This is the first in a new series I'll be returning to occasionally. I have recently come across a number of fallacies relating to the subject matter of this blog and my plan is to compile them and then correct them one at a time.
1. Paper Gold is just like Paper Anything
This first fallacy aims to undermine a good deal of what Another and FOA wrote about by claiming that the paper gold market has the same effect on gold as any paper market has on its underlying commodity. This fallacy claims that the same arguments made for an explosive revaluation of physical gold could be made for anything else, therefore they must be wrong.
Commenter "ForLiberty" put it this way:
"This whole 'paper gold is holding the price down' argument makes zero sense to me. It is just a logical nonsense. All paper trades have two parties - bidup and biddown. A paper gold trade could have never taken place if nobody wanted to short it. This is how all markets work. There are paper tomatoes sold too. Is there a conspiracy there too?"
ForLiberty was apparently paraphrasing Martin Armstrong who wrote something remarkably similar:
"They argue that today gold is really paper gold, and the market have multiplied that many times. They argue that the real gold is only about 5 billion ounces. They then argue that the paper gold depresses the price of gold and this is why it is not where it should be right now. All this sound nice, however, you can make the same argument about anything traded today from wheat to stocks and bonds given the derivative markets. Some see conspiracy behind everything."
Is he correct? No he's not. Can we really make the same argument for anything else? No we can't. The paper market for commodities is just as likely to have a levitating effect as a suppressing one because it allows for financial participation by those who have no need or ability to hold the actual commodity. Gold is the only one that is unequivocally suppressed by the existence of a paper market.
No conspiracy. The mere existence of a commodity-like paper market for gold suppresses the price naturally, systemically. Long term systemic suppression of gold is something totally separate and different from short term price manipulation or distortion which can occur in any commodity or paper market.
Here's ANOTHER explaining that the BIS (primarily European central banks at the time) not only anticipated that a paper gold market would lower the price of gold, but that in the 1980s they supported the creation and expansion of this market for that very purpose:
Date: Mon Feb 16 1998 14:40
ANOTHER (THOUGHTS!) ID#60253:
"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."
In other places ANOTHER explains that we should not be upset with the CBs because they were just buying us time. And later he explains what they were buying time for—to make it to the launch of the euro. He also muses about the fact that it's the Westerners playing in this new paper gold market who are most upset about the low price. The physical buyers in the East see it as a gift. But I digress.
Nobody is claiming there are more than 5 billion ounces of paper gold. In fact, there is probably far more physical in the world than paper gold. Enough physical gold to cover all of the paper a few times over perhaps. But that doesn't matter, it is only the flow that matters. It's the same with commodities that get produced and then consumed. It's the flow between production and consumption where the price is discovered in the paper markets. But gold doesn't get consumed at a rate anywhere close to its next closest competitor. It just accumulates.
In commodities the paper market regulates the flow between the producers and consumers, acting as a kind of a shock absorber against unexpected supply and demand shocks. But gold is different because it just accumulates. There are two main differences between gold and everything else. The first is that gold just accumulates rather than getting consumed, so there is no reason for there to ever be a supply side shock, even if all the mines suddenly stopped producing. In fact, today we have a 60 year "supply overhang" in gold. Nothing else comes close.
The second difference is that the vast majority of demand for gold is in currency terms, not weight terms. This is not true for commodities. If you need a ton of copper for a construction site, you need a ton of copper. That's weight-denominated demand. But gold demand is overwhelmingly in currency terms. If you need a tonne of gold, what you really need is $50,000,000 worth of gold. It doesn't matter how much it weighs because you're just going to stick it in a vault.
Having a paper market as a shock absorber for the gold market only has the effect of keeping the price too low. My explanation for the LBMA survey discrepancy is a perfect example.
Since gold is not consumed by consumers or industry the way corn, oil, copper and grains are, and because it simply accumulates, supply shocks are not economically critical. On the demand side, gold is apparently used as a "safe haven currency". And we apparently had a demand shock of around 7,575 tonnes in Q1 2011. The normal supply for that period would have been around 700-1000 tonnes, so the paper gold market acted as a shock absorber and absorbed that demand shock by expanding. That way the price of gold only rose $30 in a quarter with a demand shock of 10 times the normal physical supply flow.
But that wasn't really demand for 7,575 tonnes of gold. It was demand for $337B worth of gold. Hypothetically, if the price of gold had been $55,000/oz. in Q1 2011, that demand would still have been for $337B worth of gold, the only difference being that the $337B demand could have been supplied by only 190 tonnes (a mild 20% increase in flow rather than an extreme 1,000% increase) and the price of gold would therefore have barely felt a bump in the road, even without a paper market shock absorber.
Therefore, having an elastic paper market shock absorber for gold is only necessary if the price is too low, because there will always be plenty of supply if the price is high enough (60 year supply overhang, remember?). At today's price, having a paper market shock absorber is apparently necessary to keep the gold market from blowing up.
It logically follows that it is the very existence of the paper gold market which is keeping the price too low, because if you took it away, price alone would have to regulate the flow. Take the paper market away from other commodities and you simply remove the investor/speculator money in the middle thereby exposing producers (and consumers) to unpleasant shocks.
We have no idea what the "stock" of paper gold is. The LBMA survey only gave us a glimpse of the flow (paper gold turnover) over a given time period (Q1 2011) and in a given market (loco London spot, forwards, options and swaps, with spot transactions being 90% of the reported trades). That turnover was 2,700 "tonnes" of paper gold per day with 64% of the LBMA members reporting. We only got a lucky glimpse because the largest banks in the world (bullion banks like JP Morgan Chase, Goldman Sachs, HSBC, Barclays, Deutsche Bank, Credit Suisse and UBS) are lobbying for a technical rule change that will make their overall Basel III compliance easier.
Sincerely,
FOFOA
616 comments:
«Oldest ‹Older 201 – 400 of 616 Newer› Newest»I don't think interest adds to the money supply. Instead, it redirects an existing portion of the money supply to whoever is owed the interest, away from other things.
Hi d2thdr,
You commented:
"How will a bank establish if the investor is/is not going to undertake non-productive investment? "
Banks lend money based on the borrower's perceived ability to repay, yes?
How can someone repay a loan? Perhaps by earning/making enough money to do so, by being productive?
If banks are made to bear the fruits of their lending decisions (because CB backstopping them will be limp a a eunuch without savers holding the new emissions), perhaps prudential lending standards will prevail?
Sure banks will make bad loans; no one is omniscient. Indeed, no one banker is smarter than the banking superoganism, yes?
Not dictating loans by central decree, as the banking superorganism is the one's best equipped to do this, to assess the ability of a borrower to repay. Bankers competing with one another to make productive loans and thereby make a profit off of these success loans. Do you see this view?
Cheers, J.R.
Congrats Zenscreamer,
Good to see that unlike money, some things are built to last.
Indeed, what good is stored purchasing power without others to share with?
#WhatReallyMatters
Cheers, J.R.
Dr. O,
Agreed, I also don't think interest earned adds to money supply (base or credit money).
The interest portion of the loan is still available to the whole economy, as long as the party who earned the interest spends it into the economy again.
Hoarding of interest earned could be harmful though, as less money is left for the rest of the economy to repay their principal + interest. This will potentially lead to economic contraction and defaults.
But fear not, Freegold can solve this issue as easily as it solves other harmful hoarding of paper surplus.
Don't save/hoard in the same medium as you get payed in.
/Burning
costata, JR,
C'mon, guys, we're trying to have a serious one-sided discussion here. You're spoiling the groupthing!
(/sarc off, for the slow)
Regarding interest, here is a relevant critique / response from the movie 'Money as Debt':
http://paulgrignon.netfirms.com/MoneyasDebt/disputed_information.html
scroll down to
"Disputed Information #2
The Unpayability of Interest Necessitates
Perpetual Growth of the Money Supply (Debt)"
The critique via email (emphasis added):
"The video repeats the fallacy that not enough interest is created to repay all the debt. This is not true. Actually, when you make a loan payment, only the principal portion is destroyed. The interest portion goes to bank revenue. That money is re-spent in the economy by the bank or its shareholders and eventually goes towards principal on someone's loan payment. All the loans could technically be paid off without creating any more money."
The response (emphasis added):
"Obviously, I don't think it is a fallacy. It is true that IF 100% of the interest is recycled back into the economy, all the interest payments can be made. ... The big question is... does this happen?
...
But critics insist that 100% recycling of interest happens now and there is no problem. I disagree.
Yes, the banks spend most of the interest they take in on interest to depositors, wages, rents, dividends etc. so that most of the interest money is available to be re-earned to pay interest over and over. However, for there to be NO shortage ALL of the interest money has to be spent. Otherwise there is a shortage.
... Banks use their profits to seek more profits. As well, non-bank lenders re-lend money that comes into their possession adding additional layers of interest. This theory also assumes the existence of a uniform money supply accessible to all when in reality we have a stratified money supply with a bias to move upwards from those who have little to those who have excess, because those who have excess money can easily gain more via lending it at interest. This leads to vast amounts of money being routed into the gambling economy of high finance (like the foreign exchange market) where it is not available to be earned by the borrowers who created it."
If we take off our $IMFS caps and put on our FG-RPG hats, it seems like the problems with interest payments is that they lead to the stratification of the money supply, where money goes from those who spend it to those who hoard it, depriving the borrowers the access to money to make their debt payments.
So in FG-RPG, would the excess money earned through interest still be unavailable, or would it be more likely to recycle into the economy (where it can be spent) by the purchasing of gold?
One more point: costata, even 1% steady annual inflation is an exponential curve. It will run to infinity given enough time.
I don't see how anyone can "hoard interest". The only way for currency to be removed from the economy is if it is either pulled out as cash and physically stored someplace (by citizens), or stored as excess reserves at the Fed (by banks). Both of these reduce the supply of currency to the rest of the economy.
Any creditor collecting interest has the advantage of choosing where that currency goes (e.g. banker bonuses), but if they choose anything other than the two options above, the currency is available to the rest of the economy. This is true both in FG-RPG or $IMFS, whether they buy gold, stocks, bonds, or lava lamps.
Life in the Ant Farm
Exponential Debt
One of the things Gordon writes about is probably the most catastrophic aspect of this mountain of debt: the maturity wall. This is the hurdle of old debt rollover that is facing us collectively right now, where all of the world's present saving must be compelled into the interest payments alone on the old debt. Talk about the unproductive and inefficient use of savings! What I can tell you is it ain't gonna happen. The system cannot be saved at this point.
I received an email from a reader, Lars Olsson, with a nice article he wrote about exponential growth and debt. Here is an excerpt from his piece with an exercise you can try at home to wrap your mind around what happens when savings are compelled into indiscriminate debt:
If you believe that 2+2=4, then you should believe the following. Compound interest at 2% is a miniscule interest charge measured by today's standards. Compounding the interest charged on a single unit of money can be written as follows: money-amount * 1.02 * 1.02 * 1.02 .... (adding another term for each year) .... and on and on. That is, if you can place your faith in mathematics and calculations and really "believe" that the calculator will return a correct result when you punch the buttons. We reckon our current time since the long ago birth of a civilization some 2000 years ago. History tells us they had money then. A functioning economy of sorts. Mediterranean trade. Payments for goods. Money of gold and silver. If any man would have placed only a fraction of his purse at interest, his descendants would be wealthy beyond imagination, and the world have been hollowed out.
[...]
compound interest is not a sustainable operation spanning millennia. Compound interest applied to any finite system will grow out of bounds, which is what we are experiencing today. The current "money" system, which is engineered with "debt/credit" as its foundation has breached its sustainable limit. Stimulating the economy without addressing the fundamentals of the "money system" decay will not restore economic prosperity. Money at interest, does not price risk in venture. A functional society requires an efficient "money system", but "money" can be made available through means other than extending fractional reserve privilege to the banking class and putting a price on the existence of money.
Lars' piece may seem simplistic, but I like it. I'll even take it a step further and say that a monetary and financial system that uses compounded interest cannot afford to compel all savings into the hands of debtors. It must have a means of hoarding wealth outside of the system in order to constrain the exponential growth function, or else the entire system will become retarded and then collapse. In return, this constraining function of "gold the wealth reserve" will restore intelligence to the human superorganism. Intelligence that has been sucked dry by Wall Street's systemic aggression against a free-floating physical gold price.
We are all like ants in an ant farm when we patronize Wall Street. Our contributions to society, should they exceed our day-to-day needs, are deployed by a system that does not care how they are deployed, just that they are deployed ASAP. If you would like to make a real contribution to the future of civilization then please buy physical gold and find a way to keep it close. Hoard your efforts outside of the system and watch as they receive a tremendous power boost just in time for deployment. You will be rewarded with the freedom to choose when and how your saved effort will be deployed and in so doing, you will help shape the future.
Michael H observes,
One more point: costata, even 1% steady annual inflation is an exponential curve. It will run to infinity given enough time.
I made essentially the same point to VTC some time ago when he was discussing the "negligible" 2% interest rate target of the ECB.
Edwardo,
Just to be clear, while 1% is still an exponential function that will go to infinity (or zero, depending on the sign), I do think that a consisent, small amount of inflation is socially desirable.
The reason is that employers will find it easier to say "Sorry folks, times are tough and I can't give any raises this year" instead of "Hurray, team! Thanks to your excellent efforts this past year, I am only cutting your pay by 0.5% instead of the planned 3%."
Granted, this could simply be "$IMFS-thought", and not generalizable to FG-RPG.
Dr. Octagon,
"I don't see how anyone can "hoard interest". The only way for currency to be removed from the economy is if it is either pulled out as cash and physically stored someplace (by citizens), or stored as excess reserves at the Fed (by banks). Both of these reduce the supply of currency to the rest of the economy."
Obviously, one doesn't 'hoard interest', one hoards 'money'. I think what is meant by 'hoarding' in this case is 're-lending at interest'. This re-lending creates more interest-obligations above the initial debt that created the money in the first place. To be honest I'm still not completely clear on this point.
An example: You sell your house to someone with a mortgage. This is a newly-created debt; you are paid with new credit. This new credit has interest obligations attached.
You turn around and buy government debt with the proceeds of the sales. Now the money created to buy your house has two layers of interest on it: one for the mortgage, and one for the government bond.
Edwardo,
I made essentially the same point to VTC some time ago when he was discussing the "negligible" 2% interest rate target of the ECB.
View it this way: this is going to be your incentive to hold gold.
Finally, once the MoE is not widely held for the long run, it will be a lot easier (!) for the CBs to keep the MoE stable with respect to gold. Well, they need to find a way of controlling the total credit volume in the banking sector that's relevant to consumption. They will somehow sort this out. Then, it will be a lot easier, simply because fluctuations in velocity play less of a role when velocity is high than they do when velocity is low (as it is today).
Perhaps Michael H is also right. It is politically easier to keep wages unchanged when there is inflation than to cut them when there is no inflation. But then, a number of years into the new system, people might as well get used to a stable MoE and no longer care.
Victor
Credit needs inflation or else it gets crushed by the deflationary dynamic of economic growth, and we need credit. Keeping money stable means inflating along with the growth in the real economy - without such inflation the money/credit system gets crushed in the deflationary dynamic of real economic growth.
Keeping money stable is a nominal idea, in real terms money devalues which is why you save in gold, the reference point against which money devalues.
The Setup
Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economic expansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding the expansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to a much more expandable "balance sheet money system" as I like to call it — or another name I like is "purely symbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life" gadgets, widgets and shipping lanes that the world had never before imagined.
For the next three or four decades we would be able to comfortably afford the new introduction of Betamax VCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digital cameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderful products would be built cheaper by someone else on the other side of the world and shipped to us cheaply using the oil purchased from the Middle East with easily available U.S. dollars.
The reason I like the term "balance sheet money" is that whenever there is a need for more dollars they can be easily gotten from any bank's balance sheet. The dollars don't have to be there in the bank. You simply jot down the "need" for them on one side of the balance sheet and the dollars magically appear on the other side. Presto!
Of course once that "need" (demand) is supplied, the balance sheet must then be serviced with interest. But the thing about easy money is that you can always borrow new to service the old. In the previous system (con)strained by its parity fixation to the U.S. Treasury's limited supply of gold all these wonderful life-enhancing advances would have put a deflationary pressure on the dollar.
What this means is that when all these new products came to market, the dollars we needed to purchase them would have become more and more precious with each new widget that came to market. The cost to borrow dollars to buy a new BMC-100P or DynaTAC-8000 would have been prohibitive. And even if you did borrow the money, the service of that debt would have grown more and more burdensome over the life of the loan as dollars became ever more precious.
This deflationary dynamic would have stifled the global economic growth rate and confined it to only reasonable risk-taking. Which is part of the reason the foreign central banks, represented by the BIS, did not lobby the U.S. to officially devalue the dollar against its Treasury gold in 1971.
Credibility Inflation
Oops, I posted.
As you were people.
@ Dr. O
I don't see how anyone can "hoard interest". The only way for currency to be removed from the economy is if it is either pulled out as cash and physically stored someplace (by citizens), or stored as excess reserves at the Fed (by banks). Both of these reduce the supply of currency to the rest of the economy.
Interesting. So your point is that credit money can't be hoarded? Only when citizens take delivery (cash) or banks place the money on deposit at the central bank is it possible store paper money. Meaning: Only base money can be hoarded! Credit money can't be hoarded by definition as it stays in circulation because you gave the debtor access to use of the money?
So, this maybe this is what Costata was alluding: As long as you "hoard" your interest in credit money it is the same as expanding the money supply (the credit money part)?
Is this true? anyone?
What happens if the bank chooses to keep the interest earned on their books, but doesn't loan it out again all the way up to triggering the minimum allowable fractional reserve ratio? Is that akin to hoarding credit money?
(potential credit money = money that legally could be lent, but isn't because of?... lack of good quality collateral perhaps?)
That again maybe is the very essence of the business cycle.
First lend all the way up to the limit for a number of good years = No credit money hoarded/withheld, everything re-emitted as debt. Everything earned as interest also re-lent, thus expanding money supply.
Then no more good collateral to lend against = Collapse of confidence/credibility = Time to collect/Bank payday = No more expansion of credit. Withholding of debt money = Hoard the profit as base money (but loose almost everything in the end in real terms because of inflation).
Lather. Rinse. Repeat.
Having a secondary circuit for wealth hoarding seems preferable either way.
@burningfiat - yes, that's a good way of putting it. Only base money can be hoarded, as far as I can tell. Regarding your question: "What happens if the bank chooses to keep the interest earned on their books, but doesn't loan it out again all the way up to triggering the minimum allowable fractional reserve ratio?" Isn't this money held in reserve at the Fed, and therefore base money?
The current rate of extraction sees the world's physical gold stock growing at an annual rate of just under 2%.
What cannot continue will not continue. There is no infinite supply of gold.
The theoretical value of gold, however, is a different thing altogether. It has no upper bound. It is theoretically infinite, as free as the same imaginations which are able to attribute credibility (another abstraction with no upper bound).
Interest is credibility, again.
Matt claims all money is debt, which I'm afraid is not a tight enough definition if we want to proceed.
All "money" is credibility, and of this credibility there are two quite distinct varieties: the credibility which is backed by past surplus value production, and the credibility which is backed by future surplus value production. The former is proven, and is thus stored in gold. The latter is unproven and is therefore a speculation, and is indeed debt.
Do you see the difference Matt? One draws the past into the present, and the other draws the future into the present. One has already occurred, the other has not.
Do you see what this makes gold? Gold is the antithesis of debt.
Quite. Gold is the other half of another incomplete barter transaction.
Something was provided already, and nothing was asked in return but gold.
@ Dr. O.
Right you are. If a bank has excess reserves it is placed overnight at the central bank. AKA base money.
http://en.wikipedia.org/wiki/Excess_reserves
Nice graph of reserves in above link :)
I'm glad we have this discussion. Helps me clear up some points.
I meant our modern definition of the money supply Blondie in line the conversation that was occurring - danged definitions!!
Burning fiat - re the text book version of money, credit, reserves and multipliers can I also suggest:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
Guys, physical assets are the other half of an incomplete transaction - gold is just one form that is particularly suitable for wealth storage.
Lord knows the Saudi's are fond of West London houses and super yachts too!
Correction: COMMODITIES are the other half of an incomplete transaction
Sorry
On a kinky side note: FED has payed interest on the excess reserve deposits since 2008. Sure beats the return on mattress style base money! Why can't I have my base money at the FED? ;-)
"...as the Federal Government is currently "supplying" about 10% of the economy. When (not if) that is withdrawn the truth becomes impossible to hide."
I don't invoke Mr. Denninger as I'm not a fan. And, in that spirit, I note that, as per the quote above, he didn't seem to listen too closely to Stockman's words...
"...and in a political environment where 'we cannot possibly raise taxes - and we cannot possibly cut spending.'
in the interview at the link.
http://www.market-ticker.org/akcs-www?post=208692
or you can listen to it here
http://www.zerohedge.com/news/ombs-stockman-were-fiscal-endgame
Hi FOFOA,
I have drafted a comment that attempts to explain the issues I have with this point in time perspective of debters and savers. Before I post that comment I would like to clear up another matter you raised.
From the post: "Now would probably be a good time to restate that "the debtors and the savers" is a dichotomy, not a moral judgment."
I'm not suggesting that you are presenting morality plays. I didn't have you in mind when I made that comment about morality plays. The topics we discuss here are often argued elsewhere as morality plays. The goldbug and silverbug communities provide some stellar examples. I was also mindful about some of the views I have advanced from time to time - mea culpa.
Cheers
Hi again FOFOA,
I just wanted to make it clear to others that I think you are misusing my Debtors/Savers model in order to appropriate it for a different mission for which it was not designed, a mission on which you and I disagree.
I don’t think the perspective of debtors and savers you describe is in any way wrong. When you examine this subject at any given point in time you see a group of economic actors. At any point in time some of these actors are in debt and some are not. The actors who are in debt have certain needs and aspirations from the currency their debts are denominated in while they are in debt. Savers have an opposing set of needs and wants from the debtors.
Changing the currency system can resolve this conflict. You have described the changes necessary and in process through this Euro Freegold-RPG project.
I think the enduring value of your analysis is that you can apply it at any point over a period of time and it helps the observer to understand the scene they are observing. We might perhaps describe this as a valid perspective at any point in time during any period of time.
If we examine the same scene while the actors are in motion we can glean other information. We can see that some individual actors are changing roles. Moving back and forth between the roles of debtor and saver for example. We can see some actors who are in the debtor camp most, if not all, of the time eg. government.
Given the fact that you/we are attempting to communicate with these self-same actors I think that actors who are playing multiple roles may have difficulty in relating to this perspective. I think that they might benefit from being encouraged to look at this scene in a dynamic way. That doesn’t invalidate the perspective I’m describing as static – a point in time perspective.
Do we need to consider the scene from an “in motion” perspective? Obviously I think we do. At the same time I can appreciate that you could come to the decision that your perspective is adequate and no further elucidation is necessary. I hope we can agree that attempting to look at the scene from both perspectives does not invalidate your perspective and that I’m not attempting to “misuse” or warp your perspective to a purpose it was not designed for.
I'm sorry you think I'm misusing your dichotomy. I don't think of this as a personal "mission". If I was forced to make some kind of "mission statement" I might say something along these lines: I'm seeking to achieve more clarity in how we identify the actors and interpret their actions in a pre-transition context and a post-transition context.
An interesting find, Peter Bernholz report on the survival of the BIS:
http://147.142.190.246/joomla/peio/files/Bernholz.pdf
JR et al,
I just caught up with the rest of the comments. Good discussion in my opinion. Let me attempt to clarify what I'm saying about interest (and not saying).
I wasn't suggesting that interest is some kind of perpetual money which can't be offset through the destruction of money elsewhere in the money supply "circuits". The overall money supply can expand and contract.
I'm saying that interest is an expansionary impulse. Repaying debt is a contractionary impulse to the money supply.
When a loan is created it "frontloads" the money creation process and as that loan is paid down some of that overall expansionary impulse goes into reverse. However the interest remains an expansionary impulse for the money supply.
Coming back to JR specifically. I don't see any conflict with FOFOA's description. If there is a conflict please continue to try to point it out.
Cheers
I think this piece by Paul Craig Roberts and Nomi Prins is a very worthwhile contribution to the discussion of this LIBOR scandal.
http://www.paulcraigroberts.org/2012/07/14/the-real-libor-scandal/
VtC,
In order to add another dimension to this discussion about the banking system's impact on the money supply I think we should also consider the impact of defaulted debt.
The money created in the system by that loan remains in existence but it is no longer backed by a performing loan. If the deposit loaned into existence was also destroyed in the process it would offset the defaulted loan to a large extent.
I really feel for those farmers who were/are caught up in this mess with MF Global and PFGBest. A super drought just to top it all off.
http://globaleconomicanalysis.blogspot.com.au/2012/07/extreme-drought-hits-much-of-us-1000.html
Mish gives a reasonable overview here IMO but other readers may be able to add to the picture locally.
Matt said:
"Guys, physical assets are the other half of an incomplete transaction - gold is just one form that is particularly suitable for wealth storage. Lord knows the Saudi's are fond of West London houses and super yachts too! "
I was under the impression that you had read at least the last couple of posts here, and their accompanying comments, but your comment above has most definitely called that impression into question.
Either you missed all discussion of diminishing marginal utility; or you didn't understand it; or you believe that there is infinite demand for West London houses and super yachts?
Hi Costata,
Before you indicated "Paying off the principal does reduce the money supply. It's only the interest component that persists after the principal has been repaid." and now you seem to suggest something else?
What is an expansionary impulse?
-------
When a loan defaults, the bank no longer has the loan as an asset backing that liability? Any thing else? Assets minus liabilities = ______?
Cheers, J.R.
Hi Costata,
Before you indicated "Paying off the principal does reduce the money supply. It's only the interest component that persists after the principal has been repaid." and now you seem to suggest something else?
What is an expansionary impulse?
-------
When a loan defaults, the bank no longer has the loan as an asset backing that liability? Any thing else? Assets minus liabilities = ______?
Cheers, J.R.
My drought sob story:
The lake that I have my boat moored on is so low; I have to get in the water and push it out 30 meters/yards before I can motor out.
On the bright side, my lawn has gone dormant due to lack of rain, so no mowing. And the mosquitoes have been non-existent.
JR,
I'm not sure how to respond. It seems quite straightforward to me. A bank advances a loan for $100. The borrower repays $110 including interest. The interest is a net increase in the money supply.
This isn't necessarily an inevitable and permanent increase in the overall money supply. Ten dollars might also be subtracted from the money supply at the same time through a different channel or circuit. The direction of the trend created by the interest component (the impulse?) is expansionary.
Perhaps it would help to take interest out of the picture. Let's say a bank advances a loan for $100 and the borrower repays $100. There's a temporary increase in the money supply.
If you collapse the term of the loan to zero time the impact on the money supply is neutral in real terms. But at the time the loan is originated there is a temporary increase of $100 in the money supply from the deposit it gives birth to elsewhere in the banking system.
Recalling some earlier comments I posted perhaps it would help to point out that under certain conditions these lending-repaying transactions are highly beneficial for most actors in the economy. Under other conditions these transactions are highly damaging to many actors and highly beneficial to a few.
Interest is a wealth transfer mechanism. That's fine provided there is wealth creation happening as a result of the lending. But wealth creation isn't a prerequisite for a wealth transfer to take place through a bank lending and charging interest.
In a sense you could also think of baking and selling a loaf of bread for a profit as a wealth transfer mechanism too. Under most conditions wealth changing hands in an economy is beneficial to all of the actors in the economy.
Uncle,
I'm not so sure on your line of thinking. But let me work through it.
Let's say that a bank uses a depositors $100 and loans it to me, and I pay back $110 dollars.
Suppose that I am a person that pays my debts on time, such that at the end of a month I have repaid my loan. In my mind, there has been no increase in money supply, but merely a decrease in my own spending power, such that I have $10 less than I would have if I had simply waited rather than take out a loan.
But say that I am over my head, and I pay the loan back by using a credit card.
And suppose that I lived this way for a long time, constantly floating my debts from credit card to credit card, until one day I simply stopped making payments.
And lets say that I was clever enough to do this by paying little to no interest - but in the end I still defaulted on all my credit card debt.
Was there a wealth transfer? And if there was, did anyone benefit? Certainly not the creditor (for the unsecured loan was defaulted on). And certainly not me (unless I used the funds to buy gold), because now my credit rating is trashed.
Of course, the banks have a mechanism to deal with defaulted debt don't they? On the large scale its a bailout. And a bailout is just a transfer of wealth from the tax payers. And that from the government, which is where the money creation really happens, does it not?
But I think you mean something else. I think you mean that a loan is originated to someone with credibility. Someone who would use the funds to perhaps created a product or service. And by virtue of a good business model is able to repay the loan and also generate a profit for himself.
BUT...on the other end of that business are consumers. Some of those consumers pay in cash, others on credit, and ultimately many default on their debt just like I described. So in this case as well, I think, it is the government that creates the additional money. Doesn't it all come down to debt that is NOT repaid as the prime mover for the creation of money?
Nickelsaver, I think it's the government too. Example the postman works for his wage and the government prints the fiat to pay him (in part, aside from taxes etc)
So it's a fraction of societies labour paid for with new money that balances the new money required to pay the interest.
Some use this argument to claim that the whole fractional reserve system is stealing our labor to pay for government/banks etc. but I don't but into that at all. It's a system which works OK for me, and great for many others.
Nickelsaver,
If I were you I would try to separate those transactions, decisions and actions you describe in order to look at their impact. If you are suggesting that debt needs to be looked at in terms of its componosition then I agree.
I would like to get past this point in the discussion if we can. Assume for the sake of argument that interest is money creation. This identifies three you-know-whats in the money supply punch bowl:
1. Banks creating "money".
2. Obviously the currency issuer can create money.
3. Government issuing debt and creating money in the process through interest.
The debt deflationists can claim some support for their case from the constraints that numbers 1 and 2 may be under at the moment. (I think they need to address derivatives to count No. 1 as a point to them.) But Number 3 is no help to them at all. The government can create monetary inflation too without using a printing press.
I would hope that readers understand the clear distinction between inflation and HI. But inflation does help to create the right conditions for a catastrophic loss of confidence in the currency to occur.
This also points to the EU being on a completely different trajectory to the USA. Despite all the hoop-la about everyone going down with the ship from some pundits. I think it's another piece of supporting evidence for the arguments advanced here about the Euro project.
And thank you in advance AD for your thoughts on this claim by Uncle costata.
Cheers
Blondie, mind your feet when you're swinging that hatchett.
costata,
"The interest is a net increase in the money supply."
As Nickelsaver said, the interest isn't an increase of money supply, but a transfer of the existing money stock from one entity to another.
I think what you mean by interest being an 'expansionary impluse' is that this transfer of money away from the debtor will 'gently encourage' the debtor to come up with more money, either through producing more or through taking out more loans to pay off his interest.
"In a sense you could also think of baking and selling a loaf of bread for a profit as a wealth transfer mechanism too."
My first reaction to this statement was that the payment of interest is different from the selling of bread because interest doesn't produce any real goods, while at least the baker is being compensated for increasing the world's stock of real bread.
Upon further reflection, however, I realize that making a loan at interest is indeed a real 'service', and if it is done properly then society will benefit.
My initial reaction is colored by $IMFS-glasses. If we had bread piling up in the streets I probably would have resented the baker in the example instead.
costata
I don't have a desire to get involved in this discussion, however perhaps me sharing my view on some of it helps.
While the debtors/savers dichotomy may be applied to individuals during any snapshot of time, I see it as aspects of humanity, ie. traits that we all posses. We all like easy loans, and hard debts.
We also of course have different stages in our life where one side of the coin may be more dominant.
TF
Hi Costata,
This is simply wrong. I am pretty sure you know this, because you have tried very hard to dance around this.
It seems quite straightforward to me. A bank advances a loan for $100. The borrower repays $110 including interest. The interest is a net increase in the money supply.
The 100 is the increase in the money supply. That's what the bank created. The interest gets paid out of some other credit money created by another bank. Someone has to go earn that interest by doing work for someone who borrowed has borrowed money into existence. You borrow the loan. The interest is serviced from another loan created somewhere else.
The direction of the trend created by the interest component (the impulse?) is expansionary.
? Interest funnels production to bankers, they get paid for their services too. Interest redirects money, it does not create or expand money.
Perhaps it would help to take interest out of the picture.
Sounds like it would really help you.
Let's say a bank advances a loan for $100 and the borrower repays $100. There's a temporary increase in the money supply.
If you collapse the term of the loan to zero time the impact on the money supply is neutral in real terms. But at the time the loan is originated there is a temporary increase of $100 in the money supply from the deposit it gives birth to elsewhere in the banking system.
Recalling some earlier comments I posted perhaps it would help to point out that under certain conditions these lending-repaying transactions are highly beneficial for most actors in the economy.
This is so simple, why does the word interest cause you to confuse everything?
====================
Under other conditions these transactions are highly damaging to many actors and highly beneficial to a few.
Yes, like when the savers' savings are used to denominate the loan?
Interest is a wealth transfer mechanism
Yup, as is money or barter or any exchange.
That's fine provided there is wealth creation happening as a result of the lending. But wealth creation isn't a prerequisite for a wealth transfer to take place through a bank lending and charging interest.
Right, because in the $IMFS we have giant CBs supporting the wealth transfers gained by fraud. The banks don't need to create wealth, its supplied by the savers saving in the debt and the CB backstopping it. The banks are profiting from expansion because someone is doing the “wealth creation” and eating the hot dick sandwich by saving in the currency (or because everybody who holds the currency gets the dick sandwich via the CB devaluing the currency to support the banks).
In a sense you could also think of baking and selling a loaf of bread for a profit as a wealth transfer mechanism too.
LDO. Its just like any other profession, the silly bankster haterade is blinding you.
Under most conditions wealth changing hands in an economy is beneficial to all of the actors in the economy.
So what are exceptions - is it the banksters and their interest, or is it the savers donking their wealth off into the system in return for paper?
“we’ve met the enemy and it is us.”
Its not the banksters Costata, its us. We enable it. The only thing we need to stop, the only thing we need to regulate, is ourselves.
Cheers, J.R.
...Their foundational thesis is that fiat currencies and the CBs that manage them are the most fundamental flaw in today's system from which all other problems flow. This directly conflicts with my thesis that using the same medium in both the primary and secondary monetary roles is the fundamental flaw from which all other problems flow. My thesis applies to both hard and easy money systems. Their thesis points to the CBs as the bad guys. My thesis holds up a mirror and says, "We have met the enemy, and it is us."
Unambiguous Wealth 2 – The MF Global Chronicles
Michael H,
the interest isn't an increase of money supply, but a transfer of the existing money stock from one entity to another
The "existing" money stock that came from where precisely?
JR,
With this comment at July 17, 2012 6:13 AM above I think you have illuminated this whole discussion.
costata,
As someone said above, the money supply either comes from credit or base money.
If this isn't the answer to what you asked, then I don't understand the question.
So by this point I think we established interest is not a special kind of money, but merely the wages of sin. Sin being money-moving.
All money is just a means to obtain goods and services. Even bankers' families need goods and services to survive.
Why is it sin?
Are your wages sin?
Banks provide a service and get paid for it. Under Freegold, without the peoples saving in the currency, banks have to be prudent and make good loans or they go broke.
The ability to recognize a good borrower from a bad one and to thus make good and not bad loans is a skill. If you are good at it you will get paid. If you are not you will go broke.
When we subsidize bank activities by saving in the currency, we allow the banks to offload risk - in economics this is called moral hazard. AKA when someone does not bear the consequences of their actions, they engage in more risky behavior than they would if they bore those consequences.
Freegold simply offers a different way of controlling credit expansion that is more effective than the modern Austrian suggestions of making money harder and/or limiting or eliminating fractional reserve banking. There is no need for all that convolution, just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch (which comes from this comment by yours truly). Snippet:
But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.
The Return to Honest Money
=================
You seem to be under the impression that lent money must come from the savers' savings. This is not how it works in a purely symbolic fiat currency system like we have now... and like we'll have in Freegold. Credit money is borrowed into existence from the banks. This is what banks do. They expand their balance sheets to satisfy the debtors and for that risk they earn interest. They take the debtor's promise onto their ass(ets) and create liabilities that can be spent like base money created by the government.
This system will continue in Freegold with the exception of the securitization process. The securitization process allows the banks to offload their assets (risks) to savers relieving them of the need for future prudence. Securitization, or structured finance, was born in the 1970's, expanded beyond mortgages in the 80's, institutionalized for sub-prime debtors in the 90's and blew up in the 2000's. Outside the US, this process was more than a decade behind, only emerging in Europe in the 80's.
comment to One Tin Soldier
And thereby JR justifies his previous claim that LTRO is a horrible artifact of the $IMFS paradigm.
Without our savings on deposit to loan out, bankers will be risking their own money. Also since we won't be demanding the savings we don't have on deposit, liquidity & maturity transformation are non-issues. Ah-ha!
Quick idea that may confuse things up (I hope not),
Interest is the fee paid to the bank for their service. Its the bankers wages
It is a fundamental FOFOA point that we need the money supply to grow with economic activity for efficiency. Not that money supply growth causes economic growth, but that it allows for it.
FOFOA Quote:
"So we need money, and lots of it. In fact, we need money in unrestricted amounts!"
Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time- there is a basic minimum amount of money that is needed for something to even function as money.
[...]
for FOFOA the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy. This does not mean that expanding or contracting causes more economic growth, but that it allows for economic growth.
Windmills, Paper Tigers, Straw Men and Fallacious Fallacies
Me getting paid wages does not increase the money supply. But the more economic activity there is, the more wages are paid for goods and services, the greater demand there is for money. More wages and more economic activity = more demand for money.
Banks in Freegold do a good thing by responding to this demand for more money by extending credit to worthy borrowers.
So when you see interest, think "wages being paid to people from increased economic activity." In this sense, interest (aka the wage paid to banks for their economic service) is just like any other wage paid to an economic actor. The "expansionary impulse" from interest is the same as the expansionary impulse form any other wage - this increasing economic activity increases the demand for money.
The money supply (banks extending credit) react to demand for money. So in the sense that interest, like any other economic activity, increases the demand for money, interest is an expansionary impulse because it (like any other wage paid for economic activity) means more demand for money.
Cheers, J.R.
Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time.
If the money was that one paper dollar, that's true. If the money was one digital dollar, it's not true. The dollar could be divided into billionths or trillionths and people conduct their economic activities with those tiny fractions of a dollar.
When I buy stock from a broker, they will sell the shares of stock broken down to the the thousandths of a share. It doesn't have to be sold only in whole units.
In the U.S., the government used to issue half-cent coins back in the 19th century. There's no conceptual reason why they couldn't have held the money supply constant and as the productivity of the economy increased, begin to issue tenth-cent, hundredth-cent, millionth-cent, etc denominations.
Costata - were you simply referring to the accrual of interest due but paid in arrears (where it creates a financial liability/asset that could potentially be packaged off and sold)?
Costata,
As Mark Twain observed, history doesn't repeat, but it rhymes. There was a terrible drought in the last Great Depression, and, lo and behold, amidst another fearsome economic contraction, here we are again. With respect to the bond bubble, arguably the mother of all bubbles, there is some TA that suggests that we may have a generational high in bonds coming in this summer. My view is we have been in the window for just such a generational high since the latter part of last year. The Libor scandal has the scent of something that amounts to the proverbial bell ringing at the top, as does the fact that Wall Street is advocating for record bond allocation. I wish I had the Bloomberg chart handy, but I don't.
Yay DP,
If we don't save in the currency, there is no "maturity of that savings" for the banks to transform. They can't re-lend / re-risk our money if they don't have it. So they have to use their money.
Humans are generally more prudent with our own stuff than with other's stuff, yes? #MoralHazard.
==================
For the activity of the banks as negotiators of credit the golden rule holds, that an organic connection must be created between the credit transactions and the debit transactions. The credit that the bank grants must correspond quantitatively and qualitatively to the credit that it takes up. More exactly expressed, "The date on which the bank's obligations fall due must not precede the date on which its corresponding claims can be realized."
Mises
Maturity transformation = obligations due (the bank must pay demand deposit on demand or short term note on maturity) before claims can be realized (before longer terms loans are due to be repaid to the bank).
Currently, the savers don't understand the huge risks that the banks have by funding with demand deposits and shorter term debt and lending long. But slowly, the savers are realizing this.
FOFOA:"It's just a shift in the perception of savers. Can't change that."
“Savers”: those producers who currently do not understand gold.
Go Go Blondie!!
Yes MnMark,
There's no conceptual reason why they couldn't have held the money supply constant and as the productivity of the economy increased, begin to issue tenth-cent, hundredth-cent, millionth-cent, etc denominations.
You mean besides the fact that the deflation you advocate for will blow up the credit system?
Lotsa people demand the money, and it increases in value because the supply does not increase. Hmm, Hayek got the obvious problem there:
I do believe that if today all the legal obstacles were removed which prevent such an issue of private money under distinct names, in the first instance indeed, as all of you would expect, people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.
Hayek via Freegold Foundations
You can't force people to borrow. Credit is created in response to demand for it.
J.R.
MnMark,
"There's no conceptual reason why they couldn't have held the money supply constant and as the productivity of the economy increased, begin to issue tenth-cent, hundredth-cent, millionth-cent, etc denominations."
In addition to what JR said, a good reason not to follow this plan would be that currency would be hoarded, as physical cash if need be. Why make loans, or invest in a business, or do any economic activity if you could increase your real wealth by simply holding green pieces of paper?
Hm, replace 'green pieces of paper' with 'useless yellow tokens' and that statement would begin to sound like AD. But at least gold has no other 'higher and bettter use', as opposed to currency, which is better used for lubricating the real economy.
DP and JR,
"Without our savings on deposit to loan out, bankers will be risking their own money. Also since we won't be demanding the savings we don't have on deposit, liquidity & maturity transformation are non-issues. Ah-ha!"
The banks would still have some of our deposits, since we'd all want to keep some currency in a bank account so we could pay for our stuff.
The deposits would be constantly turning over, so a bank run would not be that dangerous. It would be like the dam breaking on a shallow but very turbulent puddle.
As opposed to a bank run in today's system (or worse yet, under a gold standard), which would be like a dam breaking in front of a huge, calm lake.
Yes Michael H,
The banks will have deposits, but the deposits will not be our **savings**!! We will hold our currency we wish to spend in the banks, not our savings!!
There is no need for bank deposits to be any more than the money we all earn and then spend within a normal period of a month or two. That’s still all of the money. It’s all of the debtors’ money because they don’t save, and it’s maybe 95% of our earnings (if we save at a rate of 5%). And if no one is sitting on “money” (credit) for more than a month or two between the time of earning it and spending it, then mild inflation is not only inconsequential, but it becomes economically beneficial and desirable. I’m talking 2% to 3% inflation.
The inclusion of the savers’ savings in this process only damages the savers disproportionately to everyone else. And it damages the savers more the more they save. Inflation “taxes” savers disproportionately. But not in Freegold.
FOFOA comment to Interview
JR commented
//The banks would still have some of our deposits, since we'd all want to keep some currency in a bank account so we could pay for our stuff.
The deposits would be constantly turning over, so a bank run would not be that dangerous. It would be like the dam breaking on a shallow but very turbulent puddle.//
To attract fiat from people, the banks will have to give a very high interest rate return which will not be feasible unless they have more successful investment in loaning money to small businesses.
I wonder though the strict lending criteria could lead to the rapid increase in the number of money lenders who provide a high interest rate loan with collateral. In India this collateral has been gold. And even today people in India do not sell gold but put it as collateral. And as long as you have repaid the loan you can get your loan back. It has worked in the past I am not sure of the future. But its just one another model which could work. I know the idea that gold wont be lent in RPG era. But its a thought process which has stayed with me as I still feel there are many people out there who have the ability to run good businesses but do not have the credibility to get a loan.
Eg Zaveri bazaar in South Mumbai has a roaring diamond trade. Every 11 diamonds out of 12 are cut here. And the businesses there have no security. They just do the work on the basis of credibility. You cannot get in unless there are 5 different people vouching for you. The deals are done with a handshake.
Hi d2thdr,
And even today people in India do not sell gold but put it as collateral. And as long as you have repaid the loan you can get your loan back.[...]
I know the idea that gold wont be lent in RPG era.
FOA (06/19/01; 19:26:30MT - usagold.com msg#78)
Time for a rest!
...your feelings were easily comparable to those of drinkers during our American prohibition. Alcohol was against the law but people did it anyway. In many ways people's actions are the free market that is so powerful against government laws. During the war, everything from cigarettes to rubber was rationed and outlawed from typical use. Still, the market often overcame the law. Heck, even today, drugs and any number of other illegal activities are done as the law has little ability to stop the same.
But that's not the kind of law what this vision of a Free Gold market will depend on. These examples above outline rules and laws that restrict actions. For any wealth law to have an effect, it would have to be a known official protocol on the recourse side of disputed claims. Almost like how the dollar Legal Tender is a law in the US and mostly a protocol in the rest of the world. It regulates how you settle currency debts everywhere but has no real jurisdiction overseas. Except through IMF agreements.
On gold settlement, the comex did as much when it changed it's rules on silver during the 1980 hunt fiasco. By stopping the hunts from settling their futures contracts in physical silver, they stopped real people from dealing silver thru contract. At least on that exchange.
I don't expect the EBES (Euro Bullion Exchange System or whatever type name they use) to act exactly, but in the same spirit. No one is going to tell anyone they cannot enter into gold contracts. Sure, we will be able to borrow, lend, option or sell gold all we want. But, unlike those overt alcohol laws during prohibition, today's gold party people be able to drink all they want. (smile) That is deal in all the gold collateral you want. But, if any of those deals go bad because the other side wants to walk, instead of deliver, you will have to settle in cash. In a Euro court of law, no one could bind you to physical settlement if the deal was in Euro Legal Tender. Even if it was in the contract. You would have to accept cash, if contested.
Now, some say this will simply drive all gold deals outside Europe. That's thinking in the present context. But in the future the dollar reserve and it's credit gold market will be in a shambles with people running all over the globe just looking for a place to deal gold at all. Credit gold will be a joke by then as trillions of losses will be outstanding.
The effect of all this would be to drive most every portion of physical gold dealings into "on the spot" buying and selling. Mostly in Euros. A mine could still borrow, using the value of gold as collateral, but it would only be the "cash value" of that gold that could be used in settlement (if the deal went to court). OR physical settlement if both sides had no problem (and stayed out of court).
This kind of legal protocol change, not unlike changing comex rules of trade, only affects the financial side of gold and in no way restricts investors from cash spot dealing in physical gold. Again, it would force the world gold markets to adjust away from copying the old dollar markets that so manipulated the physical gold price in the first place. Of course, no one would be trying to deal gold in dollars then anyway.
In reality, very little physical gold would be borrowed, either ahead of production or from world stores to sell into the spot market. If one owned gold and wanted to liquidate to buy something, you would sell it, pay taxes and use your dollars ,,,, errrr Euros! Gold would, over time, rise to reflect it's real reserve value to both central banks and private owners the world over.
http://www.usagold.com/goldtrail/archives/goldtrailfour.html
You can do whatever you want, but you can't force a court (and by extension, the country from which the court derives its jurisdiction and power).
Gold is not money. Governments in the past have tried to make gold money. That failed. So the idea is gold is not money. A court can order money damages if you lend your gold and someone does not return it. But the gold you lent is not money, and the court can only order money damages, not gold ounce damages.
FOA: No one is going to tell anyone they cannot enter into gold contracts. Sure, we will be able to borrow, lend, option or sell gold all we want. But, unlike those overt alcohol laws during prohibition, today's gold party people be able to drink all they want. (smile) That is deal in all the gold collateral you want. But, if any of those deals go bad because the other side wants to walk, instead of deliver, you will have to settle in cash. In a Euro court of law, no one could bind you to physical settlement if the deal was in Euro Legal Tender. Even if it was in the contract. You would have to accept cash, if contested.
And if some dumb country tries to make gold money again, well guess where the savers won't be flowing the gold too.
FOA: Now, some say this will simply drive all gold deals outside Europe. That's thinking in the present context. But in the future the dollar reserve and it's credit gold market will be in a shambles with people running all over the globe just looking for a place to deal gold at all. Credit gold will be a joke by then as trillions of losses will be outstanding.
Ooops
"You can do whatever you want, but you can't force a court (and by extension, the country from which the court derives its jurisdiction and power) to treat the gold as money and order damages be paid in gold. Damages are paid in the currency of jurisdiction in which the contract was denominated.
Contracts denominated in currency, not contracts denominated in gold ounces."
FOA: A mine could still borrow, using the value of gold as collateral, but it would only be the "cash value" of that gold that could be used in settlement (if the deal went to court). OR physical settlement if both sides had no problem (and stayed out of court).
So yes d2thdr,
Collateral, aka security for a loan, is a big part of lending. But gold won't be used much for that purpose:
FOA: If one owned gold and wanted to liquidate to buy something, you would sell it, pay taxes and use your dollars ,,,, errrr Euros!
================
FOA (05/08/01; 20:54:48MT - usagold.com msg#71)
A Tree in the Making #03
[...]I would state that no form of lent gold be recognizable or enforceable in the court of law as a legal tender contract. One may borrow gold, relend it, or even borrow against it, but that gold would not be valid in the payment of all debts both public or private. It could not, by law be legal tender. This is not to say the trading of gold would not somewhat supplant currency in function. It could and most likely would to a degree, but it would no longer carry a credit quality that fiat would in the form of a time function. Indeed, in our modern economic structure, a credit time function is very valuable and gives digital contract currencies their demand.
To deal in the future,,,,, to borrow,,,,, to capitalize would require the use of a fiat function. Gold could / would be a final trade; I'll give you ten cars (or gold) for your house,,, deal done. If I want more time to pay, I and we must engage a fiat loan
http://www.usagold.com/goldtrail/archives/goldtrailfour.html
Hi JR
What about a GELOC (gold equity line of credit)as mentioned previously by FOFOA? Isn't that using gold as collateral for a loan?
Although I have wondered who would hold your collateral in that case - seems very risky to let it out of your physical possession.
Hi Lisa,
Yes, the GELOC is an idea for the $IMFS ;)
The gold certificates on the asset side of the Fed's balance sheet are not even paper certificates with fancy fonts and pictures. They are electronic book entries representing the dollar-denominated amount of $11 billion. They no more represent the US gold by weight than they are redeemable in that gold. They are a nominal dollar token accounting entry.
The Fed's "Fisher" was wrong [here] when he said, way back in 1997, that a revaluation of the gold would require selling off other assets to balance the Fed's books. Firstly, if Congress were to revalue Treasury's gold, that would not automatically revalue those "certificates". They have no market value because they are irredeemable, non-negotiable and obviously unmarketable! Secondly, even if it were to automatically affect the Fed balance sheet in some cartoon universe, selling off other assets is not the only way to balance a gold revaluation. The more logical way is for the Fed to issue new Fed liabilities, aka dollars, to the owner of that collateral that is rising in value.
Think back to when house prices were actually rising. If you bought a house for $250K and it was suddenly worth $350K did that revaluation automatically appear on your bank's balance sheet as an additional $100K asset? Of course not! But you, as the homeowner, could put it on the bank's balance sheet with a HELOC or a second mortgage.
Maybe you could call this gold revaluation a GELOC to tide you DC spendaholics over until you can get your act together later this year. And that (soon to be) $400 billion "bridge loan" will not even be debt in the traditional sense, and it certainly won't be "debt subject to the debt limit" any more than Bernanke's QE is subject to limit.
Honestly, the Eurozone is so far ahead of you DC guys on this it's not even funny. They mark their official gold reserves to the market price every quarter, and they just voted to make gold a system-wide acceptable collateral asset.
http://fofoa.blogspot.com/2011/06/open-letter-to-ron-paul.html
A GELOC is a huge step on the road to super high priced gold!! But when we get to high priced gold, we are no longer in the $IMFS.
=================
Although I have wondered who would hold your collateral in that case - seems very risky to let it out of your physical possession.
Yeah, you better have a big stick because the Government's big stick won't help you.
In addition to what JR said, a good reason not to follow this plan would be that currency would be hoarded, as physical cash if need be. Why make loans, or invest in a business, or do any economic activity if you could increase your real wealth by simply holding green pieces of paper?
Think the simple answer is that presumably you would not put your appreciating currency into any investment that did not have a good chance of yielding more the rate at which the currency was appreciating simply because of the improving productivity of the economy. It seems to me that this would have the beneficial result of weeding out marginal investments.
I am relatively ignorant about macroeconomics, so maybe someone can explain where I am getting this wrong: if the government decides to expand the money supply to match the expansion of the economy, then they are going to be doing that by printing money in some form or another - adding money to the economy that did not exist before. That means that whoever gets to spend that new money first is, in effect, getting the benefit of the improved productivity of the economy that would otherwise have been distributed proportionally to all the savers in the economy who would otherwise have seen their currency become more valuable. How is that a just or desireable outcome? Why should the money-printer get to skim the cream of productivity increases off the top, while Grandma and Grandpa Saver get nothing of those increases?
Please note I am not talking about why G & G Saver should or shouldn't save in gold. I am making the argument that increasing the money supply to match the expension of the economy does not seem necessary or just.
As for the discouraging effect it would have on borrowers who would see it become harder and harder to pay off their debts -- good! Let them be VERY careful before borrowing money to be sure that what they will use that borrowed money for will yield more than enough return to cover the appreciating value of the currency. Let it be onerous for someone to borrow money simply to consume. It seems to me that this is an incentive of the right sort for the long-term health of a society.
After all, why would you sell your gold for less than it is worth? Collateralize it and as it rises, pull out that equity - sounds like a better plan, yes?
But things become different when gold's true worth is recognized!
MnMark,
"Think the simple answer is that presumably you would not put your appreciating currency into any investment that did not have a good chance of yielding more the rate at which the currency was appreciating simply because of the improving productivity of the economy. It seems to me that this would have the beneficial result of weeding out marginal investments."
Isn't this true as long as real interest rates are positive, regardless of whether the currency itself is appreciating or depreciating?
Still, you bring up a good point: the inflating of the currency is part of the 'credibility inflation' of the $IMFS. We must keep our savings in the bank to earn some yield, while cash under the mattress loses value. The savings in the bank then get to power the loan-making machine.
Under freegold, we wouldn't need a 'yield' as an incentive to keep deposits (deposits, not savings, h/t JR and DP) in the bank; we'd keep them there simply for the convenience.
As for loans being difficult to pay back: your condemnation of borrowing casts an awfully wide net. Even productive businesses would be prone to failure.
Plus, the real interest rate of loans would be directly and inextricably tied to the general price level (which would depend also on money velocity and overall economic activity) in a way that may not be beneficial to society.
Should, say, velocity increase, the price level would rise without a corresponding increase in the money supply. This would raise interest rates, but the economic climate may not necessarily warrant the higher rates.
There are two other negative aspects to the deflating currency system you describe, beyond difficulty of paying back loans:
1. Wages and prices would be constantly decreasing. I think it would be more difficult for society to adjust to this dynamic to an inflating dynamic. As I said in an earlier comment, this could be a real problem, or not, just as our current inflating currency and rising prices is no problem.
2. Consumption would be discouraged. I would be the first to say that we are currently overconsuming in the US, but going to the opposite extreme of actively discouraging all consumption doesn't seem like the correct solution.
Maybe we have a young Japanese person among us, who could tell us all first hand how wonderful an entrenched deflationary environment is?
DP,
Japan is not a good analogy for the environment MnMark was describing.
http://www.tradingeconomics.com/japan/inflation-cpi
(first reasonable hit on google)
CPI for Japan was around 0 or -1% from 2000 onwards. I'm sure that economic activity has expanded by more than that, just by population growth. So the money supply must have increased during that time as well.
Just not enough to get everyone up and dancing.
Michael H,
I must admit I have difficulty following your arguments. This is more a function of my difficulties following abstract economic arguments than it is your language.
Having said that, I would make a few responses to your points.
I don't see that the need for wages to decline would be a difficulty or that it would necessarily even occur. As innovations occur, workers can produce more goods in the same amount of time, justifying that their wage stay at least even (speaking generally). We are quite accustomed to prices declining; it happens every time a new television technology comes along, for instance. And there are industries whose workers have to accept pay cuts or lose their jobs as those industries become irrelevant (buggy whip manufacturers, etc). People are very adaptable to economic circumstances...I suggest that the reason gradual deflation seems like a bad thing is because we haven't had it for a hundred years and no living person in the West knows what it's like. Wasn't that basically what we had throughout the 19th century, a time of dramatically improving living standards?
Also, I don't think you responded to the point I made about the injustice of the money-printer skimming the benefits of productivity increases off the top by spending the newly-expanded money first.
It seems like a quite just and beautiful thing that a young man would be able to earn a dollar, put the dollar away for safekeeping, and then bring that dollar out at age 80 and buy three times as much in real terms, enjoying the overall productivity gains of society during his lifetime. Instead not only does he not receive those gains, 98% of the real value is stolen by the money printers.
The "mild inflation is good but mild deflation would be terrible" argument intuitively doesn't seem right to me. If humans can adjust to mild inflation they can adjust to mild deflation. We are very adjustable. The only difference is that the fruits of productivity increases would go to the prudent and the savers instead of the government money-supply-expanders and their cronies in the banking industry that get to spend the new money first.
MnMark,
"As innovations occur, workers can produce more goods in the same amount of time, justifying that their wage stay at least even (speaking generally)."
Not across all occupations evenly through time, as you concede. So wages for many (most?) workers will have to decline.
"Also, I don't think you responded to the point I made about the injustice of the money-printer skimming the benefits of productivity increases off the top by spending the newly-expanded money first."
I didn't respond because it's not really an injustice. The 'skimming' only works as long as people save in the currency. Stop saving in the currency and you take away the money printer's ability to skim.
"It seems like a quite just and beautiful thing that a young man would be able to earn a dollar, put the dollar away for safekeeping, and then bring that dollar out at age 80 and buy three times as much in real terms, enjoying the overall productivity gains of society during his lifetime. Instead not only does he not receive those gains, 98% of the real value is stolen by the money printers."
Replace 'a dollar' with 'gold' and you might be on to something.
But to turn things around on you, why should your young man be able to 'skim' real purchasing power that is three times his original contribution to society, merely for holding a green piece of paper through the decades?
"If humans can adjust to mild inflation they can adjust to mild deflation."
While I do believe that our natural responses to reward and sacrifice are not symmetric, I already made the concession in my previous comment that this adjustment may or may not turn out to be a problem.
I think the biggest hurdle to address in the system you describe is what determines interest rates.
2.
Lisa, JR.
Re: GELOC. In order to try to enter the transition with leverage, my plan in the near future is to seek a 'gold loan' from a Bullion Bank whereby I deposit gold bars with a 3rd party fiduciary as collateral for a $ fiat loan with no haircut. Since gold is Tier 1 capital, just like cash or T-Bills, how can they object?
I will then buy more physical, rinse and repeat.
All we need to discus is the interest rate on $.
LIBOR + 1% should work? I might even be prepared to pay more.... say LIBOR + 2%.
I will report any potentially interesting BB reactions. Seems like a 'no brainer' to me.
costata,
”...saving is really just a decision to store future spending power. One can argue all day about why people decide to do so.“
They do so when they feel it is in their best interest.
”One can afford to move beyond saving into investment when...“
… one feels it is in their best interest. The question is subjective. You are stating the criteria by which you feel you can afford to do so, and applying it to others. The point at which one feels something is in their best interest is of course heavily dependent upon the environment they find themselves in, but it is always their decision. They just need to be responsible for it.
”No currency manager/issuer can permit an exponential curve to develop in the bank generated money supply if they want currency stability. The way to stop that curve from getting out of control is ridiculously simple.“
Indeed. Currency issuer sells gold, contracting the currency supply, should they feel the value of the currency needs bolstering, and vice versa.
The bank generated currency supply will always be matched by the value it produces, so the currency may be expanding but it will not be losing value... however any misallocation of capital by an imprudent bank and the bank is left holding a loss in the form of a bad debt. Banks perform a service: that of regulating the currency supply to match the needs of the economy. In order to do this accurately, they need to be responsible in that they need to have skin in the game (no moral hazard), but they also need to be paid for their due diligence, and this is interest earned. A banker is merely another actor. It is only because he currently lends out someone else's savings (credibility) rather than his own credibility that banking is not functioning equitably.
There are no ‘currency supply issues’… these are not allowed to develop, not by any actor forcing any other to do anything, but by arbitrage performed by free actors acting in their own best interests creating and consuming value and balancing this with the buying and selling gold in the maintenance of their own credibility.
I think your model would work better without presuming coercion. It is replaced by personal responsibility; this is actors acting in their own best interests… being responsible creates credibility.
You said: ”I agree with you 100 per cent. And credibility = liquidity. No credibility = no liquidity. In this new system the only "money" with full credibility at all times and over all periods of time will be gold. Sitting right below gold will be the most stable currency or currencies. The most barterable good will sit above the second most barterable good and so on down the line.“
Exactly. Can you not see how under these conditions responsibility returns and actors following their own self interests automatically regulates the system equitably?
======
Matt,
I hope that "Blondie, mind your feet when you're swinging that hatchett." is not your best effort. A number of people participating here have spent substantial time developing their thinking. Not everybody agrees all the time, but they do have the respect for one another to make their case and to publicly retract or alter it if it does not stand up to scrutiny. This is how one develops credibility.
You reject the reasoning that has been developed here, but don't feel you need to make your case as to why. Either illuminate us with your brilliance or shut up, but don't just snipe around the fringes like a know-it-all. Not making your case just gives the impression you are not confident in it.
why should your young man be able to 'skim' real purchasing power that is three times his original contribution to society, merely for holding a green piece of paper through the decades?
That is a good question. But the question applies equally whether he holds green paper or golden coins. Why should the holder of gold coins benefit from improvements in productivity?
You benefit because the producer has found a way to make more goods for less inputs, and more or less "splits the difference" with the purchaser, in order to lure the purchaser to buy his goods. The producer came up with the improvement, and he profits from it more by giving the customers some of the benefit of the improvement in the form of lower prices, thus luring more of them to him.
So the reason my young man should get three times as much for his green paper is because the producer has so vastly increased his productive ability that he is happy to sell the young man three times as much for the same price.
The young man is entitled to it (and this is a purely academic moral argument) because he originally DID produce value, and he resisted comsuming it. He was wise.
The money-printer, on the other hand, produced nothing. He simply prints more money - he counterfeits it, essentially - and then goes out and buys up the productivity gains that the young man would have been rewarded with for his productivity and saving ways.
d2thdr, all,
Former RBI Governor Y.V. Reddy tells it like it is.
This is a must listen for everyone.
The young man is entitled to it (and this is a purely academic moral argument) because he originally DID produce value, and he resisted comsuming it. He was wise.
If he chose to save in something that could be printed at will or multiplied by the lending-practices of banks, he wasn't wise, now was he?
The money-printer, on the other hand, produced nothing. He simply prints more money - he counterfeits it, essentially - and then goes out and buys up the productivity gains that the young man would have been rewarded with for his productivity and saving ways.
So now we established that this young man was not so wise, it is maybe morally ok that he looses some purchasing power?
Had he and his peers only saved in gold, nobody would have enabled this money-printer and the money-printer's plan to steal productivity gains would have failed.
JR thanks a ton. You really put in a lot of effort here and I am thankful for that.
Blondie - well the RBI chaps seem to know the problem well. Perhaps all the central bankers know the problem well and perhaps they also know the solution for the problem. Is this the moral support to the Euro faction that FOA talked about to ultimately enable 'the dollar faction fall on its sword'. Time will tell.
Well, I understood a lot of what the Indian CB said, but there were skeins of dialogue that my ear simply could not parse. I think I heard enough to make me understand why Blondie said what he said though.
Deflationists have this idea that if they force money to be hard and honest, it will make the people be honest. How can inert money make people do anything? Instead of fighting a losing war, get your own personal freegold.
FOFOA: Modern man has dug himself so deep into the hole of debt that he will never get out!
What I mean by this statement is that he will never again accept a 100% Pay-As-You-Go monetary system. This is not to say that every man in the world wants it this way. Indeed, most of "our crowd" would like to go back to a gold standard of some sort. But for the Global Collective, this is simply not acceptable...
Money is always subjugated to the needs of the state. And when it is, who pays? The savers do!
There are plenty of blogs about what we should do as a society. About how we need to start a new gold standard; a return to honest money. How we must return to a hard, commodity-based currency that will restrain the profligate governments and their greedy bankers from inflating the money supply at will. But what we must understand, what is often difficult to understand, is that there is a big difference between what SHOULD happen and what WILL happen. There is a difference between FIGHTING for something and simply OBSERVING the real world to plan your next move. There is a difference between being an ADVOCATE or PROPONENT and being a PASSIVE OBSERVER of the changes we are actually living through.
This blog takes the latter position in all of these cases. If you would like to be an activist for a better world, this may not be the blog for you. But if you are a hard working producer and a saver worried about how to protect your purchasing power from the hungry collective, this blog may be just what you are looking for!
MnMark,
"The money-printer, on the other hand, produced nothing. He simply prints more money - he counterfeits it, essentially - and then goes out and buys up the productivity gains that the young man would have been rewarded with for his productivity and saving ways."
There are two 'money printers' -- CBs that produce base money and commercial banks that produce credit money.
As JR and Blondie discuss above, interest is the profit the banks receive in exchange for regulating the money supply. They are 'wise' in that they provide a service that society needs.
"But the question applies equally whether he holds green paper or golden coins."
Thank you again for repeating my caveats (July 17, 2012 8:48 AM) back to me.
....
Under freegold, a gold holder may increase his purchasing power over time, or may find his purchasing power erodes, depending on economic conditions. Such is the reality of the gold supply-demand cycle.
....
The real problem with the scenario you are describing is that the money supply is left with zero adjustability. All changes in economic output lead directly to changes in the price level, but these changes wouldn't be a smooth '2% p/a'; they would happen in fits and starts, 2% deflation one year, 8% deflation the next, 1% inflation after that (meaning 'price inflation' and 'price deflation' in this context).
....
So, I'm your employer, and this year I have to tell you, "oops, not only did I have to cut my prices by 5% this year, meaning I have to cut your salary, but the loan I took out to buy the machine tool that provides your employment still requires constant-dollar debt service, so I have to cut your wages by 7%".
....
"So the reason my young man should get three times as much for his green paper is because the producer has so vastly increased his productive ability that he is happy to sell the young man three times as much for the same price."
The producer hasn't necessarily increased his productive ability; there's just more producers and more consumers thanks to population growth. Would the baker be thrilled to sell you bread at 1/3 the price, simply because there's 3 times as many bakers around? (But there's 3 times as many baked-goods-consumers as well)
....
Who benefits from the expansion of credit money? After all, credit money is where most of the expansion takes place, not CB 'printed' base money.
Well, at least it HAD been where most of the expansion took place, up until recently.
I hope you are reading Blondie's comments as well (for example on July 17, 2012 1:48 PM) since they are relevant.
Lisa,
Just so you know, I do not endorse ChrisF's 'leverage' scheme. I don't think I'm the only one.
Let me expand a bit, since my endorsement or lack thereof does not likely mean much to anybody.
First, leverage applied to gold does not fit with FOFOA's message. In fact, it is the antithesis of freegold.
Second, I tried dissuading ChrisF from his leverage schemes on a previous occasion.
http://fofoa.blogspot.com/2012/02/indias-gold.html?showComment=1329236135285#c1999681063329454331
http://fofoa.blogspot.com/2012/02/indias-gold.html?showComment=1329242192877#c4831618542579161227
Third, while ChrisF is welcome to lose his money in any number of ways he can devise, I don't think it is right to let him use FOFOA's platform to promote schemes that will likely end up harming anyone foolish enough to follow along. Leaving ChrisF's ideas unchallenged might be interpreted by lurkers as tacit approval.
Blondie,
Great video clip of the former RBI chief. Thank you. I'm going to sit on the sidelines for a while to see how the discussion unfolds and to absorb the input from the discussants. I mention this because I want you and others to know I'm not ignoring your responses or anyone's thoughts.
BTW if this comment section needs some kind of "code of conduct" I think you nailed it here:
Not everybody agrees all the time, but they do have the respect for one another to make their case and to publicly retract or alter it if it does not stand up to scrutiny.
Cheers
Here is an alternative risk free leverage scheme: Buy old coins with minimal numismatic value that sell for a minimal premium. You can buy all sorts of old coins cheaper than you can buy the modern bullion coins. In the U.S. you can often find dealers that are happy to find someone willing to take 20 Marks or 20 Francs or Sovereigns off their hands. The coins are unloved in America. There is a good chance that the virtually nonexistent numismatic premium will surge in the transition to freegold. Case in point: I was speaking to a European dealer last week about why Russian imperial coins sell at such a high premium compared to other European coins from the same period. The cheapest available coins are the 5 rouble of Nicholas II, which are at least 20% above melt value. Other common coins like the 7.5 rouble sell for at least 100% premium. These coins are not rare, they were struck in the millions, and they were once the cheapest bullion grade coins available in Europe. He said that Russians started buying gold coins after they emerged from their currency crisis and after the country became wealthy again -- and they have bought up all the old Russian imperial coins on the market. I think the same will eventually happen in other countries too as the wealthy and the masses start to wake up and move into physical gold. I see this as a *free* leverage play whether freegold comes slowly or quickly. If it comes slowly, there will be a chance to sell the old coins if they premium rises and buy more cheap gold at a minimum premium. If it comes quickly, I think it is a no brainer than numismatic coins will have a much higher premium than bars once the world goes back to hoarding gold.
To be clear, I am not suggesting that anyone pay any numismatic premium for any coin. That would be pure speculation. What I suggest is that if you have a choice between buying modern bullion coins/bars and buying old coins that have no numismatic premium now (but might in the future), it is a no-brainer to buy the old coins.
costata,
I don't think the comments section needs a code of conduct as such, I'm just pointing out the one that has naturally developed, spontaneously, to someone who perhaps hasn't spent enough time here to have noticed it. I find this 'code', if you want to call it that, rather interesting because:
a) It requires only that we take responsibility for our words,
and
b) When we do so we acquire credibility.
I highlight the two important terms to emphasize how they do not exist in isolation from one another.
Blondie,
I think it requires a little more than responsibility to establish credibility. So I'd like to agree to disagree on this one and leave it at that.
Cheers
I agree, our words need to add value to the conversation too.
JR
I was wondering if you have read
http://mises.org/document/3726/Deflation-and-Liberty
by Hulsmann, and what you think of it.
I know it's probably redundant to link to a piece that Zerohedge has linked to, but I found a passage in this Wall Street Journal piece on the deutsche mark interesting:
Unlike neighbors such as Italy and France, which let their liras and francs officially expire over the past year, Germany never set a deadline for exchanging its old money for euros. So, if they decide to accept marks, retailers and other businesses can still exchange them at German central bank branches.
Question is... can banks get marks BACK from the central bank?
ChrisF,
"Since gold is Tier 1 capital, just like cash or T-Bills, how can they object?"
Tier 1 capital is not about holding physical gold as reserves, but rather is about counting paper gold assets 1-1 with paper gold liabilities. Its an accounting change to boost the capital ratios of the bullion banks. If you aren't talking about a big gold lending operation of a big multinational bank, the tier 1 gold thing really has no application.
Cheers, J.R.
IMO taking responsibility for our words means taking time to post things of value, of creating posts that accurately reflect the proper view of the issue at hand. Or asking meaningful questions that reflect thoughtful consideration. If you post responsibly, you can't help but add value.
I couldn't agree more Blondie, other than I (obviously) think your qualifies is superfluousness, as its clearly subsumed in "responsibility." One can't be responsible with their thoughts and words and not add value.
Where would we be without people asking questions and thinking about these issues form their own unique persepctive?
"why should your young man be able to 'skim' real purchasing power that is three times his original contribution to society, merely for holding a green piece of paper through the decades?"
"merely...holding" a piece of paper means that he has deferred his consumption from the present to the future and it is necessary for economic calculation and entirely beneficial to all that people be rewarded for this.
Kid Salami,
""merely...holding" a piece of paper means that he has deferred his consumption from the present to the future and it is necessary for economic calculation and entirely beneficial to all that people be rewarded for this."
Deferring consumption does not by necessity lead to holding currency for the long term. There are other things one can do with one's excess.
What if our young man had stockpiled wheat instead, and thus priced people out of the bread market and made them starve?
In MnMark's scenario of a fixed currency supply, our young man is depriving society of the use of limited currency for lubricating transactions.
So sure, deferring consumption is a laudable action. But I think whether one gets rewarded or not depends on what one *does* with the deferred consumption. Hoard life's necessities? Hold paper? Invest in productive enterprise?
IMF calls on EU to commit suicide by HI; but that link is severed. :)
FRANKFURT — The International Monetary Fund warned Wednesday of “a sizable risk” of deflation in the euro zone, and called on the European Central Bank to begin buying huge amounts of government bonds to help hold down borrowing costs for troubled countries.
http://www.nytimes.com/2012/07/19/business/global/imf-warns-of-sizeable-risk-of-deflation-in-euro-zone.html
Here's a question. In terms of real world events, what would it take for you to begin to doubt that the Freegold hypothesis is correct?
A book that made a big impression on me back in the late 1980s was "The Great Depression of 1990." It made a convincing case that the collapse of the Western financial system was just around the corner because the imbalances had grown unsustainable and couldn't be fixed.
That was written almost 25 years ago and of course there was no Great Depression of 1990. Or of 2000, or of 2010. The system was able to creak along 25 years longer than that writer thought it could. There were undoubtedly people alive in 1989 reading that book who have died of old age by now, having never experienced that Great Depression.
How do we know that Freegold isn't 25 years or more away - so far away that in practical terms, as it would affect the older among us, it might as well not occur at all? Certainly I believed what that writer wrote 25 years ago. He seemed to make a very reasonable case.
Now we've been waiting four years since the blowup in 2008 and we've waited through numerous "crisis any day now!" moments regarding Greece, etc...and things just plod along.
What would you have to see - or not see - that would make you begin to doubt that Freegold is going to occur?
An interesting evolution of the "Occupy" movement I've just stumbled across…
"#strikedebt"
Party on, dudes. :-\
MnMark,
Your comment reminds me of FOA's Foundation post. It is too long to post but answers your doubts very well. Read the whole thing.
FOA (2/26/2000; 11:13:56MT - usagold.com msg#7)
Foundation
If I had a nickel for every time we thought the dollar was finished, I would have a bunch of nickels! Remember back in the early 80s or even further back into the 70s. All we heard was how the dollar was finished and going to crash and burn. Books about hyper inflation and the need for gold / swiss francs were all over the place.
I read all of them to gain perspective and also acted on some of their advice. Made some money on it too. But even then, something just didn't completely ring true about the whole scenario. Indeed, in hind sight, gold never did return above $800, the dollar didn't hyper inflate and most of the world kept using the dollar as a reserve.
Today, we can more fully understand why so much of that early insight failed to deliver...
Jeff,
you didnt answer this interesting question at all, but stated something just to overplay the issue adressed. Let me repeat:
"In terms of real world events, what would it take for you to begin to doubt that the Freegold hypothesis is correct?"
AD,
The heading at the top of the blog says 'Everyone knows where we have been' but of course, not everyone agrees on the past. That makes it even harder to agree on the future doesn't it? That's probably why FOFOA says he offers a view, and you can take it or leave it.
IMO the world is moving toward freegold; I see evidence of it. You don't agree; I'm aware. If I saw evidence that the world was moving the other way, I might change my opinion.
So I ask you AD, 'In terms of real world events, what would it take for you to begin to believe that the Freegold hypothesis is correct?'
AD,
If core countries in the Euro-zone began to exit the Euro, I would begin to doubt parts of the Freegold hypothesis, mostly the part about Euro acting as prime paper sidekick (MoE) to gold (SoV).
Would I sell my gold if that happened? No, never. That would be the time to hold it extra tight.
/Burning
Jeff,
you ask for me personally? I simply dont think it is correct. When could I change my mind? e.g. When the IMF decides to change the accounting rules about gold (receivables). Now ask yourself how realistic is that?
Greets, AD
I will tell you one thing that would make me begin to doubt the imminence of Freegold: if the U.S. Congress actually took serious, extensive action to balance the budget.
Another thing that would make me question the timeline of things would be if the ECat nickel/hydrogen LENR technology that Rossi is allegedly developing pans out. That would massively undermine the importance of oil and would give the world a huge boost of "free" productivity increases that might put even the internet revolution to shame, and would buy governments perhaps decades more time because of the way it would cut costs.
I do think that especially when you find yourself very convinced and enthused about a financial hypothesis like Freegold it is important to ask yourself what you should be looking for in the way of counter-evidence. Otherwise it's too easy to exclude it because you are very happy to have found an explanation you like.
@Jeff:
You wrote: IMO the world is moving toward freegold; I see evidence of it. You don't agree; I'm aware. If I saw evidence that the world was moving the other way, I might change my opinion.
Can you identify what sort of evidence that might be? What sort of news stories, etc?
@Jeff:
I would also just mention that the post by FOA that you pasted was written *twelve years* ago.
I believe we have read speculation that the reason Freegold hasn't happened yet was because the Chinese came along - something Another/FOA didn't anticipate - and that extended the life of the current system an unexpected additional decade.
So what other things might come along to extend it another 12 or 25 years, or so long that it has no practical significance for we who find the Freegold hypothesis convincing?
MnMark,
Agreed, but highly highly unlikely the USG will balance budget.
To add events that could threaten FG (probably more likely than US balanced budget):
- Alchemists succeeding
- Huge gold-filled asteroids smashing into Earth.
FWIW, personally I put more faith into this free energy device than Rossi's E-cat. Please notice the all-important rubber bands :D
/Burning
What would make me doubt Freegold?
If the all the banks/countries sell all their Gold.
or this
MnMark, good comments. You are right. Nobody knows the future, and this could drag out a long, long time. Like FOFOA says, you can think of it as an overdue earthquake. Just because the earthquake is overdue does not mean that the Big One is coming anytime soon. When it does come, you can be sure in hindsight that everyone will agree it was overdue.
MnMark,
Even if USG voluntarily balances the budget and/or gets rid of the trade deficit (both highly unlikely), credibility inflation remains a massive threat to the dollar. All the dollar-debt savings out there simply isn't worth anything when measured against real world goods & services. The US cannot make good on all the promises it has made to its own citizens and to other countries in real terms - it is impossible.
And even if the US outright defaults on those promises instead of simply defaulting via printing, this still will severely undermine confidence in $IMFS (who will save in dollar-debt having just been burned?), thereby leading to a new international reserve, which will very likely be gold.
Of course this is all just theoretical because it will never happen, we'll just print our way into oblivion. It's difficult to conceive of events that could postpone the day of reckoning far out into the future. But hey, anything is possible I guess.
Just my 2c.
http://www.zerohedge.com/news/ubs-issues-hyperinflation-warning-us-and-uk-calls-it-purely-fiscal-phenomenon
Looks familiar?
Wow, what an excellent article DP. A few excerpts:
Countries at risk
"Bernholz notes that preceding a case of hyperinflation, government deficits usually amount to more than 20% of government expenditures, and that deficits amounting to 40% or more of government expenditures clearly cannot be maintained."
"Of the Top 10 deficit countries, India, the US, Japan, Spain and the UK all exhibit government net borrowing above 20% of government expenditures (Table 1). However, Spain does not have its own currency and therefore cannot trigger hyperinflation on its own."
...
"The euro is therefore not a prime candidate for hyperinflation, as long as the core countries do not leave the currency union."
...
"We think that a creditor nation is less at risk of hyperinflation than a debtor nation, as a debtor nation relies not only on the confidence of domestic creditors, but also of foreign creditors. We therefore think that the hyperinflation risk to global investors is largest in the US and the UK."
Good thoughts MnMark,
I liked this especially:
"So what other things might come along to extend it another 12 or 25 years, or so long that it has no practical significance for we who find the Freegold hypothesis convincing?"
Did you know FOFOA has written posts that explore this issue? Maybe you did not know this so here is a start.
FOFOA raised the issue of China's structural support in for example Moneyness, where he noted:
After the launch of the euro, the Europeans slowly backed off from supporting the dollar. But right about that same time, China stepped up to the plate and started buying Treasuries like they were hotcakes. This may have been related to China's admission into the WTO in 2001.
Then, sometime around 2007 or 2008, the dollar's Credibility Inflation peaked. The growth of the "economy's money" (credit denominated in dollars) hit some kind of a mathematical limit (expanding to the limit was wholly due to FOFOA's dilemma) and began to contract. Since then, China has slowly backed off from supporting the dollar. We now know that China is more interested in using its reserves to purchase technology and resource assets wherever they are for sale than bonds from the US Treasury. China is also expanding the economic zone that uses its monetary base as a reference point in trade settlement to the ASEAN countries.
Meanwhile, the junkie USG has kept the free stuff flowing in by expanding the monetary base.
cont.
cont.
And then in Inflation or Hyperinflation?, FOFOA picked up where he left off, further delving into what has happened to China's "structural support" - *WOOSH!!* and surveying the landscape of the dollar's current "willy-nilly support system:"
...one thing is as clear as an azure sky of deepest summer. This is a very different picture from the China of 2002 embarking on a "parabolic rise" in US dollar "structural support". In fact, even though it is true that some combination of Japan, oil exporters, Caribbean banking center, Taiwan, Switzerland, Russia, Luxembourg, Belgium and Ireland (to name a few) managed to cobble together the necessary support last year, the dollar is now living off of a willy-nilly support system rather than the "structural support" it enjoyed for the last 30 or so years. If FOA was here, he'd probably say something like this:
The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.
Of course "hot inflation" is coming! But how long will it last? How long can it last without the structural support of foreign CBs mopping up the dollars the USG will be printing in order to defend its own "lifestyle" in real terms? How far can prices rise without hitting that hyper feedback loop at the margin where prices are discovered? The USG is net-emitting $3.6B per day today, and the problem is that the USG is not an economy. It is a consumer and a printer. So the daily net-emission of global dollars is now backed, not by an economy, but by the largest consuming entity ever known to man!
[...]
Gregor is correct about the "benign" inflation we've had, not just for the past decade, but for the past three or four. This is what FOA was talking about. "Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles." But hyperinflation "never showed up because the world had to support its only money system until something could replace it." The euro was born, then came China, and my call is that hyperinflation "is now being 'structurally' set free to run."
[...]
The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands. Which kind of renders the premise invalid, doesn't it?
I hope you find the time to read them in detail, I think you will find them illuminating. Remember:
The dollar is so vastly overvalued today because the rest of the world has kept it on life support for 30 years past its expiration date
China's support allowed the overvaluation to grow, in the sense that the problem now is quite different than the one faced @ 2002 when China embarked on its period of structural support.
Cheers, J.R.
Indeed, Aaron.
If only we could get the author patched in to our daily #GroupThink conference calls, he might help us confirm our biases even more!
JR,
Thanks for the post excerpts. I am not well-enough informed on international finance and macroeconomics to have a strong opinion on whether FOFOA is correct that structural and political support for the dollar as reserve currency is gone and - I assume he is implying this - there will be nothing to replace it as there was when China came along.
I am a little bit skeptical though. If I had lived in Germany from 1915 through 1950 then I would have had personal experience of living through a currency crisis and would know viscerally how very possible it is. My personal experience has been ~30 years of reading doomer literature about how the end is nigh, and yet the nigh never seems to arrive. It sure looked like it was arriving in September 2008. But it didn't.
I see the logic of how it can't continue, but I also saw that logic when I read back in 1970 how there wouldn't be any breathable air or drinkable water by 1980 or 1990 or 2000 and how all the oil would be gone by then. Same with the predictions of financial collapse. You know how I got my initial gold stash? It was because I was convinced that Y2K was going to be the trigger of the whole sh**house going up in flames...and pfffft, that turned out to be a joke.
My personality is a doomer-type personality and I am trying to grow to a new level of awareness where I don't reflexively believe whatever new doom stuff that comes along. That's why I am testing this Freegold hypothesis...
J.R., you seem strongly convinced by it. Let me ask you this: if ten years from now you are still reading this board and still waiting for Freegold, will you start to wonder if maybe there was a chink in the theory somewhere that you missed? I get the earthquake metaphor, but doesn't there have to be a statute of limitations on believability at a certain point?
Yeah Aaron!
Great article DP!
The article says:
The classic examples of hyperinflation are Germany in the 1920s, Hungary after the Second World War, and Zimbabwe, where hyperinflation ended in 2009. Indeed, hyperinflation is not that rare at all. Economist Peter Bernholz has identified no fewer than 28 cases of hyperinflation in the 20th century.
[...]
However, Spain does not have its own currency and therefore cannot trigger hyperinflation on its own.
Hmm, where I have heard that sentiment before:
Here's one: Under the $IMFSystem when relatively small currency zones have control of "ALL aspects of monetary and fiscal policy," hyperinflations are relatively common. Hyperinflation is the adjustment mechanism in floating exchange rate zones under the $IMFS. This is exactly why the euro severed its link to the nation-state... Because a) we are still living under the $IMFS and b) Europe has a living memory of hyperinflation.
comment to Hair of the Dog
It seems FOFOA's ideas are part of a bigger #Groupthink than may first appear. Might the gravitational pull of BIG IDEAS be arcing the orbit of other celestial bodies?
As Another said: "We watch this new gold market together, yes?"
Cheers, J.R.
whats funny about the religious FG believers is the assumption that HI is some kind of automatism to FG.
So preaching & assuming HI, automatically means&proves FG. Folks, face it: Even if HI would occure, that's not the automatic case for FG. Plenty of other maybe even more realistic outcomes on the other side of your beloved HI.
Greets, AD
Hi MnMark,
I feel your doomerism and the "I've been burned before sentiment" wrt failed prognostications. I came here via hard money and a fondness for environmental economics.
But broadly speaking, I see it a little differently wrt the A/FOA. Perhaps the biggest issue is what were A/FOA really talking about, and is that been born out by reality?
This is a tricky concept, so please don't take this as the final word. I am only throwing out a big basic idea to perhaps help you start to see my perspective, my view. Not that you have to agree with my view, but at least try to understand it. And as it is a view many are unaccustomed to, it sometimes takes time for others to see the view. So I offer this as a starting point in this process of trying to see my view, not as the final word on my view. I'm not asking you to agree, but to see where I'm coming from before you pass judgment.
So thank in advance for having an open mind!
===================================
I think people get confused about China's structural support for the $ buying the time on the US going HI. A key message of A/FOA was the changing role of gold, related to this is the idea that the $IMFS was a by-product of foreign support that was fading away.
What we have seen is that yes, A/FOA were right in their description of the $IMFS and the role of gold and foreign support. What people/nations might do is not within the purview of mortal men, but the ability to comprehend and describe the system in which the people/nations are acting, to accurately frame the debate and define the contours of possibility, now that is divine. As Anotyher wrote, "Everyone knows where we have been. Let's see where we are going!" So here is a glimpse of what I get from A/FOA that I think is divine, that view of where we are going.
cont.
cont.
The dollar requires support from abroad and it has faded away. Both in the emission of paper" way, and in the "support for the integrated $ hedge that props up the $'s SoV role," the paper gold market.
As the key message of A/FOA was the changing role of gold, lets start for support for the paper gold market, as this is A/FOA's key insight and its not something you appear to be focusing on.
IMO you have to start with gold if you are talking about what A/FOA were talking about and predicting. So in terms of gold, we have seen a hugely visible change in the gold market since the Euro launch, yes? This was A/FOA's key insight, would you not agree? Here's FOFOA talking about the key insight from Another
The Architects
In my opinion, there are two things we learned from ANOTHER via his mouthpiece FOA that outweighed all the other great insights they shared. Those two things are:
1. The true purpose behind the euro and its architecture, and
2. The effect the approaching euro launch would have on gold.
[..]
What we learned from ANOTHER thirty years later was:
1. The purpose of the euro was to provide an international transactional alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."
Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."
Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600
Monday, August 8, 2011 - GOLD ABOVE $1700
Thursday, August 18, 2011 - GOLD ABOVE $1800
What I can tell you with full confidence is that this is only the very beginning of gold's functional transformation.
Once Upon A Time
Okay MnMark, there is a lot there to digest, so maybe we can let that steep and chat again soon?
Be well, Cheers, J.R.
AdvocatusDiaboli said...
whats funny about the religious FG believers is the assumption that HI is some kind of automatism to FG.
What's funny about AD is that he consistently puts up his own straw men and then proceeds to beat the shit out of them hoping he's confused enough people into thinking he's added value somewhere along the way.
No AD, HI is not some kind of automatism to FG. HI and Freegold are two distinct events. You are the only one claiming HI is some kind of automatism to FG.
If you are insistent about hanging around these parts could you at least put a little effort into understanding Freegold?
@Aaron,
Yup!
I haven't had the time to continue (sorry AD, I know you're disappointed), but yes: question AD's premises and the straw-man comes apart every time.
It's just soooooo UN-interesting, and takes away from productive activities. But, like bathroom cleaning, it has to be done every once in a while :-)
Sexy thoughts for AD and MnMark,
Following in Aaron and AD's footsteps, did you know FOFOA wrote this way back in 2009 in Confiscation Anatomy - A Different View:
""As I have explained many times, freegold and hyperinflation are separate events. Freegold is the establishment of a physical gold market after the paper gold market is arrested through default, breaking the dollar's grip on gold, and also breaking the dollar's international settlement function.
The first way this collapse could play out is a quick devaluation of the dollar, say, over a couple weeks, followed by the emergence of freegold. Think of it as the riverbed at the bottom of the waterfall.
The second and more likely way this will play out is with hyperinflation thrown in, perhaps lasting many months or years after the initial plunge/devaluation. The overwhelming evidence that this will be our path is the political control the Executive Branch is exercising over dollar monetary policy."
=====================
And more recently, from FOFOA's 2012 post GLD Talk Continued
A/FOA said the ECB/BIS strategy was to “expand and support” the dollar paper gold market so the dollar would eventually “bankrupt itself” just to keep the gold market going and stay in the game with the euro.
[...]
So it seems that as the war switched from dollar v. gold to dollar v. euro, the euro side helped make the dollar gold market TBTF. But with a rising physical gold price/demand, the dollar paper gold market has to keep up because it’s TBTF now. Too many of those “gold” FDIC stickers out there! If those stickers fail, the dollar loses. So the “gold” market is TBTF. Remember this from FOA?
[...]
So the paper gold of the bullion banks is now TBTF. Of course that doesn’t mean it can’t fail. It either fails, or the USG hyperinflates the dollar as prices rise. They are related, and each will likely cause the other almost immediately, but either one could end up being the initial cause IMO. If price inflation forces the USG to hyperinflate then the paper gold insurance stickers will have to fail to perform. And if these price rises in the gold market fail to manage the flow (demand) of physical as they have so far, we’ll likely see a 10% or larger GLD puke at some point. That would signify more than a 120 tonne allocation demand, a system-busting size. They might think they can rocket the price at that point and get it back, but more likely we’ll see more allocation requests coincident with a falling (paper) "gold" price as the longs dump their worthless “insurance” while wishing they had the real thing.
FOA (06/12/00; 19:48:25MT - usagold.com msg#26)
Put your cards on the table!
The current paper gold world will die (burn) as its value to users erodes, not increases!
…Again, most everyone in the Western Gold bug game is running with the ball in the wrong direction.
…So who is in danger of being hurt as this unfolds?
That's right, the Western paper gold long! I'm not talking about just the US market! This is about the entire world gold market as we know it today. The real play will be for the ones that get out in front of the move by owning physical…
It seems every Gold bug sees only half the trade and has great faith that contract law will favor a short squeeze. Yet, none of them see where it is the long that will be dumping and forcing the discount!
Cheers, J.R.
P.S.
On recent discussions regarding gold lending and collateral enforcement in freegold, remember the key idea is courts (and the nations from who they get jurisdiction) will not enforce gold ounce denominate contracts, only currency denominated contracts.
You can get money damages in court, but you can't get a court to force the other side of the paper contract to make good on the contract and deliver you physical gold, aka you won't be able to turn paper gold into real gold
So if this doesn't seem ldo that this is where we are heading, re-read what I just posted about paper gold failing. Here's a key point to focus on:
It seems every Gold bug sees only half the trade and has great faith that contract law will favor a short squeeze. Yet, none of them see where it is the long that will be dumping and forcing the discount!
People dumping paper because all you can get is paper as contract law will not force delivery of physical gold and cause a short squeeze.
MnMark & JR,
Just have to add that I really appreciate the discussion being generated between you two. JR, I especially appreciate you taking the time to construct an answer to a question that many of us have asked in our own minds.
I continue to frequent this site to read the comments secion and delve into past posts, as this is the best education that money can buy, IMHO. What I find remarkable is why AD continues to loiter around, when he clearly has no interest in learning. Seems playing the antagonist with an arsenal of nothing but baseless argument would prove tiring.
JR, thank you for that answer to MnMark's question.
The value I see in A/FOA/FOFOA is similar to what you describe: they don't tell the future, they describe what the game is and how it is played. Through that prism one can make sense of the present and thus be less likely to be surprised by events as they unfold.
My analogy is as follows. If you're an american, have you tried to watch an American football game with a foreigner? You do your best play-by-play, trying to make the experience pleasant for your friend so he knows what's going on.
Then, in the middle of the second quarter, he blurts out 'they call this game football?! where are all the damn kicks?!' and you realize that everything you have said has gone over your friend's head. So you start again, really sloooowly.
So A/FOA/FOFOA aren't going to give us the final score, but they'll let us make sense of what we are watching.
And how is team USD doing? I'd say they're down 21 points with 2:15 left to play in the 4th quarter, and they just recovered an on-side kick so team ROW can't simply run the clock out on them.
So what events might make me doubt the likelihood of freegold?
Should the Euro break up, I would expect it would delay freegold by another decade at least. This is because it would give the ROW a strong reason to continue their support of the USD. I would still think freegold would be the ultimate resolution.
But while a breakup of the Euro is 'possible', I don't really think it 'probable'.
I don't take any analysis seriously that presents the choice as one between the Euro and the DM, or the Euro and the Drachma, or the Euro and the Peseta / Lira / what have you.
The real choice is between the Euro and the USD. Where do the Europeans want their monetary policy made: Brussels, or Washington?
Another possibility would be if a country or bloc of countries were to take up the mantle of China in supporting the USD. I think China is about tapped out in that role. The rest of the BRICS could conceivably fill the void but they don't look interested in the job at the moment.
Again, I would see this action as delaying, but not avoiding, freegold.
As for the US balancing their budget: so unlikely that it is not worth considering.
What it comes down to is that the US and the USDs position in the world is not sustainable, so it will eventually have to change. The longest delay to freegold would be if the USD is replaced by another national currency as a global MoE *and* SoV. I don't see this as likely, either.
JR,
I appreciate your attempts to explain things...I will say that I have been reading this board and the comments for four years so I have seen those quotes of FO/FO/A a number of times. I don't have the chops to argue with them because I don't have enough understanding of international finance and banking to see the flaws. Am I correct in assuming that your quotations of them essentially means that you don't see any real flaw in their arguments? OK, I understand your position then.
But you didn't really answer the last question I asked, so I will ask it again: if ten years from now you are still reading this board and still waiting for Freegold, will you start to wonder if maybe there was a chink in the theory somewhere that you missed?
Cordially,
MnMark
Michael H:
I think it's understandable that Europeans would want a currency of their own to compete with the dollar and free them up from the U.S.'s "exorbitant privilege." I think it's understandable that Europeans would want something to help tie the continent together and help prevent more wars. I think it was wise of them to include gold on their balance sheet and to mark it to market as they do. All well and good.
The problem is that the European nations are very different peoples and trying to manage a single currency shared by very different peoples is, in my opinion, unworkable in the long run. This is becoming obvious. The socialist/collectivist aspirations of the Europeans, their collectivist idealism, that apparently led them to think that a Germany and a Greece could share a single currency without political union - which neither one really wants, or would really want once they had it for a while - is misguided. As I watch Europe these days I see a Euro that is doomed as it is currently organized. I think it might be possible for a northern European euro to survive for a much longer period of time, but the basic problem is that the Europeans want a United States for themselves without actually giving up sovereignty like the American states did.
I think what will happen is that an attempt at a defacto fiscal union will occur, complete with ample money-printing (using different names for it) to try to paper over the irreconcilable cultural differences between the Germans/Finns and the Greeks/Italians/Spaniards/etc. This will drag out for a good while yet before either the northern Europeans leave the Euro or they succeed in getting tough enough regulations and oversight in place that the southern Europeans will leave.
One of my basic understandings of the world is that what works best is a separate soveriegn country for every distinct people. The wars of this world occur where more than one people are competing for control of a country or a territory. Because the Europeans are composed of very different peoples, what will ultimately work best is that they each have their own countries and they each have their own currencies - floating against gold, I imagine (hope).
So I don't think the Euro is going to be what brings on Freegold.
MnMark,
So you are saying that you think the Germans don't want to share a currency with the Greeks / Spaniards / French / Italians, and they would instead rather support the USD and the US's exorbitant privilege (or perhaps the "socialist/collectivist aspirations of the Americans", to use your terms)?
Let me play JR:
FOA (10/28/00; 10:40:51MD - usagold.com msg#44)
There Is No Way Such A Currency Could Ever Last!
...
Here we have eleven completely different country's and each one operating under an independent government. They all still have their own internal currencies and banking systems but set most or all of their trade settlement and pricing in only one currency unit. With all the in fighting and at odds views, how could it be expected to last? To this end I completely agree with all the negative sentiment people today have! I completely agree,,,,,,,,,the dollar will never work! (smile)
Can you imagine any success at all when these nations try to use such a currency scheme? The countries of Canada, Mexico, Australia, Brazil, Britain, Japan, Peru, Argentina, Taiwan, Venezuela and Hon Kong all have operated for 20+ years under a Dollar system not much different in effect than the new Euro Project is birthing today. In fact, most of the world has used this ad-hock dollar reserve system for a long, long time!
So when we hear all the stories and reasoning about how the Euro will never last, just remember, the very same reasoning was applied to the dollar's future a long time ago. It's still here.
MnMark,
I think you are missing a nuance. It isn't the Euro that necessarily brings about freegold. It is the collapse of the paper market for gold.
What the Euro provides is the alternative WRC, so that the $IMFS may collapse and not leave the ROW looking for its replacement.
Once the dollar collapses, the design and position of the Euro will shine. But in the current paradigm, its glow is hidden from view.
I liken the transition to a vessel of water changing into steam. Right now, heat is being applied, and the water has reached 100c/212f. It is still water, and what is left that is needed to change it into steam is latent, immeasurable to the senses. But soon enough latent heat will be applied, and that water will flash into steam.
The evidence of that flash will be HI. But even if HI does not occur, the collapse of the dollar and the paper market for Gold will be enough.
Hello MnMark-
Seeing as you posed this question to the wider audience further on up, I guess I would say that FOFOA has pretty well laid out our course moving forward. If we haven't seen Freegold in the next 10 years, well then someone decided to pick up the US Treasury ball and run with it. Add to that we'd have had another 10-year run of weak hands letting go of their gold for peanuts. You are correct in that it could happen. It is certainly possible we won't see Freegold for X number of years. But moving from using US Treasuries as a store of value, an environment which continues to benefit the USG with a never ending pile of free stuff on the backs of everyone else, and replacing that store of value with physical gold and all of the properties that comes with it (can't print it, fungible, etc etc), can you envision the ROW continuing to buy up US debt indefinitely sacrificing their own prosperity? For what benefit?
There are a lot of nations in huge financial trouble right now as a result of the $IMFS.
As Blondie often points out (correct me if I'm misquoting you Blondie), that which is not sustainable will not be sustained.
Looking at our situation from another perspective, the global financial system is moving away from a debt-based store of value towards an equity-based store of value and this has everything to do with credibility. Debt is defaulting (no longer credible) and CBs are buying that debt up with more debt in an effort to keep the system alive just a little bit longer. This is unsustainable. When we can no longer assess each other’s credibility through some agreed measure (unsustainable debt), trade locks up -- until we can find a new focal point to reassess and compare values.
...but once you find that new reference point to reassess and compare values, you just might find the world a little more golden.
Err...golden.
DP, you aren't an easy act to follow you know. ;-)
Nickelsaver,
WRC (World Reserve Currency) is a contradiction in terms.
It is the very definition of "a contradiction in terms"!
The euro is intended only as a replacement MoE, nothing more. Because the euro has severed its link with gold, the role of SoV will naturally be assumed by gold. There will be no (indeed there can be no) "World Reserve Currency", but rather a World Reserve Asset: Gold; and the various MoEs that holders of gold are willing to exchange it for. The euro will be prominent amongst these, to be sure, possibly even predominant, but that is really neither here nor there.
R.S.: "When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.
And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.
The breeze is fair and the road ahead is clear for the ascent of gold."
Because its link to gold is severed (THE most important monetary development in more than 2500 years), the euro will be free to expand and contract in quantity as the aggregate economy using it requires, while its quality will vary in accord with its exchange rate with physical gold (the SoV/"World Reserve Asset".)
Because in addition to its link to gold the euro’s link to the nation-state has also been severed, both the quality and the quantity of the euro will be determined by the markets and not subject to the interests/control of any particular nation-state. This is why it will likely be the market's preferred MoE.
A symbiotic relationship between the SoV and the MoE, serving the interests of both the debtors and the savers.
Once one can understand this clearly, then not only will the inevitable nature of this change become apparent, but the list of large-scale wholesale changes that will follow in its wake should start to become apparent also. Some of these may indeed seem "too good to be true", but it may be that it is your conditioning that needs recalibrating in that case. We can (and do) just leave this alone for the time being.
Bear in mind that the financial system is derivative of and subject to the monetary system upon which it is built, thus all understanding of the complexities of the $IMFS become completely useless if the monetary system to which it is subject is changed. Wood to trees. We live in a world full of financial experts but woefully short on monetary experts.
Our financial system today, as we have all known it all our lives, is built upon that contradiction in terms "World Reserve Currency", it exists only because of that contradiction.
Contradictions attract resolutions.
Michael H, Nickelsaver, and Aaron: thanks for your responses. I have thought for a long time now that the logic - "that which is not sustainable will not be sustained" - seems very strong. My original question was just to ask: "this sounds so airtight; where might the weaknesses be, if there are some? What sort of development might render the Freegold theory invalid?" I personally have a lot of 'skin' in this, so it behooves me to try to take the contrarian position and test it out.
I guess I'd also toss out that old saying that "if it seems like it's too good to be true, it probably is." Here's this blog where these folks make this good case that buying physical gold now is likely to yield a 30-fold return in the next few years. I've been hearing stuff like that my whole life - haven't we all, in some form or another? So it's a good case...but in some ways it would be more reassuring if there weren't so many people commenting here who seem to be uniformly and entirely convinced...there ought to be more doubt, shouldn't there?
I think I've said enough for now....I'm repeating myself. Thanks again for the responses.
Blondie,
Yes, thanks for cleaning that up. Every little nuance is important. The Euro, as a currency would not be a reserve, but rather Gold as the focal point behind it, and behind every other currency.
But the Euro would certainly behave like a WRC in the transition - until the routes that gold would flow are established, other currencies recover, and the Freegold system is understood.
And I think that the Euro will replace the petro-dollar in a very quick fashion.
MnMark
"I guess I'd also toss out that old saying that "if it seems like it's too good to be true, it probably is."
We all hold different beliefs about what truth is. If the ideas discussed at this blog make you uncomfortable, I would encourage you to reject them.
MnMark,
”So it's a good case...but in some ways it would be more reassuring if there weren't so many people commenting here who seem to be uniformly and entirely convinced...there ought to be more doubt, shouldn't there?”
Would you care to expand the “logic” behind that statement?
"if it seems like it's too good to be true, it probably is."
You know there’s a qualifier in that statement, right?
Have you considered why?
From the comment I posted immediately before yours (with additional emphasis in bold):
”Some of these may indeed seem "too good to be true", but it may be that it is your conditioning that needs recalibrating in that case. We can (and do) just leave this alone for the time being.
Bear in mind that the financial system is derivative of and subject to the monetary system upon which it is built, thus all understanding of the complexities of the $IMFS become completely useless if the monetary system to which it is subject is changed.“
Perhaps you didn’t read it, being that I no doubt appear to be so uniformly and entirely convinced?
If ” it's a good case “ as you say, perhaps your conflict is caused by the other things you “know for sure”?
“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”
-Mark Twain
Having said all that (and the other stuff I edited out), I second Aaron’s far more precise observation: ”If the ideas discussed at this blog make you uncomfortable, I would encourage you to reject them.“
Interesting!
http://money.cnn.com/2012/07/18/news/economy/Olympic-gold-medal/index.htm?iid=HP_River
I guess they don't want Michael Phelps to be a millionaire. ~$10,000 worth of gold seems to be the current prize for being the top athlete in your field. If a 2012 Olympic gold medal were made solely of gold, albeit slightly smaller than the less dense 'silver' gold medals, it would fetch you around $728,617 in Freegold (and around $21,000 in today's pricing). Not bad!
Also, since gold's value is much greater than its current price, I guess the old adage "worth its weight in gold" doesn't apply to gold itself! Start passing it on... "gold is worth 20x it's weight in gold!" When people give you a weird look, tell them "Just go see FOFOA"
MnMark,
Now if I'm being honest, I would share (not doubts) but rather moments of insecurity.
I have found it troubling that this Freegold theorem or POV is not widely discussed by mainstream economists, or at the very least, in wider circles. As I ponder that aspect, I am forced to choose between two conclusions. The first being that (while incredibly logical) this POV is but wishful thinking by a very small number of people. If I allow myself to think along those lines, I invariably find myself wanting embracing a normalcy bias. This conflict forces me to look at the fundamentals (as I understand them) and the other conclusion that must be true, if the first one is not. That is, that I have been fortunate, albeit against high odds, to have actually encountered truth residing in a corner of a vast expanse. But then that very idea is troubling in light of an apparent confirmation bias. This again forces me to re-look at the fundamentals.
But there is one other thing for me. And this thing I perhaps stand even more alone in. And that is, where the road paved with facts and reason ends; where it has taken me as far as it can go; FAITH takes over. And this faith is not in FO/FO/A, but in the Giants - whose footsteps we follow in.
Synthesis
Europe views its privilege and its debt differently than the US. The US will never give up its mountain of unfunded liabilities until it has printed its dollar into oblivion. Europe is different. The Eurozone members gave up their right to print to oblivion by joining the euro. And the euro only has one single mandate: low inflation!
Now we can argue until the cows come home whether or not ANYONE should have the privilege to print currency. The winner of that argument is probably no, that no one should. But the flaw in the argument under today's dangerous conditions is that people get caught up in what SHOULD happen and lose sight of what WILL actually happen.
[...]
ECB v. FED
In many posts I have highlighted two important differences between the ECB and the US Federal Reserve. The first is the separation of currency creation from the control of a single sovereign government, or the elimination of "exorbitant privilege". And the second is the demonetization of gold making it a supporting reserve asset instead of a competing currency. The Fed views gold as a competing currency, which was clearly shown in Adrian Douglas' recent revelation titled: More Fed minutes document gold market manipulation (a must-read for anyone who is still reading my post).
The ECB, on the other hand, revalues all European gold reserves every three months to their market value, reflecting the very real rise in reserves. The Fed still has US gold booked at its 1973 price of $42.22 per ounce. The late Dr. Willem F. Duisenberg, first president of the ECB, articulated these differences in his acceptance speech when "the euro" won the Internationaler Karlspreis zu Aachen, also known as the International Charlemagne Prize:
"The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro."
cont.
cont.
the point I am trying to make here is that the ECB has created a new product for Europe. It is 10 years old now. The FED's product, the dollar, and its offspring the $IMFS is now 97 years old. The ECB's innovative creation was the result of lessons learned living under the $IMFS for more than half a century. And the point is summed up most eloquently in Another's own words, written before the euro was even introduced:
"In the very same mindset that people buy the best value for the lowest price (Japanese cars in the late 70s), and leave an established producer to die, so will they escape the American currency and accept any competitor that offers a better deal."
Just last week Trichet said, "We did not create the euro against the dollar, the euro is for Europe.”
The euro architects were not trying to force a reserve currency on the world. There is a big difference between creating a government product with sovereign-monopoly backing that everyone must use, and creating a product that the marketplace must freely choose. In this case, the marketplace consisted of sovereign nations that chose to give up the privilege of printing their own money in order to join in the benefits of the euro.
[...]
The US dollar MUST devalue (one way or another) against the entire physical world. Think about this. The euro, on the other hand, might just hyper-depreciate against only one specific asset. An asset that happens to also be a MONETARY asset held by its member debtors.
[...]
Defensive Action
FOA (9/23/2000; 9:26:10MD - usagold.com msg#39)
ONWARD!
"Go back and read the most recent speeches and comments by the ECB president, Mr. Duisenberg. Truly, the ECB is not interested in "crashing" the system, rather let's "transition" the system into a more fair order. If intervention is needed, it's needed to keep the American economy from failing too fast from the coming hyperinflation of its currency. If the ECB is worried about the "exchange rate" being too far out of whack, it is a worry about its effect in generating a dollar-system meltdown from deficit trade. Not a total failure of the Euro as so many report. When the time comes, and it will, the dollar will begin its fall away from its own past policy failure. Until that time, for the benefit of oil producers and many others, let's move as far down this Euro / gold trail as possible. Without a breakdown.
The hyperinflation of the dollar is already a done deal. It has been since the 90's at least. Massive quantities of perceived dollars already exist stored in debt held globally and inside the US. Europe knows this. They have known this was inevitable since at least the mid-90's when they changed plans and went with higher gold reserves for the new ECB. They have always been willing to wait for it to happen naturally, unless the EU itself faces an existential threat from debt brought on by the $IMFS. And in this case, I believe their only option is a targeted hyper-depreciation of the euro.
By "targeted", I mean that the euro devaluation would be targeted to go only into gold. Gold can absorb a devaluation if you do it carefully, and in turn devalue the debt without causing inflationary havoc.
Of course this would cause the hyper-depreciation of the dollar as well. Only the dollar's collapse would be against all of creation, not just one asset.
This is the risk that we all face today. The dollar is like a spring snow-pack high on the mountain that is still fighting gravity. It wouldn't take much more than a shout to bring it down. But then again, what have I said time and again? The dollar's specific value does not even matter in the context of its primary function. It only matters to those holding its debt as the store of their life's efforts.
Three Birds With One Stone?
I'm still "on the sidelines" while I absorb the excellent lines of thought and discussion I have been reading in this thread. But I couldn't resist respondiing to this FOA thought shared by JR:
By "targeted", I mean that the euro devaluation would be targeted to go only into gold. Gold can absorb a devaluation if you do it carefully, and in turn devalue the debt without causing inflationary havoc.
How might you ensure that you hit the target you are aiming for? Perhaps:
1. Ensure that the bulk of the gold is in the Treasuries of the EMU member states. So that their sovereign debt is recapitalized by the gold revaluation.
2. Use that recapitalized sovereign debt to in turn both recapitalize and restore the collateral backing of the banking system that creates the bank credit money component of the Euro money supply.
3. Ensure that the ECB Eurosystem central banks are holding just enough gold to make their collective balance sheets very strong and hence the Euro currency strong enough to absorb some inflation. BUT not so strong that the Euro currency experiences a rush to adopt it as an alternative reserve currency like the Swiss Franc experienced (to a preliminary stage) before they adopted the Euro peg.
4. Ensure that the use of the Euro for trade was primarily as a unit of account for those that wanted to switch rather than a reserve holding for trade settlement. You would do this to divert any demand for FX reserves outside the Eurozone into gold instead of the Euro itself.
The three birds in question from the title are: the banking system, the central banking system and government. The stone, for the stragglers, is of course gold.
Cheers
PS. If you are looking for the biggest can kick for the $IMFS since China started buying USG paper in volume then I suggest you look at the Swiss Franc peg and its timing. The market was voting with its feet and moving to "employ" the Swiss Franc as the newly appointed reserve currency alternative to the US dollar (IMVHO).
The Swiss PTB turned down the job offer. Leaving how many short term alternative candidates for the job of replacing the US dollar? I think the fact that they pegged to the Euro might be a hint but thats merely Uncle costata's opinion.
@Costata, The Aussie dollar is the next replacement - just kidding.
Thanks for helping another on the sidelines get the big picture.
Freegold doesn't need the euro; the euro was Europe's response to the end of the $IMF taking down the world. If the euro died tomorrow you would get high priced gold in a hurry, but it wouldn't be fun. Remember, FAIL THIS AND WE WILL PRICE GOLD IN DOLLARS AT THE TRUE VALUE OF OIL TO THE WORLD!
ANOTHER (THOUGHTS!): The US$ is today, backed by oil. As all other currencies are but "digital units" tied directly to the dollar, they are indirectly on the oil standard also. This world currency position is supported thru the BIS. In CB circles, it is well known that the world debt markets as we know them, can only be maintained with cheap and cheaper oil! Without cheap oil the entire system fails and reverts back to pay as you go economies. This is the central reason for "two price gold".
With gold discounted to it's production cost and below, those that have it can trade it for it's monetary value. Make no mistake, the BIS knows gold in the many thousands. The future "reset value" of gold is the key. "support the dollar with oil and the currency system works" "fail the currencies and the dollar will come off the oil standard and the BIS will reset gold to $10,000+ with many conditions"
Hey, maybe the Chinese want a toot on the old exorbitant privilege bong next mkay?
Yes.
Just what the Chinese need to drag the rest of their sorry asses out of poverty into jobs - world's strongest currency!
Quick update from a "core country of europe":
http://www.faz.net/aktuell/wirtschaft/frankreich-die-wohlhabenden-werden-zur-kasse-gebeten-11824694.html
"...in total the new taxes will add up to over 100%..." :D
If there is one politian I love most, it is Hollande. He's my hero. It's not about eating the rich, it's about a chain saw massacre to all and every enterprise or saving spirit. I deeply pray and it really starts to look like that this dude is successful in burning down this whole €-crap.
Greets, AD
If you think freegold is too good to be true, consider this:
We are going to go through a hyperinflationary collapse (those of us in the US). This means we may well witness crazy shit like people eating their pets (occurred in Weimar Germany) as well as an uptick in crime, and all sorts of other associated miseries. Can't wait to fight off some hoodlums!
Further, if you display that you are wealthy around so many others who are financially destroyed, you will become a target. So who knows when you'll be able to deploy your gold for your benefit? It could be years. Yes, there will be a gold revaluation but there will be a lot of misery to accompany it.
AD, and then? Take it through to the end. The euro implodes and then?
...then I feel better :)
Greets, AD
No, you won't feel better. You would live in eurobartertown.
ANOTHER: "...If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work""
PJ,
Gold has to flow for trade to flow. It can't take years.
Question....
IF GLD were to puke 10% in a day, would that be published?
I think not.....
"No, you won't feel better. You would live in eurobartertown."
So what? I better live in bartertown, than in €-scam-town.
The €-fascists have by now broken any kind of law and promise. The line is drawn, no further. Time for the street lamp poles.
Greets, AD
The €-fascists have only one promise. So far, they've delivered on it.
Seems to me you continue to enjoy conflating the euro, with the politics of the various sovereign nations within the Eurozone.
OK, let's say the euro fails (hurray! :-\ ) and "the Central Banks will hoard all gold and buy any offered if this new European currency does not work".
Gold is (the only) money, yes? Oil just want gold, and everything needs oil.
How many seconds do you think your impressive stack will last? And then?
Forgetting you now, what about the children? Mud pies all round again, forever?
Oops. Gotta love a #HMS. :-\
Michael DV commented
//The longest delay to freegold would be if the USD is replaced by another national currency as a global MoE *and* SoV.//
USD replacement is freegold. Is it not?
It was Michael H not DV. Apologies.
DP,
no I dont. Price stability? The real inflation had been since the introduction of the € about >=4%, that's twice the promised target. The german people had even an income decrease, instead a dramatic cut in social securities (but not in the ongoing fees). Not to mention the breaking down infrastructure of germany, while other pigs party.
Maastrich treaty? Every essential one concerning € and government debt, broken.
ECB, since 2010, we love bonds and any other crap you bring to the window, promise broken.
Anything else you can possibly screw up in a monetary union?
Here's a documentary, those people find their own failure and fraud obviously even so funny and the new norm, that they state it right in the public camera:
http://www.youtube.com/watch?v=PZhFt4o0uRk
"the Central Banks will hoard all gold and buy any offered if this new European currency does not work".
So what? How they wanna pay for it? With printed €? LOL
So I personally guess the earlier it ends the better and people learn again, that food does not grow in cans in the supermarket.
Maybe with mud pies the greek will learn that it was not such a good idea to abolish the agricultural sector due to payments from Bruxel and the British that "finanical industry" does not produce anything.
Hi MnMark,
"if ten years from now you are still reading this board and still waiting for Freegold, will you start to wonder if maybe there was a chink in the theory somewhere that you missed?"
If gold does not continue to do what it has been doing over the past ten year, to continue to stand apart, to grow in salience as the natural "Focal Point" for value, yeah, I'd say freegold theory missed a chunk.
But then again, I look back over the past ten years and go wow, A/FOA sure knew what they were talking about. I don't get this "waiting" you seem fixated on, the process is already happening, its been ongoing for a decade now, and its plain as day to me.
So I still think the issue is understanding what A/FOA were talking about, and that is the changing gold market and the changing role of gold as understood on a greater level.
The Architects
In my opinion, there are two things we learned from ANOTHER via his mouthpiece FOA that outweighed all the other great insights they shared. Those two things are:
1. The true purpose behind the euro and its architecture, and
2. The effect the approaching euro launch would have on gold.
[..]
What we learned from ANOTHER thirty years later was:
1. The purpose of the euro was to provide an international transactional alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."
Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."
IMO its not so much a matter of whether what they were saying will true as much as its a matter of recognizing what's happening around you.
Cheers, J.R.
If you want to eat mud, go ahead. You will be dining alone.
FOFOA: The ECB and the BIS have a secret weapon. They don't want to have to use it because they don't want to be seen as the instigators of the dollar's collapse. They would prefer the market to take care of it for them. But don't doubt for a second that they won't use it before sitting back and watching permanent damage come to the euro system.
This is freegold. And this is the secret weapon. Although it is not so much of a weapon as it is a defense... against the inevitable.
Of course it would have devastating effects on the value of the dollar and the rest of the paper gold market. You see, in order for the BIS to supply actual physical gold to each and every giant that was ready to buy, the price would have to rise high enough that someone else with an equally huge amount of gold was willing to become a seller. And right now, at today's prices, we know that the central banks of the world have become net buyers! So the question is, just how high would the price have to rise in order to balance out the demand of the world with the supply, in a physical-only official price discovery market?
The euro architects knew the difference between the monetary functions. They knew that the infinite growth, store of value function was the dollar's Achilles' heel. So they designed the euro to be a stable transactional and accounting currency even if the world chose non-euro physical assets as a store of value. The dollar does not have this design.
This is not to say that the euro will not devalue against gold right along with the dollar. All infinite, symbolic, transactional currencies will, which is to say all currencies will. And to a lesser extent, all currencies will have to devalue against the rest of the finite real world as well. But they will not all hyperinflate to infinity in the aftermath as the dollar will be forced to. Some will. Others will not. The euro probably will not.
This is freegold. It is coming whether or not the euro uses its secret weapon. Like I said, they would prefer not to be seen destroying the paper gold market proactively. They would rather just wait until it destroy itself (which, by the way, it is doing pretty well).
Peak Exorbitant Privilege
...the U.S. has run a trade deficit every year since 1975. You should also know that, since 1971, the U.S. government has run its national debt up from $400B to $15,500B, and that foreign Central Banks buying this debt have been the primary support for both the relatively stable value of the dollar and the perpetual nature of the U.S. trade deficit.
[...]
Very generally, let's call this common thread the monetary privilege that comes from the rest of the world voluntarily using that which comes only from your printing press as its monetary reserves. It started as a privilege, grew into an exorbitant privilege 35 years later, and then peaked 45 years later at something for which, perhaps, there is not an appropriately strong enough adjective.
[...]
Here's my thesis: that the U.S. privilege which began in Genoa in 1922, and was so complicated that only one in a million could even fathom it in 1931 and 1960, became as clear as day for anyone with eyes to see after 1971. And so, to see it in real (not nominal) terms, we can very simply look at the percentage of our imports that is not paid for with exports. So simple, which might be why the government doesn't publish that number and the media doesn't talk about it. All you have to do is compare the goods and services balance (which is a negative number or a deficit every year since 1975) with the total for all goods and service imports.
[...]
A trade discrepancy of 2.14% in any given year would be normal under normal circumstances. You'd expect to see it alternate back and forth from deficit to surplus and back again as it actually did from 1970 through 1976. But it becomes something else entirely when you go year after year (for 36 years straight) importing more than you export.
[...]
The point is that the U.S. exorbitant privilege peaked in 2005, for the last time, at its all-time high of a third of all imports, and soon it will go negative, where it hasn't been in a really long time.
[...]
The U.S. government has grown addicted to its exorbitant privilege over the years. It is a privilege that has been supported by foreign Central Banks buying U.S. debt for the better part of the last 30 years. But as I wrote in Moneyness, and as Ms. Pomboy has noticed above, that ended a few years ago.
[...]
I would like you all to give this some serious thought:
1. The U.S. exorbitant privilege peaked in 2005 (before the financial crisis) and is now on the decline, meaning it is no longer supported abroad.
2. The U.S. government (with the obvious assistance of the Fed) is now in defensive mode, defending that inflow of free stuff with the printing press.
3. The U.S. federal government budget deficit (DC's "needs" minus its normal revenue) **eclipses** the trade deficit by more than a 2 to 1 margin.
So what could possibly go wrong? The recession has already contracted the U.S. economy, all except the part that resides in Washington, DC. And just to maintain its own status quo (when has it ever been happy doing only that?) our federal government needs to insure our national business of exporting empty containers at its present level.
What could go wrong? Prices! If the price of an apple doubles, what do you think happens to the price of a full container?
Inflation or Hyperinflation?
...here we find the key to the kingdom: "supporting foreign dollar settlement with CB storage."
All currencies have the value of whatever they can buy. In a sense, they get their value from price tags offering prices denominated in their unit. But this MoE (medium of exchange) usage demand is not enough for the dollar. It is not enough that foreign goods are priced in dollars. The dollar requires another kind of usage demand: SoV (store of value) usage.
The reason for this is simple. The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years. To some extent, that pool of external dollars can circulate outside of the US as long as some foreign goods, like oil, carry a dollar price tag. But that is not enough.
Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.
Now I've got to make an important point about stock and flow here. We need not be concerned about the stock of dollars held by these foreign CBs, which today stands at more than $5T. The real danger is the unstoppable flow of dollars. No one needs to dump their dollar holdings to collapse the dollar. In fact, they won't dump and I don't expect them to dump, at least not until collapse is well underway.
All they need to do is to slow down mopping up the gushing, unending flow. Here's how fragile the dollar actually is. It is supremely overvalued because its SoV arena, its "trading asset arena" as FOA termed it, simply dwarfs the MoE arena where all currencies get their value. But what threatens the dollar's massive overvaluation most clearly and presently today is only that tiny, marginal portion of the flow: the deficit portion or the unstoppable net-emission of dollars.
Trillions of dollars circulate (change hands) every day, and orders of magnitude more sit idle in investments. But the real threat to all of it is the net-emission of dollars which must be mopped up (stored) by someone. This is the structural support that holds the whole system together: foreign CBs perpetually gorging themselves on Treasuries. It's not that they might sell their stock of Treasuries. The real threat is that they might slow or stop their rate of accumulation relative to our rate of emission.
Title: Federal Net Outlays
Series ID: FYONET
Source: The White House: Office of Management and Budget
Release: Fiscal Year Budget Data (Not a Press Release)
Seasonal Adjustment: Not Seasonally Adjusted
Frequency: Annual, Fiscal Year
Units: Millions of Dollars
1971-06-30 210172
1972-06-30 230681
1973-06-30 245707
1974-06-30 269359
1975-06-30 332332
1976-06-30 371792
1977-09-30 409218
1978-09-30 458746
1979-09-30 504028
1980-09-30 590941
1981-09-30 678241
1982-09-30 745743
1983-09-30 808364
1984-09-30 851805
1985-09-30 946344
1986-09-30 990382
1987-09-30 1004017
1988-09-30 1064416
1989-09-30 1143744
1990-09-30 1252993
1991-09-30 1324226
1992-09-30 1381529
1993-09-30 1409386
1994-09-30 1461753
1995-09-30 1515742
1996-09-30 1560484
1997-09-30 1601116
1998-09-30 1652458
1999-09-30 1701842
2000-09-30 1788950
2001-09-30 1862846
2002-09-30 2010894
2003-09-30 2159899
2004-09-30 2292841
2005-09-30 2471957
2006-09-30 2655050
2007-09-30 2728686
2008-09-30 2982544
2009-09-30 3517677
2010-09-30 3456213
2011-09-30 3603061
Inflation or Hyperinflation?
I am also not interested in taking this bet because it is a timing bet and I think that sends the wrong message. But I did want to mention it because it makes some specific points which are relevant to this post.
1. That "high inflation" might be caused by supply constraints (similar to the effect of resource scarcity which Gregor mentioned) or increases in the notional value (I think he meant price) the government pays for goods and services.
2. That because there have been no large price increases from 2008 through 4/25/2012, they are unlikely during the next five years.
I will show you that he is looking at the wrong things in saying that if base money creation in 2008 didn't cause price inflation yet, then it won't for the next five years. There are some important differences between today and 2008. For example, the federal budget deficit in 2008 was "only" $438B while the trade deficit was much larger at $698B. And in 2007 the federal budget deficit was even smaller, at 23% of the trade deficit. The 2007 budget deficit was only $162B while the trade deficit was $696B. Today that situation is reversed. So prior to 2009, the foreign sector was supporting the sum total of both the US private and government sector deficits, leaving some room for the private sector and foreign support to contract while the government sector expands. And that is exactly what happened.
Today the federal budget deficit is more than twice the trade deficit, and the foreign sector is supporting less than half while Fed printing supports the rest. Additionally, there are signs today that foreign support is waning even more. I will get to those later, but this is the very recipe for hyperinflation which FOA described, only an order of magnitude worse than in 2001 when he was writing.
JR,
"The point is that the U.S. exorbitant privilege peaked in 2005"
just to remind you, that today the golden (LOL) euro is almost below 2005 $ value...and $bonds are at record low....
Keep in mind: just C&P FO(FO(A)) all the time is no argument at all. I know, I know, pointing out reality is kind of unfair.
hi d2thdr,
"USD replacement is freegold. Is it not?"
High priced gold replaces the USD in the SoV role. Many expect the euro to survive and fill in for the international MoE role, but if not #eurobartertown. From Jeff above:
ANOTHER: "...If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work"
==================
FOFOA on $ and its MoE role not being enough,, what is key is its continued SoV role:
All currencies have the value of whatever they can buy. In a sense, they get their value from price tags offering prices denominated in their unit. But this MoE (medium of exchange) usage demand is not enough for the dollar. It is not enough that foreign goods are priced in dollars. The dollar requires another kind of usage demand: SoV (store of value) usage.
The reason for this is simple. The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years. To some extent, that pool of external dollars can circulate outside of the US as long as some foreign goods, like oil, carry a dollar price tag. But that is not enough.
Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.
Inflation or Hyperinflation?
Hi Ad,
just to remind you, that today the golden (LOL) euro is almost below 2005 $ value...and $bonds are at record low....
SO WHAT?
Think on it son, its obvious to everyone else
JR, looks like I cant beat that argument.
The real inflation had been since the introduction of the € about >=4%, that's twice the promised target.
The promised target is based on the HICP index. So that may not be 'real', but that was the promise.
the breaking down infrastructure of germany
Political will. You had the money to vendor-finance your exports. You could have instead chosen to invest in your own infrastructure.
while other pigs party
You didn't have to provide credit to them. The party's a bit quiet now. Hope they kept a bottle of ouzo for you!
ECB, since 2010, we love bonds and any other crap you bring to the window, promise broken.
They didn't promise not to repo assets to ensure liquidity, not forgetting that they haven't bought those assets, only allowed banks to pawn them for cash. In fact, quite the opposite - the one thing they promised was no shortage (or over-supply) of euros for commerce.
So I personally guess the earlier it ends the better and people learn again, that food does not grow in cans in the supermarket.
+0
Maybe with mud pies the greek will learn that it was not such a good idea to abolish the agricultural sector due to payments from Bruxel and the British that "finanical industry" does not produce anything.
Finally, a point I can agree with!
...
just to remind you, that today the golden (LOL) euro is almost below 2005 $ value...and $bonds are at record low....
The euro doesn't attempt to be "golden". If you believe it is, you haven't understood a thing written on this blog. The single mandate makes it abundantly clear.
$bonds are at a record low because the Fed are monetizing them hand over fist — everybody loves to get themselves in front of a free bar. They are yet another flip trade speculation, nobody is seriously looking to hold these things for 30 years with these yields.
JR commented
//High priced gold replaces the USD in the SoV role.//
Yes thats what I meant. People will see the rising price of gold and when it wont come down they will understand it is worth saving in something that does not change much.
Common man does not understand much of SoV MoE UoA stuff. He just wants to see his saving is not lost by profligacy of the politicians.
Hi AD,
Please go for it, that's what people want you to do, to stop trolling and start thinking.
Anybody can hate, can you create?
Here's a FOA creation:
FOA (9/23/2000; 9:26:10MD - usagold.com msg#39)
ONWARD!
"Go back and read the most recent speeches and comments by the ECB president, Mr. Duisenberg. Truly, the ECB is not interested in "crashing" the system, rather let's "transition" the system into a more fair order. If intervention is needed, it's needed to keep the American economy from failing too fast from the coming hyperinflation of its currency. If the ECB is worried about the "exchange rate" being too far out of whack, it is a worry about its effect in generating a dollar-system meltdown from deficit trade. Not a total failure of the Euro as so many report. When the time comes, and it will, the dollar will begin its fall away from its own past policy failure. Until that time, for the benefit of oil producers and many others, let's move as far down this Euro / gold trail as possible. Without a breakdown.
this very scenario—$IMFS collapse—was faced 32 years ago and a solution was crafted at the highest levels. That solution took 20 years to launch (at great cost, mind you) and today it stands at the ready. If you read too much ZH and thereby think the European debt crisis changes things in some way, guess again. The European debt crisis is a symptom of the dying $IMFS, not the Eurosystem. In every way this is true.
Jim talks about the sociopathic bond vigilantes (a relic of the $IMFS) who can take entire countries down through the debt markets. He talks about them waging WWIII in the bond markets every day. If you want stability, insulated from these sociopathic traders, you don't want some slipshod unit of account basket solution patched together by the IMF at the 11th hour. You're more likely to fall back on the long-line plan that took two decades to implement and another decade to season.
The Achilles' heel of the $IMFS is that debt is the system's official store of value and foreign exchange reserve. And bearing this flaw, savers, currencies, banks, governments and even entire countries are all vulnerable to the inevitable failure of the debt.
The problem with debt performing these functions is that debt is a derivative of the currency itself. Currency moves opposite the flow of real goods and services. And with a derivative of the currency acting as the only counterbalance to uneven trade, there emerges the exact opposite of a natural adjustment mechanism for correcting trade imbalances.
With debt as the store of value and official reserve asset, the party producing more real goods has no way to record his net production (savings) other than lending that excess currency back to the consuming party, encouraging him to consume more, and recording the new debt. A true adjustment mechanism makes the balance swing back and forth. But the debt system requires an infinite debtor. So the system is designed to fail. The debt backing the system is designed to fail. And as the official store of value and reserve asset, the savers, currencies, banks, governments and even entire countries are destined to fail in the end… under the $IMFS.
Enter the euro.
Unambiguous Wealth 2 – The MF Global Chronicles
DP,
"Political will. You had the money to vendor-finance your exports. You could have instead chosen to invest in your own infrastructure."
ACK Absolutely, therefore I am personally not really that mad at the pigs. That's basically the reason I am much more wondering how wheelchairs might look when hanging from street lamps.
Greets, AD
P.S.
Do you know those two dudes? The great architects for "private savings".
http://syndikalismus.files.wordpress.com/2011/04/brc3bcder.jpg
MnMark
I appreciate your polite critical thoughts.
When I fist stumbled upon this blog, I set out to disprove it. In order to do so I read the whole of it, and failed in my goal.
Deep reflection on the arguments posed from the position of an open mind convinced me of their soundness.
I second Blondie's recommendation of Aaron's comment.
Free energy or transmutation are viable ideas for delaying or even stopping freegold.
On other fringes of the internet claims for those are made, some more convincing than others. For now I tend to view them as implausible.
TF
… wheelchairs …?
XD
d2thdr,
Yes, freegold is the likeliest USD replacement.
The reason I don't think it likely that another national currency will supplant the USD as MoE and SoV is that the USD got to its position by historical accident. 'monetary system evolution', if you will.
The world was looking for a way to get out from under the shackles of the gold standard, and stumbled into the USD standard. Seemed like a good idea at the time.
Just like the world moved from the gold standard to the USD standard, and not to a silver standard or a higher-fixed-price-gold standard, the world will not move away from the USD into another national currency. Or into a basket of national currencies like the SDR.
As for the breakup of the Euro delaying freegold: I think that if the Euro breaks up, the Europeans will think it in their best interest to support the USD status quo for a short time longer (say a decade; that is a relatively short time for these matters) while they figure out how to best proceed, while minimizing chaos and social disorder.
Even in that case, however, I would expect that high priced reference point gold would be the solution they pursue.
Transmutation doesn't change the need for a store of wealth, it changes the issue of what the store of wealth is.
Free energy doesn't solve scarcity. As long as we need to economize resources, we need prices and thus we need a SoV.
JR,
Agreed on transmutation.
About free energy: Why do I need to economize resources if I can easily extract free energy from the vacuum between the atoms in the air that surrounds me?
Free energy allows me to produce oxygen,carbon,food, water + other things I could ever want for the rest of my life.
unbelievable, everybody who even wastes a word about "transmutation" and "free energy" is a retard and better stay with his stash of bitcoins.
But wait: Go ahead, the picture of those folks gets clearer and clearer.
Greets, AD
@AD People that waste their time reading, and replying to people writing about "transmutation" and "free energy" are what then?
Free (or ultra-cheap) energy will be our reality much sooner than most think. Today, it would be difficult for me to convince anyone that this is true or even possible... six months or so from now, it should be very clear to anyone with eyes and ears. Until the technologies are on the market and fully understood, one can only imagine the implications.
I don't think this will impact our need for a SoV, and it wont fix our terminally ill "system". It will change our world, though! and it should certainly alter the core dynamic of the world economy.
Can you feel it coming, baby?
SV & BF,
thanks, go ahead. Anybody else?
AD,
I usually skip over your shit, but you gotta be the most ignorant fuck I've ever encountered..
Run away...
SleepingVillage,
Any particular technology you're thinking of?
Truly free and unlimited energy would remove the need for most of the economy (except maybe the human care jobs), and thus remove most of the need for a SoV.
Truly free and unlimited energy would remove the need for most of the economy (except maybe the human care jobs), and thus remove most of the need for a SoV.
After thinking about it a bit more, maybe I should qualify that. Most of the existing economy would be redundant, but of course plenty of new areas of the economy would grow... As for a store of value, hmm? Need to think a bit more.
Sorry AD, I know you're deeply distressed by the discussion of these hypothetical issues, but it might just drag on a while longer.
SleepingVillage
"Free (or ultra-cheap) energy will be our reality much sooner than most think."
I'll take that bet... ain't gonna happen.
Peace.
JR, thanks for the response. You make a good point that when you look at the events of the last decade, it seems clear that gold is becoming more and more important, more and more the focal point. If it simply continued on in that manner for the next decade as it has for the last, that would be fine with me.
Blondie, the logic of my observation that "there ought to be more doubt, shouldn't there?" was just a gut feeling that often when you come across a belief system (for lack of a better word) that purports to make bold predictions about the future (if not the timeline), and which has followers/adherents who are completely convinced, you are dealing with something that is more in the nature of a cult than an accurate understanding of the world.
Before anyone says "If you don't like it, why don't you go elsewhere and find something you like," I am not calling Freegold a cult. I think it is a remarkably thought-out theory about how the world works and I have not read anything else more convincing.
But that doesn't mean it is perfect. My original point was just to say "ok, this sounds good - what are the weaknesses in the theory? What events, if they occurred, would tend to disprove it?" I think that's a reasonable thing to ask, and I think that searching for the weaknesses of a theory is a good way of getting a deeper understanding of it.
And before someone says "FO/FO/A wrote about this already, I suggest you go read the archives before asking questions that have already been answered before", I have to say that there are hundreds or thousands of hours of reading material here (including comments and the original FO/A archives) and frankly my memory is not good enough to recall everything I have written here in the past four years. Nor is it realistic to read back through all the material - which is not indexed or written in the manner of a book with chapters, etc (that's not a criticism, that's just Blogger) to find the answer to a particular question. If the standard for asking a question is to be that you don't ask anything that has been asked before, then you aren't going to get any questions at all because no normal human is going to remember everything that was written here in these last years.
I can understand that if you already understand this material thoroughly, it would be irritating to have people ask questions that you can see would be answered they read and understood it like you do. And it is really my problem if I have difficulty with some points. I guess I would just request that if my question(s) irritate you, please ignore them.
And as long as I'm griping here, there is one other common response that gripes me: the "maybe you should think about that some more" response, which is condescending. If you find the question trivial, then ignore it, but if you're going to respond to it please respond like you had to explain it to a child because sometimes that's more or less the level of understanding some of us have. Cryptic responses that suggest that I go sit in a corner and think on it some more are a bit insulting.
In a way, there should really be two discussion threads for these posts. One for the advanced readers who want to discuss the material at a high level with others with that level of understanding, and another for the newbies and slow learners who have to ask the same stuff over and over again before they get it. Blogger is very limiting! At least it's free.
Like MnMark, I have a book from 1992 that lays out good arguments for eminent hyperinflation in the USA. I read it recently, and other than a need to replace Japan with China, it makes as much sense today as it probably did then. Yet, here we are, 20 years later, still operating under the $IMFS. This reminds me that no matter how obvious an outcome appears, I can't possibly have thought through all the possible scenarios. Special events may or may not happen, but I don't think I can personally ever be sure about them.
One of my main hesitations in accepting the freegold/RPG outcome relates to the link between the US government and the US dollar. I'm not sure that this link is as tight as required for hyperinflation or RPG. The link *is* really tight between the US dollar and banks that operate under the federal reserve system. The US government borrows what it spends from those banks. But other governments, and non-government businesses borrow US dollars from banks too. And non-US banks have dollar liabilities. I think that the dollar is more of a global currency and has more global support than we recognize here (support for the dollar, not support for the US). Just because the US government is broken doesn't mean that the dollar will collapse, and just because the financial system is screwed up doesn't mean that the rest of the world will let it fail. I'm not arguing that it won't, but as I stated above, I don't think I can be sure, unless a collapse actually happens.
I do think that gold is very likely continue to rise in price over time, and currency to devalue over time, which is reason enough for me.
MnMark said...
I can understand that if you already understand this material thoroughly, it would be irritating to have people ask questions that you can see would be answered they read and understood it like you do.
I don't think you've irritated anyone. Please, if you have more questions fire away.
But as you've noted the comments section can be a bit rough at times (sometimes rightfully so with idiots like AD inserting bullshit into the discussion with the sole intention of confusing other readers) so just as you've asked folks to please ignore your questions that they might consider trivial, perhaps you might do the same when you feel someone is being condescending. Just take what you'd like from their response if anything and ignore the rest -- but don't be too quick to dismiss the content of the response. Sometimes that which we seek is right in front of our eyes.
In a way, there should really be two discussion threads for these posts. One for the advanced readers who want to discuss the material at a high level with others with that level of understanding, and another for the newbies and slow learners who have to ask the same stuff over and over again before they get it.
As you might imagine the fine folks at this blog are all over the map wrt their level of understanding so if we tried to run separate discussions we would need 100 different threads to accommodate everyone -- and I would need my own thread down near the bottom! Blogger will have to do for now.
MnMark,
Your question was reasonable and was answered. Some gave specific quotes, some answered in their own words, and I suggested a specific post from FOA (did you read it?), not simply telling you to read the archives. Question asked and answered, no? If you are entitled to gripe about an answer, why shouldn't someone gripe about the question? We are all adults here.
As for your loaded statement about belief systems and adherents, leave the straw men and religious analogies to AD, unless you want to receive the sort of replies he gets, which it seems you don't desire. There is a difference between blind faith and conclusions based on evidence.
MnMark,
It surprises me that after 4 years of reading this blog that you would struggle in the way that you have described.
I understand that everyone learns at a different pace. That being said, your objection to being directed to what has been written before, and a lack of indexing, is an argument with very little teeth if you consider the fact that JR is constantly providing just that function. What we are left to assume then, is that you do not read them. Or that if you do, you do not look for the answers you seek within them.
But if your position is that it is still too complicated, perhaps the burden is on you to ask the right questions - so that those here can meet you at the level of understanding you are at. But perhaps such a tactic requires more humility than you are willing to muster.
Here is a simple thought regarding gold and freegold timing: why worry about it!
In the current paradigm, gold is in a bull market that will persist until the system breaks down.
Tuesday, January 1, 2002 - Launch of euro notes and coinsFriday, February 8, 2002 - GOLD ABOVE $300Monday, December 1, 2003 - GOLD ABOVE $400Thursday December 1, 2005 - GOLD ABOVE $500Monday, April 17, 2006 - GOLD ABOVE $600Tuesday, May 9, 2006 - GOLD ABOVE $700Friday, November 2, 2007 - GOLD ABOVE $800Monday, January 14, 2008 - GOLD ABOVE $900Monday, March 17, 2008 - GOLD ABOVE $1000Monday, November 9, 2009 - GOLD ABOVE $1100Tuesday, December 1, 2009 - GOLD ABOVE $1200Tuesday, September 28, 2010 - GOLD ABOVE $1300Wednesday, November 9, 2010 - GOLD ABOVE $1400Wednesday, April 20, 2011 - GOLD ABOVE $1500Monday, July 18, 2011 - GOLD ABOVE $1600Monday, August 8, 2011 - GOLD ABOVE $1700Thursday, August 18, 2011 - GOLD ABOVE $1800
Hi JR
"Transmutation doesn't change the need for a store of wealth, it changes the issue of what the store of wealth is."
My wording was deliberately vague and contains some implicit assumptions. I meant transmutation from any element to another, with low energy cost.
Still we agree a need exists. In the above scenario it becomes a trickier issue however. Perhaps something like bitcoin would work in that scenario.
"Free energy doesn't solve scarcity. As long as we need to economize resources, we need prices and thus we need a SoV."
Again we don't disagree. However free energy would propel the productivity of society to such a level that FreeSomething may be delayed for a significant period of time.
Combine the two above concepts and scarcity is also irrelevant.
@AD
"It is the mark of an educated mind to be able to entertain a thought without accepting it."
-Aristotle
TF
#1 We agree, we still need a SoV.
#2 so free energy means huge growth. But unless no scarcity, still need to economize.
Wrt the $, 1) could US pay back in real terms? and 2) even if they could and not default on past debt, why would people's continue to save in it? Why not support your own growth from the new free energy technolgy and save in gold? Why give US exprbitant provilege? Unless you mean a free energy source that only the US possessed.
-------
AD was pretty on point though, r we gonna worry about purple unicorns flying out of our butts too?
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