, some may even sell their gold for money just so they can lend it for productive purposes, or invest it in promising ventures.

Debt-financed consumption only expands the total amount of debt and the ranks of the unemployed. The idea that debtors borrowing to consume can sustainably raise employment levels is pure hogwash.

So in no uncertain terms, Freegold is the key to true full employment! Debt as an alternative to gold ultimately leads to high unemployment! Izabella, Munger and the Dingbat are all dead wrong!

The Winds of Change

Are you enjoying high unemployment yet? The $IMFS is, even though its leaders will never admit it. One of the Fed's (quote-unquote)
"mandates" is full employment and Obama touts (quote-unquote) softening unemployment while the number of PhDs on food stamps has tripled.

Everyone would enjoy full employment, right? The debtors, the savers, the economy as a whole? Well, maybe everyone except the welfare junkies. And who's the biggest welfare junkie of them all? The only hint I'm gonna give you is look at the picture at the top of this post. See? Welfare junkies don't always look like this:

The flight plan to global unemployment was filed in 1922 when they came up with the brilliantly circular idea of using credit as the store of value foundation for credit. Of course global unemployment is a fantasy island destination, so here we have had an emergency hard landing on the island of reality with a brief layover before heading toward our new destination, change.

Banks can provide all the credit the debtors need beyond their ordinary income (and that includes governments). There is no fundamental economic need for the savers to contribute their surplus earnings through debt securitization as a store of value. All that does is encourage unemployment.

The savers have no business being counterparty to the debtors. A German economist, uber-easy money camper and social justice activist who wrote the book on easy money a century ago even said as much. From his book cleverly titled 'Free Money' on which John Maynard Keynes showered fulsome praise, here's Silvio Gesell:

"And it is clear that money cannot be simultaneously the medium of exchange and the medium of saving - simultaneously spur and brake.


I therefore propose a complete separation of the medium of exchange from the medium of saving. All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!"

And a fun quote from Keynes:

"I believe that the future will learn more from Gesell’s than from Marx’s spirit."

The Debtors and the Savers is simply a common sense adjustment to the prevailing dichotomy of the Capitalists and the Laborers, or the bosses and the workers. It is a slightly altered lens with which to view the history of the world. The old lens has a bloody history of leading to dangerous and deadly confrontations. It will also prevent you, personally, from understanding Freegold early enough to profit from that understanding.

Of course all present goods and services get used in the present, but that doesn't mean that surplus value is only an illusion based on exploitation. Surplus value is very real, and savable through any length of time and in theoretically limitless amount. But not if you're using debt as the medium. Using debt, too much "savings" becomes a burden which is then dealt with one way or another.

Everyone will understand this eventually, although it may not specifically be called "Freegold" in the end. Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money.

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve."

FOA: "It has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, [and here's the all-important caveat] everyone that is positioned in physical gold will carry this storm in fantastic shape."


[1] Note to Izabella: When I use you in a post like this you shouldn't take it personally. I never expect to change a fixed mind. You were simply used as a literary device, so please don't take it personally. Or do… that could be fun!


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AdvocatusDiaboli said...

"Th Old Testament must f%^k with your head big time. if rules bug you"

you talking with me or with Mr.Mundell who hoped to finally get his toilette moved, if he only could engineer the Eu(ro)?

costata said...

Yes Skippy,

I'm talking with you. You idiot.

AdvocatusDiaboli said...

I wonder if Mr.Mundell even knows that not only the positioning of his toilett is regulated by now, but as well the toilett itself has to be certifite.
But wait, it gets even funnier, not just the toilett, but the shit taken for the simulation of the flushing for that certification is being regulated....

costata said...


Give us your thoughts on re-unification. Touch on the exchange rate between the currencies in your answer.


Onlookers leave us well alone. I want to have a chat with Skippy. Don't get in the middle of this Okay?

Jeff said...

Oil up nearly 6%. MTM day for them too?

Edwardo said...

What's the over under on the levitating duration of the latest EZ can kicking exercise?

Jorge said...

As a lurker who is trying to learn as much as he can, I'd like to better understand the consensus here regarding heavily - regulated Europe, because I've heard much the same arguments as AD is putting forth from others who have also lived in Germany.

Instead of calling him an idiot, wouldn't it be better to shut down his arguments? At least for the benefit of lurkers like us. :)

It does seem a bit hard to reconcile the cognitive dissonance between the Euro + Freegold, & European bureaucracy.

enough said...

I guess it will be Veuve Clicquot served at the MTM party after all and not Freixenet........

Aaron said...

Hi Jorge-

Unfortunately Skippy is a complete idiot. He has no argument to shut down. If he did, we'd be all over it.

Happy lurking!

JR said...

Hi Jorge,

Can you expand on this comment:

"It does seem a bit hard to reconcile the cognitive dissonance between the Euro + Freegold, & European bureaucracy."

I think a lot of the issue is the conclusory fashion with which propositions are put forth. We can't really disagree until we understand each other's opinions, otherwise we are just talking past one another.

That you see dissonance makes me wonder what you see? Can you help me understand what you mean?

JR said...

As long as its not Gruet.

Madame Clicquot Ponsardin, thank you for remuage.

Go bubbles too, buy American (even visit!!): Domaine Chandon, Domaine Carneros, Schramsberg.

AdvocatusDiaboli said...

what you wanna hear about the reunification? I am/was a Wessi with mixed feelings about that.
The EastMark was not convertible (never had been accepted) at western banks.
Despite that you could exchange them on the black/free market at about AFAIR 1:5~1:10
(Note: AFAIK amazingly that was also basically the price of gold (but that was not officially traded in the DDR)).
Then the wall fell. The Ossis somehow where fanatic to buy west products at whatever prices therefore travelling to the west (even buying comparable stuff). I guess a problem was that the Ossis never had a real feeling for pricing/money/business but enough of Eastmark.
The whole Eastern economy was still working but in horrible condition. But with the fallen wall things got even worse.
Now Mr.Kohl came in and things got a little bit out of control on what to do best. So politicians became pushed by the events.
The decision was taken to "unite" the DDR but the right word would be better to annex the territory.
Now the currency reform. How do you convert the currency of an economy that is not comparable to the western economy/finance?
Just as we all know, politicians are brownnosers and Mr.Kohl wanted to win the upcoming election: The decision has taken by random that the exchange rate on existing "savings" shall be fixed at 1:2 (AFAIR coinage was 1:1). So it was a huge one time present to the "currency savers" (the voters) but a deadly choice against the debtors (remaining intact companies).
Short time later: Ossis were dumb enough to vote/reelect Kohl for his deadly present. The remaining industry was bust. West industry was happy to sell stuff to the suddenly "rich" Ossis. Ossis now broke after their first consumption "experience" and western industry happy that eastern industry dead and sold on a penny of the mark, all in all paid by the wessi taxpayer and wessi "currency saver" -> voila storry told.
In order to try to lift the ossis economy still lots of (tax)money spend in e.g. (useless) infrastructure and hopeless startups, while western infrastructure brakes more and more down, even today. This is the basic storry and in case some Ossis are reading, I know, there are some exceptions starting in the east (e.g. in some parts of Sachsen, but thats the exception to the rule).
But the reunification storry is more a very special social/society storry, only very few parts are comparable to other historical events like they are viewed today at from the "western" mind.
Greets, AD

enough said...

Carneros produces my favorite REDS :-)


AdvocatusDiaboli said...

the more exact "official" version here (above was just my personal memory, but wikipedia did not show the winners&losers):

Gary said...
This comment has been removed by the author.
Jeff said...

Oil up 8%. What possible doubt could oil producers have about saving in fiat? That's stability!

victorthecleaner said...


oil up 8% is a pity. It means that the IMFS is happily alive and kicking.

On the other hand, there are a couple of short-term political effects (Iran embargo officially in effect from Monday, some industrial action in Norway, etc.). I am not aware of any reduction in Saudi supply, and so this *might* be short-term only.


Jeff said...

I discount the Iran effect, as that is old news. This kind of volatility can be dangerous to a price manager.

JR said...

Hi Gary (or do you prefer I refer to you by your other names?),

There is consensus that you think there is a contradiction in FOFOA's writing.

Apparently no one cares. It seems people are interested in what FOFOA thinks, but not so much interested in what you (or any of your other names) thinks FOFOA thinks.

Dante_Eu said...

All these twists and turns reminds me of what FOA said in his first Trail post:

We must view the world in a broad context, just as much as in a detail perspective. The larger perception can be just like looking at a river the valley from the ridge above. From far away it's easy to see what direction national trends are flowing. The whole body moves as one, always towards the sea. The problem comes when we get too close and interpret things using only a small river section in front of us. More often than not, the white water we see only hides a deeper flowing truth.

In like sense, national governments and society in general, are the same as those boulders and eddies in the river. Seen up close, they sometimes give the impression that the river is flowing up stream or sideways, when it's only one small section of a larger political will. The same is true in the modern gold markets. The largest part of the river could be flowing in one direction with an unstoppable purpose, but the various swirls and eddies make it look like it's going in circles.

So true back then but probably even more so today.

d2thdr said...

No Gary, You are wrong.

When you say,'Jorge, if you've been lurking for a while you will have noticed there isn't much dissonance at all, but when there is any questioning, it either gets stamped on or ignored altogether. Even if one agrees with the general principles of why gold is going to c.$55,000, you need to buy the whole shebang or you're viewed as a monkey. Such irony'

You may not have understood the whole premise of why gold is going to 55000. General principles? What general principles? There are no general principles. Freegold is Mandelbrotian Randomness.

Someone wise told me once,' its of no use having a head, you have to use it too.'

d2thdr said...

Just to help you appreciate the effort that goes into producing the essays on this blog, you need to remember;

Galileo and Copernicus was neglected by the church. Only when they died their theories were questioned. Darwin was considered a fool when he published his theories.

Edwardo said...

Okay, okay, I know can barely contain yourselves, so here it is. The over under on today's hot air exhalation from the EZ pol(ecat) contingent is one week. That's right, not including the weekend, that's five, count 'em, five trading days. Make your bets on whether the market levitating effects of the the latest EZ gambit wear off before or after next Friday, July 5th.

Blondie said...


When you state: ”So politicians became pushed by the events.“ and ”Just as we all know, politicians are brownnosers and Mr.Kohl wanted to win the upcoming election“ you are recognising that politics is an effect rather than a cause. The cause is the monetary system. Change the underlying monetary system to which they respond, and their responses will qualitatively differ. Thus politics is a sideshow, an effect rather than a cause.

The underlying monetary system has not yet changed, thus the political situation with all its accompanying rules and bureaucracy has not needed to change either. The euro has been constructed to function successfully in the new system. You will not see the benefits of its successful function until after the current system’s demise.

This is not the “widest” view available, but it is wider than the one you are currently employing, and thus why your remarks are roundly dismissed on this forum as purely sound and fury signifying nothing. Note that it is your view that is dismissed, and not yourself.

How can you reasonably seek to alter the consensus of this forum when you clearly do not understand it? It is one thing to understand and disagree, but quite another to not understand and loudly disagree anyway.

The biggest irony is that the very thing you want is the thing the euro will deliver in the aftermath of the change, and you will one day perhaps view Robert Mundell quite differently.

victorthecleaner said...

Not quite sure what to make of the European summit.

Apparently, banks will be able to get direct bailouts (bad -> this way, the German savers will never learn 'it'), but on the other hand, ECB may end up as the central banking regulator (-> good if they seize the opportunity).

Other facts: Seniority on the loans to Spain was watered down (the bailout fund does not have priority as it has in the case of Greece) -> bad, tries to repair 'credibility'

Still no systematic suppression of interest rates on government bonds (day-to-day fluctuations rather caused by hot money flow, nothing fundamental) -> good.


Alien said...

Seniority on the loans to Spain was watered down (the bailout fund does not have priority as it has in the case of Greece)

will bring the German savers to learn 'it'.

Interested people do know what's coming and also less savvy have a vague idea their "money" and entitlements are lost.
Sadly many are looking for socialism as a saver of last resort.

costata said...


Thank you for responding at June 29, 2012 10:01 AM above to my request for your views on reunification. A response with no caps lock. You obviously put some effort into the response. You included some facts. You drew upon your personal experience and observations of reunification to illuminate your perspective for us.

I would like to make a few observations with your leave. Firstly you remarked:

you could exchange them (East German currency) on the black/free market at about AFAIR 1:5~1:10

The decision has taken by random that the exchange rate on existing "savings" shall be fixed at 1:2 (AFAIR coinage was 1:1).

A country wanting to join the EMU would not be handed a windfall of, say, 5:1 today. They would have to contribute some gold, meet some benchmarks and so on. I doubt another country will be able to lie their way in like Greece again. I think this is a positive development. The less control governments have over currency the better IMVHO.

Secondly, there's a lot of criticism from the MSM in the US and the UK of the cumbersome decision making in the EU. It's so hard for politicians to gain consensus. To act boldly and swiftly.

Here's my perspective. I'm cheering. Bring it on I say. The less that governments are able to do the better. In my opinion there is no scheme, no system, no invention, intention or aspiration of humankind that a politician cannot screw up.

So, yes, I'm a fan of currency blocs where a central banking system operates the "token money". A CB system that is divorced as far as humanly possible from a single government's control . If we have to have a CB at all my ideal would be that the CB system has a single overriding mandate - stability.

Some basic ground rules. I don't need to like those rules but Uncle costata, like most human beings, is adaptable. BUT again like most human beings I can't adapt to changes in the rules every time a politician wakes up, reads an opinion poll and decides to change the rules.

As FOA observed, correctly in my view, there are three (3) main groups of actors in economies - government, bankers and the private sector. Since we are sharing personal perspectives let me share a little more of my perspective. Government should be as limited as possible. (And limited governments don't need much tax or other revenue.) Bankers should be treated like a pet cobra. And the private sector should be as free as possible to pursue it's aspirations.

Not a perfect world of course but I think most of us could live in that world.

Alien said...

Government should be as limited as possible.

Bankers should be treated like a pet cobra.

And the private sector should be as free as possible to pursue it's aspirations.
Would/could that ever become true?
Where is that country aka paradise?

Sarah said...

Did Jim Sinclair slam Fekete?

"Dear Jim

I have been long gold for 10 years now. I have read your site for 6 years I have also studied monetary systems and their collapse with Prof. Fekete amongst others.

I have read Armstrong.


Without additional QE we tank and take every bank in the world down with us , that obviously cannot be allowed to happen , but deflation as it is currently occurring is happening not because the monetary base hasn’t grown exponentially (it has with every QE injection). But the money IS NOT MOVING.

If it doesn’t move it may as well not be there.

Don’t stress yourself you are 73 , relax like Mr. Fred , don’t get prickly with our arch historian, he may have a point and it may be painted in the graph I linked.


Dear Adrian,

Currency induced cost push inflation will make the velocity of money explode when it occurs in full. It will be the fastest spike up in history. It will be a currency, not business activity event.

Your geniuses are not that intelligent. They have no clue of the impact of currency induced cost push inflation. Thanks, but I do not need your lesson on Velocity of Money. It has been well considered and researched in past situation of similar occurrences.

I got lesson on Velocity of Money many decades ago from the Chicago School. Don’t piss off old guys who are widowers as we have nothing to risk. Stay with your historian that used the gold gang for his own purposes, and now is kissing the ass of who he next wants a favor from.

By the time your beloved chart shows you the spike the entire event will be over and you will find yourself in a strange new world you do not understand.

How the hell can you think that I failed to consider the Velocity of Money?


costata said...


It's a perspective not a place. And it would not be any kind of Utopia if it was a place. I think we merely have three elements of a more workable, but imperfect, system in prospect. An "Honest Money" bloc currency in the Euro, gold as the reference point for pricing currencies and gold as an asset reserve/savings vehicle. Not perfect but a better foundation than this profoundly conflicted, dysfunctional $IMFS. A better "grandfather clock" rather than a Utopia.

In relation to bankers - let me simply say that my views are far too incendiary for our favourite Yeti. So I won't be exploring them in greater detail in this forum.


On a lighter note - check out this illustration:

Jeff said...

If you are waiting for German savers to morph into Indian housewives and front run the transition, even initiate it, forget that. They get their quarterly hint from the ECB; beyond that they are on their own. Everything I know about Euro political sideshows I learned from lalala the two Teutonic tools on FOFOAblog. Who thinks the ECB will throw away decades of work and HI their currency before the new system is even born? Not me.

Blondie: The underlying monetary system has not yet changed, thus the political situation with all its accompanying rules and bureaucracy has not needed to change either. The euro has been constructed to function successfully in the new system. You will not see the benefits of its successful function until after the current system’s demise.

FOFOA: The point is that the Eurosystem's response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed.

costata said...

A nice dose of reality methinks for the China watchers tempted toward over-optimism in this piece by two of Michael Pettis' students:

China's "growth" is debt fuelled too.

JR said...

Hi AD,

Pay head to this insight from Blondie:

This is not the “widest” view available, but it is wider than the one you are currently employing, and thus why your remarks are roundly dismissed on this forum as purely sound and fury signifying nothing

Oh the The Sound and the Fury!

"Caddy held me and I could hear us all, and the darkness, and something I could smell. And then I could see the windows, where the trees were buzzing. Then the dark began to go in smooth, bright shapes, like it always does, even when Caddy says that I have been asleep."

Yes, there is wider view than some can see. And its quite scary indeed for them, thank goodness for Caddy - she makes it all better.

JR said...

Tomorrow and tomorrow and tomorrow

"Tomorrow, and tomorrow, and tomorrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury
Signifying nothing"

Alien said...


If thou speak'st false,
Upon the next tree shalt thou hang alive,
Till famine cling thee; if thy speech be sooth,
I care not if thou dost for me as much.

Alien said...


China will share the fate of all countries "led" in a dirigiste manner. The EU pols tempt the same and will get the same results. Time will tell.

Beer Holiday said...
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costata said...

China Capital Flight Underway?

Readers may recall an article I linked at June 27, 2012 2:35 AM (Page 2 of this thread) from FT Alphaville by our favourite Yeti's bestie Izabella Kaminska here:

One of the curious things about that article was the report that private Chinese interests appear to be net short around 700 billion US dollars.

Since I posted that comment I came across this paper delivered in September 2011 by Victor Shih of Northwestern University (h/t Steve Keen's blog):

Here's the summary (my emphasis):

>> China has three structural causes of capital flight. First, wealth in China is highly
concentrated. Using three different methodologies based on survey data, data on
large share holders of listed company, and data on the total financial and real estate
assets in China, the wealthiest 1% urban households command between 2 and 5
trillion USD in wealth

>> A 20% reallocation of this wealth overseas would cause a substantial but likely
controllable drainage of China’s foreign exchange reserve.

>> A 30-40% reallocation of this wealth overseas would see the depletion of China’s
foreign exchange reserve by close to 1 trillion USD or more.

>> Second, underground banks, false trade invoicing, and now an experimental scheme
to allow individual investors to invest overseas provide multiple channels for capital to circumvent China’s exchange control.

>> Third, real deposit interest rates are negative and will remain so in the foreseeable future, thus prompting wealthy households to speculate overseas on a large scale if relative returns suddenly decrease in China.

>> If the top 1% of households in China reallocates 1 trillion USD of their wealth
overseas, the central bank then will be faced with a choice between large scale
quantitative easing and an illiquid banking system.

>> In the short term, China’s only recourse to reduce the volatile state of its foreign
exchange reserve is to bring real interest rates back to positive territory.

Shih also finds strong evidence that the risks posed by capital flight has been increasing (my emphasis):

Over time, rising income and wealth inequality only makes the situation more
volatile, especially at a time when the growth of the FX reserve is expected to slow. In 2009, for example, the foreign exchange reserve grew by 22%, but the wealth of the
super wealthy listed in Hurun grew by 26% in 2009 and 64% in the two year period
between 2008 and 2009.

Thus, unless policies are put into place to reverse this trend, the FX reserve becomes increasingly vulnerable to capital flight by the top 1% of households over time.

Now here's a question to ponder; if this money runs (or is running?) where will it run to?

Beer Holiday said...
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costata said...

More from the Shih paper I linked above (my emphasis):

If a major shock compelled wealthy Chinese and foreign speculators to move money overseas, these same channels can be used. Instead of falsifying an export invoice, a wealthy Chinese can pay an importer a commission to falsify an import invoice, which requires payment to an overseas account.

Falsifying import invoicing is especially easy
if the counterparty in the trade deal is located in a developing country where customs statistics are not kept carefully. The importer then only would have to bribe Chinese customs officials to approve the invoice.

Given China’s voracious appetite for
commodities import, a large part of which comes from developing countries, false trade
invoicing will be the main channel of capital flight, at least in the first stage of any future crisis. In fact, this may be happening to some extent already, as import grew by 55% in 2009 and 40% in 2010, which far outpaced China’s economic growth in those two years (National Development and Reform Commission 2010).

An exporter can also underinvoice an export order and ask the counter party to pay into an overseas account.

All in all some sound reasons for China to co-operate in kicking the can down the road - giving the "smart money" time to get out.

On reflection my own answer to the question I posed earlier about the destination for capital flight is the FX market as the staging point for later allocation into hard assets.

Interesting parallels with the Asian crisis of the late 1990s. I have seen reports of record lending by Hong Kong banks into mainland China. The Asian financial crisis connection is that the strategy used to get the money out was to do it through the banks in Indonesia etc and then collapse the banks. That and a strategy known back then as "creative bankruptcy" among, for example, RE developers.

Plus ça change, plus c'est la même chose!

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Beer Holiday said...

Maybe I should pass AD a beer :-)

Beer Holiday said...
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KindofBlue said...


Jim was 'slamming' Armstrong. His slight on Fekete and Armstrong was to the effect "they aren't that smart."

KindofBlue said...


costata said...

Japan the end of 2015 Japan will have to roll over half their entire debt outstanding, or just over 450 trillion in debt.

The graph in this piece shows:
2012 - 20%
2013 - 12%
2014 - 10%

For a cumulative total of 42% by the end of 2014.

Moment(s) of truth looming. As Andy Xie has pointed out you get the maximum benefit from a sudden devaluation and (if memory serves me) in his opinion Japan needs around a 40 per cent devaluation of the Yen.

Demographics are a bitch aint they?

For the first time in nine years Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, sold a net 443.2 billion Yen of Japanese government bonds (JGB) in its fiscal 209 to March 2010 as rising benefit payouts exceeded pension reserves (article link).

This is a major concern for Japan as the GPIF owns nearly 12% of all outstanding JGB and has been a major buyer of JGB for decades and is now transitioning to a seller of JGB and plans to sell $108 billion worth of assets between 2012-2013, a large portion of which will include JGB to generate cash to meet pension payouts (article link).

In the fiscal 2010-2011 year the GPIF sold 4.77 trillion yen worth of assets, of which 91.61% were JGB.

Gary said...
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Woland said...

Costata: Now you understand Vancouver B.C. courtesy of Shih.
No doubt the "princelings" have figured out offshore
havens as well. False trade invoicing is a popular way
to move the money.

Gary said...
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costata said...

Gee whiz Gary,

Even Skippy has managed to metamorphose back into AD with a considered response and here you are being Mr. Turd Burglar with choice remarks like this:

..Two other posters echoed my query.. dig your own hole so well.

Makes me smile, but I wonder what it does to you?

Creeps me out quite frankly Gary in all honesty.

PS. And treating an idiot like an idiot is a declaration of war in costata-land.

Jeff said...

Are you puzzled by the nature of Greenspans' game? He looked in the abyss and there was nothing looking back. In that moment he discovered his character (or lack thereof) and joined the committee to cheat the world. Do you think history will be kind to those three? Do they care?

Aquilus said...


Why make everything sound nefarious? Let's use Occam's Razor:

The number of people carrying gold through the transition in any meaningful (to them) amount will be extremely small (see FOFOA's comment above in these comments if it helps).

On the other hand, as gold is recognized as the focal point SoV, I would think that demand for stability of one's savings should increase its demand/network effect.

So if the few, few "homies" that carried physical through convert some of it to MoE in order to use it, there should be plenty of demand for the newly understood safety of physical to soak that dis-hoarding. And "homies" are the little, tiny shrimps, and there are oh so few of them...

On the other hand, I think it would be strange to think that those holding gold in vast amounts would dis-hoard a lot. Why? What can they possibly buy for those vast amounts of MoE if they did?

Remember marginal utility. They sure do and gold will still (even more) embody that property the best past the first n businesses, x castles, y private islands, z Van Goghs or whatever else they fancy to splurge/invest for productive purposes in. Also the most liquid.

Jeff said...

Didn't someone tell you to toughen up, Gary? The contradiction is all in your head. Now about loaning me that gold, I have my brand new LLC escrow company up and running. Or maybe you prefer to have someone with a better track record hold your collateral. MFGlobal? Tax avoidance guaranteed.

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Jeff said...

What's the difference between Giants and shrimps? Scale (of time and money). From this very post:

FOFOA: Gold’s value really comes from intergenerational Giants who have no need to ever sell it. They really just net-produce and net-produce and they do it willingly for more and more gold, and then just sit on that gold until they die and pass it on to the next generation. And they will keep doing this no matter what the $PoG does. They're not buying it for its weight, but for proven long run currency exchange value!...

Yes, there can be a depression and whatnot, but gold has this strange ability to stretch its value out into the time dimension rather than just a snapshot of our 3D world. This is a result of the giants having an intergenerational proclivity for the stuff. Has nothing to do with us shrimps, except to the extent that we get to go along for the ride. This post talks about that time dimension.

Jeff said...

Gary, you are too clever for me. Let's do that deal, and when you pay back the loan, we will see who is a moron, and who is a shark.

FOFOA: As Atticus wrote, it can be as simple as non-enforcement of gold lending contracts in the courts. The intent of the law would be not so much to prevent you from lending your gold as it would be to protect you from unscrupulous borrowers who would take it and spend it without the ability to get it back.

Why would a rational person want to lend gold? How about two friends; why would you want to lend gold to your friend? So he could spend it into the marketplace? That act alone puts downward pressure on the value of your gold savings, which could have instead been lying very still under your bed.

And then there is the issue that you cannot squeeze blood from a turnip. You cannot force the repayment of something real that someone no longer has. This issue can become especially problematic internationally if you really think about it. Countries have gone to war for less. Which is another good reason for an internationally codified (natural) law to protect the morons from the sharks, as well as the sharks from armed and dangerous morons.

Gary said...
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Gary said...

Jeff, seriously, you have it the wrong way round with this:

'Gary, you are too clever for me. Let's do that deal, and when you pay back the loan, we will see who is a moron, and who is a shark.'

I am doing the lending, I have no loan to pay back, I have the cash, I don't ever want the loan (gold) back, keep it with my compliments.

Woland said...

I just re:read the comments section from Sept 21,2008. FOFOA
and Ender, back and forth. STUNNING!! And something else
stood out:

!. "Ender" is the most brilliant commenter on the blog, save Ari
2. Ender cites Another, but never FOA
3, Ender has a strange "misspelling" problem for someone so wise,
like someone else we recognize.

I would be interested in what y'all think if/when YOU re:read it.

Gary said...
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sean said...

Woland, I think you are referring to these comments by FOFOA and ender, which do indeed make for interesting reading!

ender seems to have cancelled his profile unfortunately. I assume this is the same Ender who appears on usagold site around 2008 as well. You can retrieve his posts from Google by searching for: "by Ender"

Aquilus said...


I have always shown you consideration in my answers in the past. This time you chose to take my answer and turn it into a strawman that you can slay. Un-called for, regardless of your other discussions.

You asked why regular shrimps will buy gold after the reval if existing freegold shrimps will dishoard some of their gold at the time.

I answered you, with the most likely scenario, given human nature and in the context of the ideas on this blog.

You chose to pick on the semantics of my phrases, and created the strawman around the use of the conditional future. Then you proceeded to slay that strawman.

I choose to not play these games.

The point remains: I answered your query of why people will buy gold after the reval. It is your turn now to show where that view is wrong, and bring arguments as to why that is, not rebuff the fact that I don't sound all-knowledgeable in my answer.

Do that and we will have a fruitful conversation, and I will show you consideration in the future.

Gary said...
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Texan said...


After the reval, the giants will be buying every piece of gold they can find. I don't think gold in shrimp - size will be available for quite awhile, even 1/10th ounce coins will be well north of $5,000 and I don't expect a 1/100th ounce coin/wafer - along with a wide distribution network infrastructure - to be available "in size" for a long, long time after the reval.

Woland said...

Sean: Thanks for the info. I'm starting with Sept 2008 comments
from ender at usagold. A good "roll" model, for all "intensive"
purposes. Clearly english was not the first language, and some words
are spelled as heard, to my ear. He not only jokes about a tin foil
hat, (cosmic rays, y'know) but even a Faraday box (EMP protection)

Nickelsaver said...


I think one has to wrap one's mind around the concept of Gold becoming an isolated circuit. And also the idea that "savings" is really excess production, something that most of us shrimps are really kidding ourselves if we think that we have much of it. That isolated circuit, in relation to today's gold price volatility, will become a calm sea, and as such will be viewed by ALL SAVERS as a peaceful place to rest their excess production. At the same time, fiat also becomes a calmer sea, as that RPG isolated circuit fosters its stability upon it.

So your proposition is that the stability of the fiat will lead to savers being inclined to feel at peace parking their savings in the MoE?

The problem with that is that it is the burned savers of the current paradigm that will know more than anyone that choosing MoE as thier savings vehicle was a disastrous decision.

So we have 2 different savers after the shift; those that got burned because they held their savings in MoE (they will be glad to start over saving in a proven stable isolated circuit); and those that front-ran that isolated circuit and benefited from a 30 fold increase in value.

It is the shrimps within the second group (a very small elite group) that will dis-hoard, because what they did to front-run was to deny themselves now for what they could realize later. The isolated circuit will always be there for them too, but Gold will "only be repriced once". So they can dis-hoard 50% of their gold to raise their standard of living and still have 15 fold more savings than they had before the shift.

But it ain't about the shrimps now, is it?

Gary said...
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Nickelsaver said...


So the question isn't what savers would do in RPG then. For you, it is doubt about RPG occurring altogether.

For "if" RPG occurs, the "will" as to what savers do, is certain. To establish the "will" for RPG, in your mind, I suggest you re-look at all the fundamentals discussed on this blog.

Ironically, your doubts about the "will"(inevitability) of RPG puts you squarely in the same camp as AD. Gotta love it. lol

Woland said...

If I may make a distinction, Gary, one can compare shrimps
of Eastern thought with those of the West, and within the West,
say comparing French or Italian farmers with their American
counterpart. One group has a long history of dislocations, war
and revolution on their own soil - the other has not. Likewise,
the shrimps of India, the gulf arabs, and now the Chinese also
have a different attitude toward gold than those of us in the USA.
After a revaluation, one very large group will look accidentally
to have been quite smart - the others, not so much. No doubt
people will still try to outsmart each other in the investment
game, but at least there will be a risk free alternative allowing
peace of mind. We Americans might even learn a lesson, in
retrospect, from our 3rd world neighbors, as they come shopping
here in USA #1.

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Nickelsaver said...


So you think that those savers that get wiped out because they held fiat will have doubts about saving in gold after gold is shown to be the very thing that held value?

If there is any doubt to be had, it will be with the fiat, don't you think? For after the revaluation, with gold being freely interchangeable with fiat, why would ANY saver hold fiat for more than just transaction.

You are the one that makes no sense. I stand by my position that it is you that has doubts about freegold. It is an ALL in type of world view. You can't pick and choose what you want out of the theory and discard the rest. If gold is the reference point, and revaluation based upon it, then the only question is if it will be free to float (isolated).

What in your mind could prevent that from happening? Because I don't see a revaluation of 30 fold to a fixed gold standard. Who's going to defend that?

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Nickelsaver said...

LOL. J6P is irrelevant. He doesn't lead, he follows. Most J6P aren't savers, but debtors. But if he is a saver, he is going to learn by the revaluation where to put his savings - in the SoV, not the MoE. Just the same as any person aboard the Titanic would scramble for the lifeboat (if he could) once he hit the water.

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Nickelsaver said...

Gary, your use of the titanic analogy goes to Victor question about trust in fiat as SoV years after the reval. I don't choose to pretend to know what savers will do years into freegold, only what they (unless they were retarded) would do when it is fresh. If we continue with the titanic analogy, where the ship is the fiat and the lifeboats are gold, how many of the survivors do you think would board another ship (if they did at all) without at least pondering the lifeboats? Any?

BTW, when I say ALL, I say it in the context of statistical relevance. If .05% of people, for some reason decide to save in fiat, while the other 99.95% save in gold, that is statistically everyone. And if you want to play with those percentages to your liking to get your out regarding the term ALL, go ahead.

Gary said...
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Zenscreamer said...

It seems to me, after a few years of study, that there are occasionally turns in the Trail where my perspective has changed radically. Suddenly, and with only the subtlest of signs, my understanding of what I am seeing has changed completely. There are many others here, some who comment often and many who don't, who have had that same experience. Some have even been honest enough to report their new understanding in this very forum.

Following the Trail takes time and patience. What is read is not necessarily understood the first time, or even the tenth; the ego-centric nature of human life makes this fact inevitable. Fortunately, "time will prove all things," but also, each has his/her own intuition. Intuition helped me stay here long enough to begin to understand, and to have patience with what still remained murky to my reason.

One tool that may help in this process is Catma, or what might be called "relative disbelief" -- the skill of holding your dogma loosely enough to remain aware of exactly what it is, and also probe it for signs of conflict with experiential reality. Dogma that is not held explicitly is the most dangerous kind, and the most difficult to uproot.


I am going to attempt to respond to you, not because your question particularly deserves a response, but because I hope you will understand what I wrote above.

RE: "Do you agree with the NS view that ALL savers will go to gold or do you have a different view?"

Yes, all Savers will "go to" physical Au, or, by definition, they would not be Savers.

The definition is explained over and over, and you seem unwilling to understand it. A Saver has already exceeded his threshold for investing, entrepreneurship, consumption, and all other forms of economic activity, and still has CASH FLOW to find a place for which has ZERO reduction in marginal utility for each additional unit acquired. Obviously, this is a very select group of market participants, and NOT to be confused with J6P.

Feel free to misinterpret and berate me if it makes you feel better.

@JP, Nicklesaver, costata, and other frequent posters:

Thank you again and again for keeping the forum buzzing with intellectual breadth and depth. Your tolerance for the Tenderfoot Troop is second only to FOFOA's, and I appreciate your willingness to engage with them, even if I don't share it. :-)

I, and many others, read and appreciate everything your write.


Thanks again for another fantastic blog entry. I appreciate the effort that goes into them, and if I don't write you to say so on each one, it's only so that the Tenderfoots have less ammunition for their "everyone here is a mindless ditto head" meme. I shouldn't let it get to me, but sometimes I do.

Nickelsaver said...


Your statements make me wonder whether you believe anything at all that A/FOA/FOFOA have written. I believe what I believe because of the LOGICAL arguments presented here. If I did not believe, I doubt that I should continue to try to understand the finer points. But since I have a solid foundation in the fundamentals, I do not worry what those that are blinds might do once these realities play themselves out. I can only assume that they would do what I would do, in the same way that I would assume that anyone would choose to preserve their own life simply as a reflex.

You seem to be conflating today's mindset with tomorrows, as if a paradigm shift of biblical proportion would be largely ignored. Or is it really that you believe that there will not be a paradigm shift. Certainly FOFOA believes so. So your argument isn't with me, it is with him, now isn't it?

Gary said...
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Alien said...


why shouldn't "shrimps" after the reval save in gold? As long as they do not trust their currencies or want to save for longer term they might as well save in gold. Only the biggest savers will be able to save???

Nickelsaver said...


Actually, I agree with Zenscreamer 100%. It is not you who is being misunderstood Gary, it is you who is misunderstanding. And I doubt that I shall be able to convince you, if you can read this blog for so long and not get it. It did not take me years to get it, but only a couple of months. And I do not say that I have arrived, I am no trail guide. People like JR, Costata, Blondie, Ender, and of course FOFOA, these are the guides. But I know but your questions that you don't get it YET!

So perhaps it is you who is too far down the rabbit hole of the current paradigm to see. It is obvious that you have a good deal of market knowledge. Look at your own normalcy bias and try to do what Zenscreamer said "hold onto your dogma loosly". Try pretending that you know nothing at all. Take the argument in from the most basic premises, precept upon precept, line upon line. When you get to the point where you understand what MUST happen, everything else falls into place.

It is kind of like the game of Sudoku (a game which I play everyday). There is only one solution to a puzzle, and that solution is derived at logically, but the answer comes through solving one small part at a time. If a wrong assumption is made at any point in solving the puzzle, it will throw off every other conclusion after it(even those particular conclusions are sound in and of themselves).

Go back to the beginning and find that earlier wrong conclusion that you are missing. I wish you luck.

Zenscreamer said...

I'm sorry for any confusion, Alien.

In a free society, individuals, groups and corporate entities would, of course, have the option of trading any asset they could find a counterparty for, for any other asset. In other words, a shrimp with an asset a gold-owner wanted would be allowed to make such a trade.

I should hope that such a society would be successful in creating value, and therefore be selected naturally.

That said, I'm not sure that there are so very many "shrimps" who actually produce more than they consume, net on net.

mr pinnion said...

In my humble godlike opinion,
NS makes some good points.
I agree with you that there is too much certainty with the regulars.Nothings certain. But then again that level of certainty may come with an understanding of the deeper gubbins of FG.
I live and work in Joe sixpack land. He s not buying gold and wont before the reset,IF it happens.
Right now he thinks his pension is safe.He thinks his money in the bank is safe because its backed by the Gov. Any talk of his saveings being wiped out is crazzy talk as far as he s concerned.
When it happens, he will not trust the Gov. one iota.Different world , different rules.
Will he save in gold at that time?
I think he ll be to busy trying to feed himself to be bothered about saving anything at first.
When he realises that no one else is going to look after him but himself, he ll save in gold or regret it afterwards.
Piss poor people in India save in tiny amounts of gold because they dont trust the gov.
You dont know people will save in fiat again , making the same mistakes as before because you have never seen reality slap UK and US in the face before. Its going to be one hell of a traumatic shock that they will never forget.


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mr pinnion said...

13% a year over ten years is very anoying , but hardly a traumatic shock.Look at Argentina when they last devalued overnight. People out in the streets crying and generally voicing their disspleasure. Nobody does that if its over a ten year period. You all have to decide which day in the ten years your all going to get out on the street for a start.
Way i see it , it doesnt matter if 100% dont moove into gold, after.
They will see their savings wiped out in 6 months and they will suffer it(they will have no choice) and carry on (with a deep distrust of banks and Gov.)

70% loss over ten years looks like a group of blokes in a pub descussing how things will be better after they ve voted in a different troupe of monkeys.

80% loss in 6 months looks more like this


Börjesson said...

As a frequent reader (but rare commenter) here, who is still at the stage of trying to make sense of it all, I find it very confusing when grizzled veterans suddenly change the vocabulary. For instance, Zenscreamer at June 30, 2012 12:37 PM wrote a clear and concise definition of what has previously been referred to on this blog as Giants, but he suddenly calls them Savers instead.

I was under the impression that Savers were simply the people in the Savers camp, as opposed to the Debtors camp, which doesn't by any means imply only people that are so obscenely rich that there's nothing left for them to buy except (more) gold. FOFOA wrote a definition of Savers in this very post, and I can't see that it rhymes with Zenscreamer's.

Nickelsaver said...


I get where you are coming from. What I don't understand is why you were previously so adamantly opposed to AD's comments? Seems to me you share the same amount of doubt, only a difference in expression.

May I suggest a reread of "Glimpsing the Hereafter"

And you know, if you don't buy into the whole deal, that's cool. I didn't mean to suggest that one could not understand one part of freegold, without understanding all of it. It is just that, when you say that you grasp part of it, and then go off on a different trail with that particular knowledge, you are going to be called on it. I should amend my statement by saying that "You can't pick and choose what you want out of the theory and discard the rest" without being considered a heretic, lol. But it is fair to ask the questions why. And the answer will always be to go back to an earlier point in your logic to get you back on the trail.

Again, reread "Glimpsing"!!

Winters said...

I too am a bit sceptical of all savers moving to gold after the transition. It does seem like a big leap when I cannot convince my family to get any metal now.
However, as has been argued here J6P is not part of the requirement of the transition. The giants need only make their move and that will lead to the transition.

Is freegold a certainty? I can't say it is but I believe the logical arguments presented here are very strong. Strong enough for me to make substantial moves in my personal finances.

Do I need freegold to occur? No. While it is nice to dream of the revaluation value I don't want to count my chickens before they hatch. Never the less, the education I have received here of the nature and fragility fiat/interest/fractional reserve makes me very comfortable in this position irrespective if FG takes another 50 years. I'm a saver. Not a giant - but a saver and I don't like having my paper wealth dilutable by policitians. The 2008 GFC has shown exactly how they will act to save the system and saving in a high interest account is no safe harbour.

Now if I may, the lastest stream of comments from you have been rather belligerent and I did skip a lot of it as it was tiresome. There is a way to present an argument or argue a position but I think you have strayed from the track of etiquette.
JR made some serious charges against you of operating several puppet accounts. You didn't address those as far as I could see? Either JR is guessing or he has some inside knowledge. I don't know but it is probable that blogger would provide tools to the owner to detect these actions so maybe its the latter. Do you deny you are operating puppet accounts?

@ZenScreamer - very interesting defintion of a saver. I hadn't thought of it that way before.

While I'm here adding noise - @Costata - thanks for the Paul Keating interview a week or so back back. It was a good read and well worth posting.

Texan said...

No one is going to get "wiped out" in the initial revaluation. (except maybe those who are actively short gold via comex futures). Gold will spike, but that doesn't mean that USD savings loses any purchasing power (except against gold of course).

I highly doubt most people (in the US) will even notice. Those that do may try and buy some gold - if they can find it - but there are plenty of examples of countries that had very high inflation (including hyper) where the "shrimp savers" didn't rush out en masse to buy gold. They buy hard assets, but that takes all kinds of forms. In Argentina currently, I have read that they buy TVs, among other things. They have probably 20%+ inflation per annum - but J6P isn't demanding ONLY gold to stash their savings.

I think it's very cultural, and make take several generations. India clearly gets it, and I think China may at some point as well (right now they like to also buy apartments, which is also common in Argentina). So in some ways Gary, I agree with you. But I think if you stretch the timeline beyond the "transition", then the FG thesis makes more sense in terms of even "shrimp savers". It becomes more institutionalized and part of "what is done". Again, I think India is a pretty good example (from what little I know).

byiamBYoung said...


Forgive me if I am redundant, or am too late to the party, but I am catching up on comments and cannot help myself from answering your call for comments about shrimps moving en mas to gold.

It seems apparent to me that pre-RPG or post-RPG, shrimps will be shrimps. Most won't save a damn thing. Some will invest in tattoos. SOme will burn their discretionary income on cigarettes and lottery tickets.

Post RPG, some will save. They will evaluate a new landscape, where gold has a new value. Many confusing options will cloud that landscape.

As is today, many will completely fail to make smart decisions. Some will do some research. Some will flow with the conventional wisdom.

All of that is separate from the concept that the smart money, the shrimps who do their homework, will find gold at its new value.

I believe this, because so much of the entrenched wealth in the world is already squarely behind gold. From a shrimp perspective, that will be apparent if the shrimp seeks the truth.

So, you ask a functionally moot question. The world will shift to gold. Many people will not. They will miss the boat. But, like shrimps throughout history, they will never know there even was a boat.


FOFOA said...

Just checking my newest followers on Twitter and among them is Simon Mikhailovich of Eidesis Capital in New York. I don't know anything about him so I clicked on his company website (hi Simon!) and went to the press link. There he has a good interview he did last week on CNBC talking about physical versus paper gold, East versus West, counterparty versus no counterparty, etc…
"Gold has been a trading vehicle in the West."
"The idea of what is a safe haven has become government bonds."
"Think in military terms… no general goes into battle without having reserves, and no general has his reserves in the theater of operations… any paper gold is, by its nature, in the theater of operations because it has counterparty risk."
"Only physical bullion that is stored outside the financial system is a true safe haven."

Good to see some common sense on CNBC for a change! ;)

Dr. Octagon said...

Gary asked: "I'm keen to hear from others on this point (but not the usual suspects who subscribe to the Freegold Law). Those who visit often, but rarely comment. Do you agree with the NS view that ALL savers will go to gold, or do you have a different view?"

Does the answer to this question have any impact on the best course of action for you today? If not, and I'd suggest that this is the case, then there's no point in arguing about it.

costata said...


I'm glad you appreciated the Paul Keating interview. It was a turning point for us. It greatly strengthened our hands.


Edwardo said...

A bit more on Mr. Mikhailovich.

Edwardo said...

In the meantime, Bruce K is taking the over, and, what's more, by his reckoning, there ain't no more maneuvering room. He sees a devaluation of the Euro, but, perhaps it won't be of the sort he anticipates.

costata said...

Savings and Safety

The article below discusses a pivotal development for the European project in my opinion. The development of a banking union. Commentators who keep blathering on about "fiscal union" (in terms of securing the future of the Euro) are deluded or shilling for vested interests IMO.

(My emphasis)

Once Europe establishes a single banking supervisor, leaders said they may allow cash-strapped lenders to be recapitalized directly instead of through their home governments.

This could break the link between banks and sovereigns that has plagued the euro area throughout the crisis and become a particular flash point for Spain’s bank rescue.

Every Euro of capital injected into the banks (with appropriate "conditionality") will automatically be leveraged and the impact likewise amplified. So for those who want to time this transition I would suggest starting your countdown from the time this banking union comes into operation - provisionally in January 2013. IMHO the focus will then shift to the USA and the "grandfather clock" will be ticking loudly.

Returning to this notion of Euro bonds and fiscal union. Essentially the pundits who advocate this course are pushing for a US model. The Federal government controls the currency, issues the sovereign debt and centralizes the revenue. Fabulous idea - working like a charm for the USA isn't it?

/sarc off

The key benefits of this banking union approach IMO are as follows:

1. Supervision of all of the Euro denominated "money" supply comes under one roof - the ECB Eurosystem. (Money being the currency issued plus the bank credit money created by banks.)

2. It resolves the problem of regulators in one jurisdiction ignoring the impact outside their country (but still within the EU/EMU) of the banks domiciled in their country.

I think the push to make gold Tier 1 capital is also a key step toward a long term solution to the cobra and currency management problems. Gold's use as a reference point would also then apply equally to sovereign debt monitored by the commercial and retail banking system. I think this would address some of the issues discussed above about the response of savers after the transition to the Freeegold-RPG regime.

Post transition if I am retiring and need income on which to live then a portfolio of bonds secured by a broad revenue base makes perfect sense if (IF) I have a way to value those bonds which is not open to manipulation and obfuscation.

So, FWIW, yes as a saver I would sell gold to buy debt instruments after the transition when I am no longer in the work force and/or unable to continue accumulating retirement savings. However, my "financial adviser", my reference point, would be gold with the "valuation" (pricing) established through a free market. Gold would inform me about the safety of my capital through the performance of those bonds against gold and the interest rate demanded by the free market.

I might also consider a RE portfolio to achieve the same outcome - an income stream to live on. Again informed by gold about the safety of my capital. I would need to pay closer attention to liquidity issues and the reliability of the income stream of course. "Investing" in RE is a business not an investment per se truth be told.

During my working lifetime gold would be the main vehicle I used to take profits "off the table" from my business/work/production whatever. And yes I would still want to buy a house to live in - for lifestyle reasons and because of my acculteration.

PS. To the current self-appointed groupthink monitor I did say "after the transition". Those who seek to argue that this is not inevitable must point to a viable alternative. And preferably one that hasn't been discussed and discarded in these pages a hundred times before.

Aaron said...

Simon Mikhailovich said...

So the risks are greater than 2008?

Yes. The disruptive technologies and government policies have created an extremely highly correlated environment with all financial markets and all financial institutions.

To me the idea that bonds, stocks, and FIRE instruments are all nominally locked together comes to mind -- and none of these interconnected parts can be allowed to fail in nominal terms. All of these papers assets are tethered together by a very short string. If one sector goes to hell everything else quickly falls apart as confidence is lost and money moves into assets in the physical plane.

Yet, there is still one option -- one option alone to hedge against the collapse of the entire system. Honey bees!

Oh, and gold of course.

costata said...

Hi Aaron,

Along with Honey Bees I would add Honey Badgers to your list in the role of bank regulators.


Aaron said...

Costata -- I think you're on to something.

Honey badgers bank regulators.

Aaron said...

Here's the link for those interested in the full video on honey bees from PBS.

In posting this link I don't claim to support and conclusions about the cause of CCD. I post only for yet another perspective into the super organism.

Beer Holiday said...

@Costata, you have been a great trail guide for me too. Thank you.

I followed the trail for a few years silently, but I started talking when I became lost in the woods. You lead me back to the trail emphatically.

Now I spend my (wasted time) watching old Paul Keating, and Sir James Wolfensohn
interviews on youtube, marvelling how they spelled out this reality from those with the right eyes.

Sometimes I even watch Greenspan, you know, when I'm feeling naughty. What is there left to do - but to drink and watch the view? (possible answer: learn Mandarin). When will the lazy western beer drinkers learn to stop wasting their time* :-)

*Maybe after our world is turned upside down.

Beer Holiday said...

Edit: Acquire physical gold might be another answer to my question.

Beer Holiday said...
This comment has been removed by the author.
costata said...

This hysterical nonsense about the Target2 imbalances just won't go away. ZH banging the drum here:

Put differently, the financial risk for the country as a whole has not changed significantly on the back of the rising net claims of the Bundesbank.

This may no longer be the case, however, once rising net claims reflect not only normal commercial and investment activities, but rather deposit flight from the periphery to Germany.

Great point except for one small issue:

So far, there is no real evidence that private households or companies are shifting their deposits to Germany in a significant way.

Undaunted in their attempts to construct a mountain out of a mole hill the GS analysts say:

But a genuine deposit flight from the periphery to Germany would lead to a significant increase in the Bundesbank’s net claims. After all, peripheral private households alone hold more than €1.5trn of deposits.

Wow scary stuff! Or then again maybe not (my emphasis):

To be sure, the Bundesbank’s rising net claims vis-à-vis the Eurosystem would only represent a financial risk if a country were to leave the Euro area. Moreover, the losses of the Eurosystem are shared among all remaining countries. Thus, the financial risk for Germany has actually been reduced, as potential private losses have been replaced by losses that will be shared by the Eurosystem.

However, in the event of a break-up of the Euro area, the losses from the Bundesbank’s net claims would materialise on the Bundesbank’s balance sheet alone.

On their balance sheet alone? I guess we should worry about that.

....these losses would not impair its ability to operate monetary policy. Put differently, it is not the case that the Bundesbank would first need to be recapitalised before it could once again conduct monetary policy at the national level.

Indeed, there are several examples of central banks that have operated with negative equity and have been able to maintain price stability.

The Bundesbank could, for example, simply insert a claim against the German government on the asset side of its balance sheet in order to maintain its balance sheet in balance in an accounting sense.

Worry? Guess not.

And then Tyler goes on to highlight two big chunks of the final paragraph discussing the inflation risk. The whole paragraph except this:

A high degree of uncertainty surrounds all of this and it is not possible to be more precise about the potential inflationary implications.

Uncertaint because (a) they have no idea where those deposits would be spent, (b) how fast they would be spent and (c) whether they would be spent at all or simply go into mattresses. Rock solid case for runaway inflation, eh?

So the assumptions are:

1. Break up of the EU. (Reading between the lines - not just one country leaving it would require the collapse of the union.)

2. No co-operation or co-ordination among the national CBs of indvidual countries affected by the break up.

3. Catastrophic loss of confidence in the Euro provoking a rush to spend the bugs bunny ASAP.

Okay, fine analysis GS (though a complete waste of effort) and thanks for nothing Tyler. I'm starting to wonder if the boys and girls at Screwtape Files may have the right idea about ole Tyler.


Nickelsaver said...

Beer Holiday,

+1 on the Daniel 5:25-27 reference. Very appropriate.

TEKEL: You have been weighed in the balances, and found wanting;

costata said...

Beer Holiday,

If anything I wrote helped I'm glad to hear it. At the end of the day it comes down to your own critical thinking. I'm sure that carried a lot more weight than anything I came up with.


Beer Holiday said...

Thank you all for your kind words. I can confirm that some beer drinker are thinkers - but it's not the only way see.

Beer Holiday said...
This comment has been removed by the author.
Blondie said...

Beer Holiday,

It is interesting to hear Wolfensohn discuss the changing distribution of production over time, not only for what he discusses of the probabilities of this distribution in the future but also for what he neglects to discuss regarding this distribution in the past. This recent 80/20 split in the favour of the developed West only extends back as far as industrial development. I was going to post the following links anyway in response to Texan’s comments above to which I think they are also very applicable:

Texan said:
[on the fundamental understanding of physical gold as SoV] ”I think it's very cultural, and make take several generations. India clearly gets it, and I think China may at some point as well (right now they like to also buy apartments, which is also common in Argentina). So in some ways Gary, I agree with you. But I think if you stretch the timeline beyond the "transition", then the FG thesis makes more sense in terms of even "shrimp savers". It becomes more institutionalized and part of "what is done". Again, I think India is a pretty good example (from what little I know).“

This graph is very informative relative to both. Note that the time axis is unevenly graduated over 2000 years. So who had the greatest need of a store of value, and more importantly, over the greatest length of time??? If India and China have a more ingrained appreciation of gold’s function, this graph should go some way to demonstrating exactly why. Graph lifted from this interactive post which contains much other material supplying historical context which may be useful when considering the future - from different vantage points in the past how likely would the future as it actually occurred have seemed? How big a paradigm shift does the current epoch (2005-->) represent just in an industrial (let alone monetary) context?

(non-subscribers need to use this search to get past the ft paywall, and click on the top result)

Beer Holiday said...
This comment has been removed by the author.
Beer Holiday said...
This comment has been removed by the author.
costata said...

An article below discussing the relationship between Treasuries and derivatives such as interest rate swaps (IRS):

h/t Ed Steer's newsletter

The writer (David Chapman) describes himself as follows (my emphasis):

I was a dealer in derivatives with a major Canadian bank and later a large Canadian insurance company’s trading operations during the 1980’s and 1990’s. The vast majority of our dealing in the IRS market was for trading purposes and not client driven.

......When a bank transacts an IRS it typically hedges itself in the US Treasury market. IRS are expressed as a spread over US Treasuries. IRS holdings of banks and trusts have grown over $100 trillion since the end of 2002 but the US Treasury market has grown by only about $9.5 trillion in the same period.

My understanding is that having Treasuries as an element in these derivative trades creates demand for Treasuries which Chapman touches on here:

Growth in IRS does, however, create a demand for US Treasuries. Some contend that it creates an artificial demand that can be used to provide support for the US Treasury market.

Some food for thought:

....the US could be using the IRS market to generate purchases.

Here is how it would work. A non-bank counterparty (not corporate) calls the bank dealer and asks where do you pay in ten years for an IRS. The dealer quotes him and the non-bank counterparty says done. Except the non-bank counterparty does not sell the bank dealer the bonds to hedge the bank dealer’s position. The bank dealer then has to go into the US Treasury market and purchase the bonds.

Do this enough and the demand for US Treasuries rises. This pushes up the price of US Treasuries and interest rate yields fall, as prices move inversely to yields.

Could this explain how, not long after US Treasury bonds were downgraded by S&P, the US Treasury market rallied? Could it partly explain why interest rates fell during the euro crisis?

Beer Holiday said...

Blondie - I just noticed that you said exactly what I was trying to understand...

Thank you for the links, they are most useful.

Dante_Eu said...

Here is some Sunday fun. :-)

We all remember Rawdog and his socks from the Bitcoin post. Here's his thoughts about Euro:

The European Union an unholy union of moronic retards!

Nice response from galikazoid though:

countries might come and go

but the euro is built to last - ecb balance sheet reserve assets, line 1, is gold

it gets marked to market every quarter - making gold a nice freefloating reference point for the euro fiat currency

what will change going forward is the nature of savings assets that savers will consume

no longer will they consume debt as savings (although they might hold some), instead they will consume gold for savings

this appears to be the trend

Texan said...

Blondie, that is a fascinating way to think about it. Thank you for posting.

d2thdr said...

Hi Gary,

Just to give another attempt in helping you see;

Post transition the prices of very expensive things will be quoted in fiat and gold. The price in gold will remain stable relative to the price in fiat. That itself will reinforce in the mind of the sheeple that gold is a lot more stable than fiat.

Gary said...
This comment has been removed by the author.
Woland said...

Hello Beer Holiday:

Regarding the Quianlong Emperor, you might enjoy a fascinating
article entitled "The Great Re-pricing" which is a speech by George
Yeo, Foreign Minister of Singapore, delivered at his alma mater,
Cambridge University on its' 500 year anniversary. It covers both
the transition to the industrial revolution, and the current reversion.
Bottoms up!

Jeff said...

Interesting if you ignore the editorial slant:

Jeff said...

Saw this on another message board.

A friend called me yesterday. Told me he finally got his Gold Eagles from Pru-Bache. He'd been paying storage fee 10 years He is LAZY.. but.his coins were dated 2012 !!! They were charging him storage on AIR! They never bought his Gold nor put into safekeeping...sheese!

Edwardo said...

costata writes,

"The Federal government controls the currency."

Not so fast. The Fed, though they are chartered by Congress, are, operationally, independent from The Federal Government. I know it has been asserted here that The Fed does the government's bidding, and, while I understand the argument-or at least I think I do-which is that if The Fed didn't do gov's bidding they would be shut down, (which I think is more or less accurate) The Fed does what they please as long as they take care of Uncle Sugar.

In the meantime, I am intrigued, to say the least, by your thesis, especially as it relates to your timeline for the day of reckoning for the U.S.

costata said...


I'll stand by this statement:

The Federal government controls the currency.

My timeline for the day of reckoning begins with the commencement of the EU banking union.


Biju said...

Commenting on what Blondie mentioned about India Gold

Deputy Governor of the Reserve Bank of India (RBI) Dr. K C Chakrabarty said here, on Thursday.

Addressing a symposium -Banking Tech Summit- hosted by Confederation of Indian Industry (CII) here, he said that the yellow metal was an index of elite society of yore.
"Wearing the gold as a jewellery was a culture of the rich society when this was in 1000 AD when we were a rich country, contributing to 30 percent increased GDP. Today you do not contribute to even one percent of the GDP and you bring 50 million-60 million dollar," Chakrabarty said.

costata said...


I may just be deeply sick but I thought this was hilarious:

costata said...


This even more so:

Jorge said...

I just read through all of the new comments, and I found the debate between Gary and the others to be very helpful and illuminating for me personally, so I think you all for helping to clear up some of the fog in my mind.

I had many of the same questions, and I agree that I just don't see many J6P going into gold en masse: today, he thinks it's in a bubble and post-revaluation he might not change his mind. But, maybe that doesn't matter in the way that I thought it did. As someone else said, a lot of the politics follow from the monetary system so it will be interesting to see how things continue to evolve.

Many people still believe that the stock market has been the best vehicle for long-term savings, because it has been. From 1913 to today you get a CAGR of 9.69%. Gold would need to be at $165,000 today to match that CAGR.

If a lot of this growth has been, in fact, built upon air, the CAGRs of the two could come much closer together, and maybe that will lend some real strength to the argument in the minds of J6P who currently look at gold as the refuge of the 'loony bug' and those 'weird easterners'.

Gary said...
This comment has been removed by the author.
Zenscreamer said...


As I'm sure many here would mention, the statistic about the profit from investing in the "stock market" is seriously warped by the effect of survivor bias. I'm not saying that there weren't historical periods when the component companies of various indexes didn't do well as investments, but an actual investor putting his $FRN into the stock market in 1913 would not have had the performance you cite over the intervening period.


I'm sorry for any confusion I may have caused. Certainly the entities referred to here as Giants would naturally fall into the category of Savers as I defined it. That fact does not preclude others, shrimps included, from also doing so. Consider an individual who has crashed his/her lifestyle, with no desire to increase either consumption or investment, who is still cash-flow positive: he or she still meets my definition, only on a smaller scale.

I am sorry if my definition conflicts with FOFOA's, and I welcome anyone to explain to me what the difference is, so I may learn from it. This is a learning environment, and I am always open to reasoned criticism.

My nut to crack is still the same one I've had for the last three months. (Can I get help from anyone on this one?) To whit:

The moment when the two-tiered gold price system breaks. How does this come about? If it is within the power of the bullion banking system to create private contracts that in effect treat the PoG as orders of magnitude higher than the public price, and sustain such contracts off the radar for years, what is to prevent them from just slowly adding new clients, one at a time, and keeping the effective two-tiered system going indefinitely? I know, "all it takes is one Saudi prince to not get delivery." But they've kept it going so long, at what level would the private arrangement break down?

Nickelsaver said...
This comment has been removed by the author.
AdvocatusDiaboli said...

thanks for you encouraging comment. Yesterday was a horrible day, just when I woke up I heard on the radio that the ESM law passed the german parlament... I was hammered, completely desperated...okay brownnosers do dumb things, but what made me so hopeless, that even the opposition acknowledged the vote. So all in all >>66% (this is also the majority needed to change the german constitution)!!! And the irony of history: The communists party rejected.

Again thanks for the comment. See, costata even you called me repeatedly idiot, by now it makes me smile, since I know you love me ;)
Seriously, I hear you both, I 100% understand what you are saying, but I see a really severe lack that you refuse to take a reality check once in a while.
e.g. those $1trillion "savings" in 1% chinese households. I really wonder that you even mention those figures: PEANUTS. Just calculate that down to real numbers: $50000-$200000 (depending on the "numbers of households" you assume). That is just small change, nothing. Those chinese that will probably buy 1xAudi+2xVW and a couple of Apple gadgets....

Anyway, what I am trying to say: Start focusing on whats going on right now in terms of reality check, instead of telling other people who attempting this, that it is just a "side show", in order to prevent facing reality just to feel warm with your confirmation bias.
Greets, AD

Nickelsaver said...
This comment has been removed by the author.
Nickelsaver said...

Pondering "Life in the Ant Farm" as is relates to Uncle Sluggard.

"Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest. How long will you lie there, you sluggard? When will you get up from your sleep? A little sleep, a little slumber, a little folding of the hands to rest—and poverty will come on you like a thief and scarcity like an armed man." Proverbs 6:6-11

Edwardo said...


Someone else may come along in the next little while and provide a very different, and, likely,
better response to your question, which seems to be:

"what is to prevent them (BBs) from just slowly adding new clients, one at a time, and keeping the effective two-tiered system going indefinitely?"

The BBs and their OTC deals will be superceded.

The end of the two tiered market will come about when entities with more clout than the BBs decide they no other choice but to set things in motion such that, the only unimpaired collateral remaining, namely physical gold, must flow in sufficient quantities to facilitate debt settlement, allow bank recapitalization, and resuscitate global commerce. At the point that it is determined by those with more wherewithal than the bullion banks that not one more day can pass without gold being mobilized far beyond the present paltry level of flow, those special OTC deals will no longer need to occur because gold will have been set free to find its level out in the open.

Long story short, the CBs will, in effect, give relevant parties, such as the BBs, their walking

Blondie said...

Further commentary on forthcoming Basel 3 regulations and gold as zero-risk weighted asset.

Nickelsaver said...


My apologies for duplicated comments. I generally read comments from my email and wasn't seeing them show up. Technology...

Beer Holiday,

There are a lot of bible passages that I find strikingly applicable to America, and the current paradigm...


Life is short!

KnallGold said...

@beer holiday: couldn't follow you the other day, maybe my englisch isn't good enough or you just had too much beer (or you need a Haldol). What I wrote is just what I wrote, no tangent.

@DP: gods work, well, that might be a bit over the top but I got your tune. As for that specific Gold coin, I have a persistent feeling that she's gonna save it ;-)

Interesting and tense weekend, no doubt, with lots of stuff to read on - and what the hell did the euro ministers wear on their jackets? Almost had to use sunglasses. DP might open a special merchandising shop with all the cool stuff, yeah. save it baby save it...

costata said...


When you simply express your views without the caps lock and ranting yes we love you.

A couple of points. Sorry you feel despondent about the German parliament vote but it goes to the heart of one of the guiding principles of the analytical approach of this blog. It, or something like it, was always going to happen. Government will try to save the banking system and support the political status quo.

In relation to China, one of the points I was trying to make was that pundits who think that China is some kind of economic powerhouse which can "save the world" need to think again. They have their own problems and vulnerabilities.

Many here have moved beyond the point of getting upset about the iniquities we observe. That doesn't mean that any of us are immune from emotion either. I'd like to think that we are trying to accurately perceive reality annd test our theories against reality.

Alien said...

Nicely said, Costata!

I like it a lot better when you show your soft belly too because there are also emotions people have when seeing this disaster approaching albeit it doesn't touch one directly so badly as the rest of the people.

How do you see the post linked by Blondie re LBMA's lobbying for gold as tier one asset?
Do you share AMcL perspective?

Alien said...

could you really expand that article a bit?
I do not understand its technical part exactly.

costata said...


I'm about to go and read those pieces that Blondie linked. I think the push for gold to be a Tier 1 asset is very big news.

IMVHO two other things whose importance cannot be underestimated are cutting Iran off from SWIFT and this Libor rigging scandal. The latter is not going away. These guys have ripped off "people who matter" AKA other powerful members of the FIRE club. This isn't like stealing from J6P or taxpayers. That's simply the game as it is played these days.

I think this article provides a good overview of the latest developments (as far as we will ever know of them in advance).

Here's my favourite extract from this article:

According to the affidavit, one bank which has turned whistleblower and agreed to help the Canadian authorities with its investigation, the banks "communicated with each other... to form agreements..." which "was done for the purpose of benefiting trading positions".

Woo hoo! Watch these guys turn on each other to try to save themselves. It just needs a few months for this to gather momentum.

So yes Edwardo Costata's Countdown (TM) begins - January 2013.

costata said...


Both excellent articles you have linked. I read the Butler piece earlier and highly recommend it to readers.

It relation to the Macleod piece I would like to add that I don't think it would matter, in the long run, whether the Fed or some other institution manages to get some paper gold accepted as a Tier 1 asset as a concession to get this deal over the line.

At minimum I think this push from the BIS is akin to a Trojan Horse. Ultimately physical gold, not paper gold, will be the only acceptable Tier 1 gold asset.

Brave new world (hopefully without the gross genetic deformities).


PS. It may be worth asking the question: why did the LBMA push for this? Altruism perhaps? I think not.

Edwardo said...

For whatever reason, only one of Blondie's links-Finance and Economics- responded to my click.

Blondie said...


It links (successfully for me still) to this address:

Edwardo said...

Thanks, Blondie. I now see what happened. When I clicked on it originally, it didn't take me to an address. It just downloaded the pdf.

AdvocatusDiaboli said...

again, thanks for the warm words to a desperated soul. But:
"I'd like to think that we are trying to accurately perceive reality annd test our theories against reality."

100%ACK, so why calling essential things (at least in my mind) going on in Europe a "sideshow"? And in case your observation is that the ESM is a "sideshow", why is it never (un)covered as such here in the blog?
Sure, you can say "in the future....". But about what timeframe are we talking and what's in the meantime? And most importantly on the physical&political plane?
Sure, enterpreneurs in Russia said 1917, "dont worry that will pass..." or some Jews assumed the same in 1938...
Greets, AD

DP said...

Costata, I love your Chopper.

Gary, I'm not Scottish or fat. But everything is relative & around here that 33% strike rate of yours often feels like pretty good going. Hi-5! ;)

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