Sunday, July 1, 2012

Interview


Three weeks ago Vivek Kaul contacted me requesting an interview for the Daily News and Analysis (DNA), an English newspaper published out of six centers in India including Mumbai and Bangalore. The interview comes out today (Monday morning) in India. You can download the pdf here. Below is the interview just as it appears in the paper. (They always include a caricature made from a photo of the interviewee which is why he mentioned something about me refusing to be photographed. ;)

_____________


An interview with the mysterious, reclusive ‘Fofoa’

The dollar is as safe as a bomb shelter that's rigged to blow up once everyone is "safely" inside...

Gold will be repriced somewhere around $55,000 per ounce in today's purchasing power


Half way through the interview, I ask him where does he see the price of gold reaching in the days to come. “Well, I don't see gold's trajectory being typical of what you'd expect to see in a bull market….And I expect that physical gold will be repriced somewhere around $55,000 per ounce in today's purchasing power. I have to add that purchasing power part because it will likely be concurrent with currency devaluation,” he replies.
Meet Fofoa, an anonymous blogger whose writings on fofoa.blogspot.com have taken the world by storm over the last few years. In a rare interview – one of his preconditions was he won't be photographed – he talks to Vivek Kaul on paper money, the fall of the dollar, the coming hyperinflation and the rise of 'physical' gold.

The world is printing a lot of paper money to solve the economic problems. But that doesn’t seem to be happening. What are your views on that?

Paper money being printed to solve the problems… this was *always* in the cards. It doesn't surprise me, nor does it anger me, because I understand that it was always to be expected. The monetary and financial system we've been living with—immersed in like fish in water—for the past 90 years uses the obligations of counterparties as its foundation. These obligations are noted on paper. In describing the specific obligations these papers represent, we use well-known words like dollars, euro, yen, rupees and yuan. But what do these purely symbolic words really mean? What are these paper obligations really worth in the physical world? Ultimately, after 90 years, we have arrived at our inevitable destination: the intractable problem of an unimaginably intertwined, interconnected Gordian knot of purely symbolic obligations. A Gordian knot is like an unsolvable puzzle. It cannot be untangled. The only solution comes from "thinking outside the box." You've got to cut the knot to untangle it. So the endgame was always going to be debasing these purely symbolic units. Anyone who expected anything else simply fooled themselves into believing the rules wouldn't be changed.

Do you see the paper money continuing in the days to come?

Yes, of course! Paper money, or today's equivalent which is electronic currency, is the most efficient primary medium of exchange ever used in all of human history. To see this you only need to abandon the idea of accumulating these symbolic units for your future financial security. They aren't meant for that! They are great for trading in the here-and-now, not for storing for the unknown future. To paraphrase Silvio Gesell, an economist in favor of symbolic currency almost a century ago, "All the physical assets of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!" In hindsight, this statement is true whether money is a hard commodity like gold or silver, or a symbolic word like dollar, euro or rupee. In both cases, saving in "money" leads to monetary tension between the debtors and the savers. When money was a hard commodity, this tension was sometimes even released through bloodshed, like the French Revolution. So no, I don't think we're swinging back to a hard currency this time.

Do you see the world going back to the gold standard?

No, of course not! "The gold standard" means different things depending on which period you are talking about. But in all cases it used gold to denominate credit, the economy's primary medium of exchange. Today we have a really efficient and ultimately flexible currency. Bank runs like the 1930s are a thing of the past. But that's not to say that gold will not play a central role in the future. It will! The signs of it already happening are everywhere! Gold is not going to replace our primary medium of exchange which is paper or electronic units with those names I mentioned above. Instead, physical gold will replace paper obligations as the reserves—or store of value—within the system. Physical gold in unambiguous ownership has no counterparty. This is a much more resilient foundation than the tangled web of obligations we have today.

Can you give an example?

If you'd like to see this change in action, go to the ECB (European Central Bank) website and look at the euro-system's balance sheet. On the asset side gold is on line 1 and obligations from counterparties are below it. Additionally, they adjust all their assets to the market price every three months. I have a chart of these MTM (marked to market) adjustments on my blog. Over the last decade you can see gold rising from around 30% of total reserves to over 60% while paper obligations have fallen from 70% to less than 40%. I expect this to continue until gold is more than 90% of the reserves behind the euro.

Where do you see all this money printing heading to? Will the world see hyperinflation?

Yes, this will end. I am pretty well known for predicting dollar hyperinflation. As controversial as that prediction is, I think it is a fairly certain and obvious end. I don't like to guess at the timing because there are so many factors to consider and I'm no supercomputer, but ever since I started following this stuff I've always said it is overdue in the same way an earthquake can be overdue. As for other currencies, I don't know. Perhaps yes for the UK pound and the yen, but I don't know about the rupee. The important things to watch are the balance of trade and the government's control over the printing press. If you're running a trade deficit and your government can (and will) print, then you are a candidate for hyperinflation.

In that context what price do you see gold going to?

Well, I don't see gold's trajectory being typical of what you'd expect to see in a bull market. Instead it will be a reset of sorts, kind of like an overnight revaluation of a currency. I'm sure some of your readers have experienced a bank holiday followed by a devaluation. This will be similar. And I expect that gold will be repriced somewhere around $55,000 per ounce in today's purchasing power. I have to add that purchasing power part because it will likely be concurrent with currency devaluation. So, in rupee terms, I guess that's about Rs3.2 million (32 lakh) per ounce at today's exchange rate.

The price of gold has been rather flat lately. What are the reasons for the same? Where do you see the price of gold going over the next couple of years?

"The price of gold" is an interesting turn of phrase because I use it often to express "all things goldish" in the gold market. In today's market, "gold" is very loosely defined. What passes for "gold" in the financial market is mostly the paper obligations of counterparties. These include forward sales, futures contracts, swaps, options and unallocated accounts. I often use the abbreviation "$PoG" to refer to the going dollar price for this loose financial "gold".

The LBMA (London Bullion Market Association) recently released a survey of the total daily trading volume of unallocated (paper) gold. That survey revealed a trading flow of such magnitude that it compares to every ounce of gold that has ever been mined in all of history changing hands in just three months, or about 250 times faster than gold miners are actually pulling metal out of the ground. Equally stunning were the net sales during the survey period. The rate at which the banking system created "paper gold" was 11 times faster than real gold was being mined.

What is the point you are trying to make?

The point is that gold is being used by the global money market as a hard currency. But it is being treated by the marketplace as both a commodity that gets consumed and also as a fiat currency that can be credited at will. It is neither, and gold's global traders are in for a rude awakening when they find out that ounce-denominated credits will not be exchangeable for a price anywhere near a physical ounce of gold in extremis—ironically failing at the very stage where they were expected to perform.

So what are you predicting?

But don't get me wrong. It is not a short squeeze that I am predicting. In a short squeeze, the paper price runs up until it draws out enough real supply to cover all of the paper. But this paper will not be covered by physical gold in the end. It will be cash settled, and it will be cash settled at a price much lower than the price of a real ounce of gold, like a check written by an overstretched counterparty. It is a tough job to make my case for the future of the $PoG in just a few paragraphs. The $PoG will fall and then some short time later we will find that the market has changed out of necessity into a physical-only market at a much higher price. If you were holding paper you will be sad. If you were holding the real thing you'll be very happy.

Why is the gold price so flat these days?

Today's surprisingly stabilised $PoG tells me that someone is throwing money into the fire to delay the inevitable. Where do I see the $PoG going over the next couple of years? Maybe to $500 or less, but you won't be able to get any physical at that price. I think that today's price of $1,575 is still a fantastic bargain for physical gold.

Franklin Roosevelt had confiscated all the gold that Americans had in 1933. Do you see something similar happening in the days to come?

Not at all! The purpose of the confiscation was to stop the bank run epidemic at that time. There's no need to do it again. The dollar is no longer defined as a fixed weight of gold, so the reason for the last confiscation—and subsequent devaluation—no longer exists. Gold that's still in the ground is a different story, however. Gold mines will likely be considered strategically important national assets after the revaluation, and will therefore fall under tight government control.

The irony of the entire situation is that a currency like “dollar” which is being printed big time has become the safe haven. How safe do you think is the safe haven?

Indeed, everyone seems to be piling into the dollar. Especially on the short end of the curve, helping drive interest rates ridiculously low. The dollar is as safe as a bomb shelter that's rigged to blow up once everyone is "safely" inside. You can go check it out if you want to (sure, from the outside it might look like shelter), but you don't want to be in there when it blows up. You've got to realize that it is both economically and politically undesirable for any currency to appreciate against its peer currencies due to its use as a safe haven. Remember the Swiss franc? As soon as it started rising due to safe haven use they started printing it back down. The dollar is no different except that it's got a whole world full of paper obligations denominated in it. So when it blows, the fireworks will be something to behold.

What will change the confidence that people have in the dollar? Will there be some catastrophic event?

That's the $55,000 question. It is impossible to predict the exact pin that will pop the bubble in a world full of pins, but I have an idea that it will be one of two things. I think the two most likely proximate triggers to a catastrophic loss of confidence are a major failure in the London gold market, or the U.S. government's response to an unexpected budget crisis due to consumer price inflation. Most people who expect a catastrophic loss of confidence in the dollar seem to think it will begin in the financial markets, like a stock market crash or a Treasury auction failure or something like that. But I think it is more likely to come from where, as I like to say, the rubber meets the road. And here I'm talking about what connects the monetary world to the physical world: prices. I think these "worlds" are connected in two ways. The first is the general price level of goods and services and the second is the price of gold. If one of these two connections is broken by a failure to deliver the real-world items at the financial-system prices, then we suddenly have a real problem with the monetary side. So I think it will be a relatively quick and catastrophic event, but maybe not as dramatic as a major stock market crash. It will be confusing to most of the pundits as to what it really means, so it will take a little while for reality to sink in.

The Romans debased the denarius by almost 100% over a period of 500 years. The dollar on the other hand has lost more than 95% of its purchasing power since the Federal Reserve of United States was established in 1913, nearly 100 years back. Do you think the Federal Reserve has been responsible for the dollar losing almost all of its purchasing power in hundred years?

Yes, inflation was a lot slower in Roman times because it entailed the physical melting and reissuing of coins of a certain face value with less metal content than previous issues. This was a physical process so it occurred on a much longer time scale. The dollar, on the other hand, has lost nearly 97% of its purchasing power in roughly a hundred years. Do I think the Federal Reserve is responsible for this? Well, given that the lending/borrowing dynamic causes expansion of the money supply, I think the government and the people of the world share in the responsibility. But just because the dollar has lost 97% of its purchasing power doesn't mean that any individual lost that much. How many people do you think are still holding onto dollars today that they earned a hundred years ago? How long would you hold dollars today? As long as the prices of things you want to buy don't change during the time you are holding the currency, what have you lost? So imagine that you simply use currency for earning, borrowing and spending, but not for saving. Will it matter how much it falls over a hundred years? Your earning and spending will happen within a month or so, and prices won't change much in a month. Also, your borrowing will be made easier on you as your currency depreciates. And your gold savings will rise. So with the proper use of money, there is no need for alarm if the currency is slowly falling at, say, 2% or 3% per year.

Do you see America repaying all the debt that they have taken from the rest of the world? Or will they just inflate it away by printing more and more dollars?

The debts that exist today can never be repaid in real terms. And as I mentioned before, they are all denominated in symbolic words like dollars, euro, yen, yuan and rupees. The debt of the US Treasury, most of all, will of course be inflated away.

What does Fofoa stand for?

I remain anonymous because my blog is not about me. It is a tribute to "Another" and "Friend of Another" or "FOA" who wrote about this subject from 1997 through 2001. So FOFOA could stand for Friend of FOA or Follower of FOA or Fan of FOA. I never really stated what it stands for, so you can decide for yourself! Sincerely, Fofoa.

(Interviewer Kaul is a writer and can be reached at vivek.kaul@gmail.com)


548 comments:

1 – 200 of 548   Newer›   Newest»
costata said...

Excellent interview. I thought you gave informative responses to the questions. Well done (whatever your name is).

Aquilus said...

Going global. Love it!

KindofBlue said...

The crazy thing is, at this point I - and many others here - could have given this interview!

Thank you, Master!

nakedempire said...

Excellent.......

Great Interview........Love the Blog and the Links

Bharat Mirchandani aka Mir said...

Loved reading your interview.. and am totally convinced!!

Aquilus said...

FOFOA,

Out of curiosity, how did the interviewer hear about you? Was he a blog reader already, or coming to this subject fresh/from HMA perspective/other?

I guess I want to interview the interviewer, LOL!

Aaron said...

Bravo FOFOA!! A great summation of your work inspired by Another and FOA. I look forward to many more.

Chico_hawk said...

Congrats FOFOA.

I can only imagine this interview will encourage the people in the 2nd most populous country on the planet, who are already among the top bullion buyers, to exchange even more of their falling rupees and add to their physical gold holdings.

Well done!

Bron Suchecki said...

FOFOA, you have misinterpreted the LBMA survey with this statement "Equally stunning were the net sales during the survey period. The rate at which the banking system created "paper gold" was 11 times faster than real gold was being mined."

The reason there is a difference between buying and selling volumes is because not all LBMA market participants were surveyed yet they divided in half all inter-bank volumes (so as not to double count).

As a result you should wipe/correct all that "the LBMA had net sales in one quarter of 7,575 tonnes of paper gold. That’s a gross increase in the amount of paper gold in existence" talk from http://fofoa.blogspot.com.au/2012/06/gld-talk-continued.html

victorthecleaner said...

Zenscreamer, Jorge,

concerning the return on stocks (your discussion in the previous comment section), I think the 6% to 6.5% real return annually are roughly correct, and if you hold a good mix of stocks and don't trade, you actually get this return in the very long run (30 years or more).

This figure of 6-6.5% is very sound, does not suffer from survivorship bias, and is empirically found in all sorts of markets, not limited to public listed companies in the U.S.. This "return on equity" or, conversely, "cost of equity" has been remarkably constant, both during the old gold standard pre-1922 and ever since.

Even in a freegold world, this return must be larger than the real return on gold, simply because otherwise nobody would be willing to do any business. These 6%-6.5% is your compensation for taking business risk (note that the 6-6.5% are measured after some of your stocks went bankrupt because of this very risk).

It seems this value of 6-6.5% is one of the very few actual constants in the world of economics, called "Siegel's constant", and you can use it to gauge all sorts of other quantities, say, interest on corporate loans, etc.

The 6-6.5% growth rate is also an attractor for any total return stock market index in real terms before tax. This even makes theoretical sense: If stocks are more expensive, it is profitable to set up a new company from scratch and to take it public. If stocks are less expensive, it is profitable to buy shares, take the company private, and liquidate it. The cost of setting up a new company or the revenue from liquidating an existing company is the "replacement value of assets", known as Tobin's q, and there are some reasonably good estimates for this quantity.

Siegel's constant has a long history. There is a fantastic and reasonably easy to read book about the subject: Andrew Smithers, Stephen Wright, "Valuing Wall Street"

Victor

victorthecleaner said...

FOFOA,

fine interview. You should do this with the Financial Times though (or with the WSJ).

Bron,

can you explain this again - I am too slow. Why is the buying and the selling volume not the same?

If some bullion dealer is excluded from the survey, why would that skew the balance between sales and purchases?

Victor

costata said...

Looks like Putin is back in business big time! (My emphasis)

.... Putin's idea is that the oil and gas exporters within the SCO have been competing for promising markets (such as China or India), and to coordinate the moves SCO needs an energy club, which will act as a coordination center uniting both energy producers and the three key consumers (China, India and Pakistan).....

...... Again, a coming together of the energy producing and energy consuming countries of Asia is the ultimate nightmare scenario for the US, which fears exclusion from the ensuing matrix of regional cooperation involving countries that happen to be spearheading the fastest-growing region in the world economy.

The entire US strategy in the post-Soviet era had aimed at forestalling such a catastrophic eventuality that might put paid to the US efforts to get embedded in the "Eurasian heartland", which includes or overlooks some of the major regional powers in the coming decades - Russia, China, Kazakhstan, India, Pakistan and Iran.


http://www.atimes.com/atimes/Central_Asia/NF30Ag02.html

h/t Ed Steer's newsletter for the link

FOFOA said...

Hello Bron,

Your trademark skepticism is noteworthy as always! But I'm with Victor. I'd like to see a little more from your explanation for the discrepancy between sales and purchases before I "wipe/correct" old posts.

In the survey, Stewart Murray, Chief Executive of the LBMA explained that the LBMA members were asked to break it down into basically four categories:

1. Sales to fellow LBMA members
2. Sales to other counterparties
3. Purchases from fellow LBMA members
4. Purchases from other counterparties

(There was also a catch-all category of “other transactions” to cover "options and bullion-related commodity swaps.")

"Ultimately, 36 of the 56 Full Members involved in trading gold submitted returns. These included all of the LBMA’s spot and forward market makers."

It was only the trades reported in categories 1 and 3 that were halved: "It should be noted that the figures provided for trade between members were divided by two in order to avoid double counting."

He notes that this was conservative in that only 64% of the members reported, so many of the sales and purchases which were halved didn’t need to be since they were between a reporting member and a non-reporting member.

So 20 members did not report, 36 did. Of the 36 that did report, aggregated (and then partially halved) sales exceeded purchases by 7,575 tonnes. That's a trend. To put that trend into perspective, sales on average exceeded purchases by approx. 4.5%.

For your explanation to be correct we must assume not only the opposite trend, but a more extreme trend among the 20 non-reporting members. We would have to assume that the 20 non-reporting members on average purchased 8% more than they sold, an unlikely assumption given the magnitude (4.5%) of the discrepancy. If they weren't expanding paper gold in aggregate during that quarter, sales and purchases should have been almost identical with a sample size of 64%.

So unfortunately I don't see your explanation of the discrepancy between purchases and sales as being wholly self-evident. Perhaps an actual statistician can weigh in, but seems to me that my statement in the interview might be as conservative as the LBMA survey. If the trend was similar between reporting and non-reporting members, it could be as high as 17 times the rate of actual mine production (for that specific quarter).

If your argument is simply that these are banks and their liabilities therefore must balance with assets in aggregate, did you consider our previous discussion about how BB unallocated is being used as a FOREX trade and thereby presumably (obviously?) hedged dynamically using correlated asset derivatives by the banks?

Also, from the survey: "It can be seen that spot transactions form the large majority of the total (around 90%), with forwards and other transactions each representing around 5%. The average daily trading volume in the London market in this period was 173,713,000 ounces [5,403 tonnes] or $240.8 billion (Figure 1)." Spot transactions would be the ones used by the FOREX market, yes?

Sincerely,
FOFOA

Bron Suchecki said...

FOFOAL, I'll send you and Victor a spreadsheet as it is impossible to explain in text.

I think both of you have made the mistake of seeing what you wanted to see. To me the 7500t number was so silly that I looked further into the implications of the LBMA's method to see how it could result in an imblance between buys and sells in a market where no bullion bank had a position.

The statement about the method being conservative was in reference to the "volumes", not the "trend" of sales v purchases.

Dr. Peter T said...

And I gotta tell you, I have the absolute highest regard and gratitude for the outstanding contribution you have made in both helping to clarify Another's and FOA's work, and to seeking to contextualize it (10 years on) in the evolved current economic and political reality. Again, thank you.

Beer Holiday said...
This comment has been removed by the author.
50sQuiff said...

I can just hear the air crackling now:

"This is King World News, I'm Eric King and you're about to hear an extraordinary powerful interview with legendary Mr Freegold, F-O-F-O-A - founder, proprietor and chief trail guide at fofoa.blogspot.com."

Come on, you know you want to :)

burningfiat said...

Beer Holiday,

Plausible explanation I think.
One could even think there's a bias in the survey. Which 20 LBMA members choose not to participate in the survey? Speculation: Mostly the one's with secretive giant dip buying clients?


FOFOA, Wow going worldwide and mainstream! Great interview!

/Burning

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

Great stuff. It will be interesting to see if there are any comments from readers.

intuitivereason said...

At 36 of 56, there is still a lot of statistical variation possible, let alone allowing for selection bias - there may well also be a greater tendency for those who were net buyers to not respond.

Jeff said...

Well done, FOFOA. I'm not surprised that Indian press is doing this; I highly doubt the WSJ or Anglo establishment press will be interested. They sold out long, long ago.

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

Is FOFOA the voice of the Mysterons?

MUST LISTEN !!!!

LBMA watch out !!!

http://www.youtube.com/watch?v=bV8YbLvGrb0

JR said...

Seigel fans,

Here's the backstory. The key idea is, as npted Bob Schiller below in echoing you know who - "Everyone knows where we have been. Let's see where we are going!"

2001 NYT article

"In bear markets, multiples often return to levels below their former averages. Jeremy J. Siegel, the author of ''Stocks for the Long Run'' (McGraw-Hill, 1997), has found that stocks, even with dividends reinvested, can make no gain after inflation for as long as 17 years. As for that so-called safe five-year period for investing in stocks, stocks have occasionally done so poorly that bonds outperformed them one of three times over that time span.[...]

Mr. Siegel's basic finding was that over every 30-year period since 1871, stocks produced a handsome return that was invariably greater than the return earned by investing in bonds, and over 20-year periods, stocks outperformed bonds better than 9 of 10 times.

But the Yale economist Robert Shiller, who wrote ''Irrational Exuberance'' (Princeton, 2000) even warns that a 20- or 30-year holding period is not necessarily risk free.

''This was the most economically successful century for the most economically successful nation of all time,'' he says. ''It will not necessarily repeat itself.''"


Guess what happened:

In 1994 Jeremy Siegel wrote the best-selling book Stocks for the Long Run. In it, he demonstrated that stocks had been the best-performing asset class over the prior 120 years. It wasn't even close. Of course, stock returns were highly volatile in the short term, but Siegel showed that over longer holding periods, the range of the stock market's annual returns narrowed considerably.

Then came the recent stock market meltdown, which resulted in stunning losses for stocks. The losses have been so large, in fact, that in the 20 years that ended March 2009, the S&P 500's 7.4 percent annual return has lagged the 9.4 percent return that long-term Treasury bonds
provided. No wonder many erstwhile believers in Siegel's "stocks for the long term" gospel are asking: Were we snookered?



cont.

JR said...

cont.

Here's the three mathy criticisms:

First, they believe that annualized returns provide a false sense of security, because only total returns matter. For instance, in
their best 40-year stretch, stocks provided an annual return of 12.5 percent;
in the worst period, the annual return was 5 percent. But compounding those returns presents an entirely different picture of that relatively narrow spread: earning 5 percent annually, $1 grows to $7.50 over 40 years; at 12.5 percent, it grows to $112, a total return gap that much better illustrates stock market volatility.


The second criticism involves the use of probabilities. Since 1872, stocks have outperformed bonds in over 90 percent of all 20-year periods. But in constructing a portfolio, investors must consider not just the likelihood of outperformance, but also the amount of the shortfall they might face. If stock returns lag by just 0.05 percent annually, as happened in one period, the penalty is rather small. But falling short by 2 percent annually, as in the
most recent period, produces a total return that is less than half that
provided by bonds.

To illustrate the importance of shortfall risk, Boston University professor Zvi Bodie famously calculated the cost of insuring a stock
portfolio against a shortfall over various time periods. If the risk of equities truly declined as time horizons grew, you would expect the insurance cost to decline as well. But it doesn’t. Because the insurer has to consider not just the probability of a shortfall but also the magnitude of it, the cost of insurance rises as the holding period grows.


Which leads to the critics’ third complaint: A
long holding period actually increases the odds of encountering a severe bear market. And while you might have believed you were equipped to endure a 50 percent market decline, watching five years worth of earnings and contributions
vanish can make you reevaluate just how brave you really are. Investors who find, too late, that they assumed more risk than they bargained for are often the ones who flee the market entirely, further endangering their long-term
wealth.


and the key criticism again from Schiller:

''This was the most economically successful century for the most economically successful nation of all time,'' he says. ''It will not necessarily repeat itself.''"

hmm, where have I heard that before?

cont.

Herb said...

Great interview! It is going to open some eyes that there is a "third way" between a full fledged official gold standard and gold being used to fill teeth.

JR said...

cont.

Oh yeah, I know where I have heard that sentiment before:

FOA (1/15/00; 14:58:12MDT - Msg ID:22961).

All of the dollars success was ultimately made possible because oil could (and was) priced so far below it's "economic worth" to the world. At that time, even our Middle East friends had no idea just how useful oil would (and had) become to maintaining the world economic base.

FOA (2/28/2000; 10:18:13MT - usagold.com msg#8)

Back then, oil was literally changing our lifestyle for the better, and doing so because it's dollar price was so incredibly low relative to what science was doing with it. Modern science had made oil worth so much more than we paid for it, we could extrapolate our debt and money supply growth far into the future and still figure that productive increases would cover it.

------ the new found prosperity from cheap dollar oil was being used to justify mountains of dollar debt. As long as a barrel of oil could be used to produce more relative real wealth than the dollars used to buy it represented, dollar inflation worked in the only political measurement that counted. "An increase in the standard of living"!--------


That's a neat idea:

Modern science had made oil worth so much more than we paid for it

It was the science/technology growth that the $IMFS took advantage of, it was that growth (and its deflationary effect prices) that allowed for non-inflationary fiat fiat expansion.

cont.

JR said...

cont.

Remember this from Credibility Inflation

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.

Rather than closing the gold window, the U.S. could have, for example, raised the price of gold to $200 and kept the system going for another 30 or 40 years. A move like this would have been the mathematical equivalent of increasing the Treasury's physical stockpile 5X to double what it was at the height of the Bretton Woods experiment.

But while that would have satiated the monetary transgressions of the past, it would have done little for the future. It would not have substantially changed the system to one of easy money. It would only have extended the old system of hard money.

Robert said...

I agree with Dr. Peter T. I'd be lost if I had never found this site. The first post I ever read was Defalation or Hyperinflation last April, and that was a great place to start. I remember having the feeling that I was onto something important, even if it was going to take a long time to get my head wrapped around things. Since then I have recommended the blog to a few people, but the vast majority are not willing to invest the time to really think through these issues. I have to say that the writing has become even clearer and more concise over the last year.

Speaking only for myself, once I grasped the main ideas, everything seemed obvious. And it seemed like sheer lunacy that government bonds could ever be seen as zero risk. And sheer lunacy that anyone would ever want to save up promises. But that is the world we live in, and there is still enormous demand for sovereign debt and miniscule demand for shiny yellow rocks!

But as all of this has been sinking in over the last year, I have this nagging feeling that I should now shut off the computer -- or at least stop checking into this site and the $POG every day. Why? Because it is soooo tempting for me to get sucked into the timing temptation, and to give too much weight to the traders standing in 6 inches of water kicking up as much spray as they can. I would rather be offshore in the deeper water with the Giants. I would rather get into the mindset of thinking really long term. The Giants plan for all contingencies and then forget about it. Though I am but a tiny shrimp, something inside me tells me I should try to do the same. But I'll probably be back again tomorrow reading the comments again . . . .

AdvocatusDiaboli said...

Has'nt Freegold not already arrived?

Hmmm, you probably say "because gold is not expensive enough", but wait. Could maybe someone explain my following observation:

I like stacking and buy plenty of gold bullion coins. In Germany in most (online)shops you can choose between a random year or the newest year. Because the new ones are a little bit more "shinny", they charge a little extra. But hell, gold is gold, so I always order the random years (and most probably every real gold savers thinks like that, additionally I think, it helps a little spreading the risks to fake exposure).
So to give you an example: By now, I have more than 500 Krügerrand, random year. Occasionally when I order random year, I once in a while get a "free upgrade", meaning they ship me "2012", because they dont have old ones. But this happens very very rarely, so most of the 500 Krügerrands are old.
How can that be? Where do all the old ones come from? Somebody must have sold those (parted with their SoV in exchange for MoE). But this flood of old coins appears to never end, the shops always have both new&old (at least when it comes to Eagles, Marples, Buffalos, Philis, only the older Kanguroos appear to become more rare and "upgrades" are much more often). I watched this now for almost 2yrs in different shops. In some shops I once in a while buy all available inventory of one particular type of "old" coin, upps, a couple of days later, the shelf is filled again with that "old" coin.
Any explanation, other that Freegold is already upon us (although most people here probably wont like that idea)?
I think this is worth to notice, since the years are not "washed away" like when dealing in case of scrap vs. refined gold bars.
Greets, AD

Dr. Octagon said...

Is this the first official in-print appearance of FOFOA? Even if it's not, congratulations! I hope this visibility helps those in the real world as much as it does us blog-goers.

Michael H said...

AD,

About the old coins, and whether freegold has arrived or not ...

The reason freegold has not yet arrived is because gold credit, in the form of unallocated accounts at BBs, is still available.

In other words, most people with your purchasing power would not go through the hassle of buying coins, they would call up a BB and set up an unallocated gold account because they don't know any better.

As for the coin buyers and sellers: what shrimps do on the margins, in $10k increments, doesn't matter all that much. People sell for the normal reasons of needing cash, and most people expect tomorrow to be much like today.

The real fireworks will begin when the tons and tons of 'gold' held unallocated seeks allocation.

AdvocatusDiaboli said...

Micheal,
I think that is a too easy explanation. You assume that this flow of old coins comes from the "desperated" cash raisers. Sure there might be some. But in that magnitude? And the shelves immediately filled up again? And always so random different years (19th century...today) and different type&continents?
Why I bought coins? I really wonder if it is useful to have only 1kg bars or bigger in case I want to sell, in case FOFOA would be right and >10x from todays price.
Or will I be able to pay directly in 1kg bars for my very last and only remaining dream:
http://www.vladi-private-islands.de/de/insel+kaufen+great-hans-lollik-island-little-hans-lollik-island+us-virgin-islands+karibik/

I also think you underestimate people with "more money" to be stupid, just to hold up your vision on how things might turn out. I can live quite comfortable without that magical "FOFOA-20bagger", can you?
Greets, AD

P.S.
Amazingly this "old-coin-phenomenum" can not be seen with silver bullion coins in Germany, latest year brand new available only.

Michael H said...

AD,

"Amazingly this "old-coin-phenomenum" can not be seen with silver bullion coins in Germany, latest year brand new available only."

This makes sense in light of silver's industrial usage. Old silver coins are more likely to be melted down for industrial use than are old gold coins.

"You assume that this flow of old coins comes from the "desperated" cash raisers."

Not so much 'desperate' as 'dis-hoarding'. They bought the coins either as collectibles or as an investment, and now that the investment has 'paid off' they are ready to sell and move into what they see is a more advantageous asset.

"I also think you underestimate people with "more money" to be stupid,..."

Not necessarily, which is why I said that currently we do not have freegold because of those people with "more money" who are "stupid" enough to buy unallocated gold.

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

American eagles weren't made until 1986, canadian maples in 79, and if you are in Europe I'm not surprised you get more krugs than North American coins. In fact we get lots of krugs here in USA; by 1980 they accounted for 90% of the gold coin market. Wiki is your friend.

https://en.wikipedia.org/wiki/Krugerrand

Michael H said...

Zenscreamer,

Your wrote on July 1, 2012 9:23 AM, on the previous thread:

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

Another way to look at it is 'the moment when the single-price gold market breaks', i.e. splits between (physical, unambiguous) gold and 'goldish' paper.

Two possibilities that have been discussed here:

- If the oil price falls, and the gold price falls alongside to maintain the historical gold:oil price ratio, then the BBs may loose so many reserves that they are no longer able to service unallocated accounts. See FOFOA's and victor's posts on GLD.

- If physical gold only, and not gold credit, is counted as Tier 1 bank capital, then this may lead to the former commanding a premium to the latter. Again, BB reserve drainage may ensue.

Hill C said...

I am on board with freegold, however, I am still struggling with who qualifies as a “saver.” I do not necessarily buy into the logic of intergenerational savers driving us to freegold unless you are referring to nations/societies as a whole. I fully agree with producers driving freegold. However, super production is not a gene. You do not inherit the ability to produce. Ayn Rand makes a solid point: “Only the man who does not need it, is fit to inherit wealth – the man who would make his own fortune no matter where he started…. If an heir is equal to his money [wealth], it serves him; if not, it destroys him. Money [wealth] is a living power that dies without its root. Money [wealth] will not serve that mind that cannot match it.”
I believe that I, as a shrimp, will play a reasonable part in the conversion to freegold. It is the savers like me, cumulatively, that will dictate freegold. When the US as a whole net produced gold flowed to the US. Today, China net produces and gold flows to China. China’s impact on gold comes from the fact that it is the world’s super producer in aggregate. Can someone help me out here?

milamber said...

FOFOA,

Congrats on the interview. :)
I am really surprised that an Indian/English newspaper would give an anonymous blogger so much ink. They normally require verification, blah, blah and don't normally grant anonymity except in whistle blower type cases. Of course, what were Another/FOA but blowing a loud whistle:)

Victor,

Going back to the excerpts that you published here regards Nixon, I came across some very interesting tapes. As far as I can tell, there are no transcripts of these tapes (yet), but they are *VERY* intriguing.

This particular tape is from Oct 28, 1971.

Tape Table of contents is here:

http://whitehousetapes.net/findingaid/nixon/606.

tape can be listened to here:

http://www.whitehousetapes.net/data/audio/rmn/mp3/rmn_e606a.mp3

http://www.whitehousetapes.net/data/audio/rmn/mp3/rmn_e606b.mp3

The first one (as it relates to gold)starts around the 15 minute mark. Very hard to hear, but it is worth the effort IMO!

there are of course more tapes (with no transcripts) & I expect all will find nuggets with some effort expended.

Milamber

Clyde Frog said...

'There are many who would take [what you thought was] your gold'?

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

@ Hill C,

Can you take a look at this comment & see what you think?

http://fofoa.blogspot.com/2012/06/blondies-view.html?showComment=1339416396647#c4042392172567299745

Milamber

Ender said...

Wow, FOFOA, the timing on this article is amazing! It will have an impact.

From the list of questions, Vivek Kaul has a practical understanding of the Freegold Concept. The choice of questions is pertinent and concise. More importantly, it’s condensed your thousands of words into a power handful that lays the key principles on the line – in full print – for the world to review. The artfulness expressed here will be remembered for years to come.

This article, IMHO, will touch people.

Congratulations FOFOA!

Congratulations Vivek Kaul!

All, it is getting close to the point where we will have to organize and find a technology that will allow for better virtual interactions in the comments section of the blog. Regular forum software has already proven to not be useful. We need the ability to comment on comments and the ability to collapse and expand those threads all while being able to see the comment stream in real-time. It must also be secure.

May your day be golden!
Ender

victorthecleaner said...

JR,

I made an effort and gave people a concise overview and pointed them to the best book on the subject (Smithers-Wright). So please stop posting bullshit. Your arrogance is misplaced as you obviously don't have the slightest clue what you are copy-pasting here.

To put things into context:

Siegel got the idea right. He may have been a bit big-mouthed, and his estimate of the number (7%) is too high because the market was over-valued at the end of his study period.

Shiller understands it perfectly well. When he wrote his book, the U.S. market was grossly overvalued, and he warned people. Apart from that, he perfectly agrees with the 6-6.5% figure. In fact, his criterion (cyclically adjusted price/earnings ratio) is one of the tools in order to figure out how 'cheap' or 'expensive' the market is.

In case you are interested in the present data: The U.S. market is about 55% overvalued relative to its long-term trend. Towards the end of a serious decline, it is usually about 40%-50% undervalued. So there is lots of room to the downside.

Most continental European markets, however, are 10%-40% undervalued.

My theoretical comment that the average real return on equity must be larger than the average real return on gold should also be evident.

Victor

AdvocatusDiaboli said...

Michael,
thanks for that sentence:

"Old silver coins are more likely to be melted down for industrial use than are old gold coins."

Perfect!! I 100% agree that this interpretation, makes sense: Those are melted down to serve other purposes. (but remember it is an assumption!)
Can we conduct something from that working principle when applied to gold, since the old gold coins appear NOT to be melted down?
Where do those supposingly "giants" get their 400oz bars from? There must be either:
a.) plenty of scrap from broken western housewifes
b.) they get lots of the "real stuff" from the CB
c.) they get the stuff from the miners
d.) none of the above, that "giant-argument" is just BS

Let's assume that d.) is not valid, due to that it is one of the thesis of this blog. So let's look at a.): Nope. Just take a look at the balance sheet of some of the refiners, much too small.
b.): Nope, at least the thesis of this blog is also, that the CB still have in total what they claim in physical.
c.): From the Miners appears the only valid source left.
Have I missed something?
Greets, AD

AdvocatusDiaboli said...

Jeff,
plenty of other much older coins available in huge quantaties, even without much spread (~5-8%):
Pesos, Sovereign, Napoleon, Kronen, Gulden, Vreneli, Dukat, Rand, Liberty, Rubel...
I only mentioned the ones that I personally buy.
Greets, AD

Jeff Snyder said...

Could someone please point me to the article where Fofoa explains on what basis he arrives at a $55k equivalent purchasing power post dollar revalutaion? I recall seeing an article where he uses the bell curve showing the range of possible values, with 55k being smack dab in the middle, but I don't understand on what basis these calculations are made. I would appreciate any help.

Jeff said...

AD, I don't know much about european coins; I don't see many of them here. But I see lots of krugs from about 1976-82, probably because that is the last time people were buying a lot of gold coins, and the krug was about the only game in town. After that period some things changed:

- $POG began to fall
- at some time, the kruggerand was banned from import, to protest apartheid
- demand waned (see the falling price)

Why do I see so many of them in shops today? Because, and this goes to Hill's question too, those buyers from 1980, are not giants. They don't need to store wealth over generations. They want or need the money, and their time is limited. Their gold flows! The global John Galts don't flow their gold.

Clyde Frog said...

@Gary,

But does he? I agree he definitely does when he wishes to draw a distinction, but I'm not sure he does so consistently. For example:

Yes, gold just like currencies has been "digitized".

It feels to me like he's talking about all forms of "gold" here, not just GOLD? I just wanted to pick one example, there may be any number of others where he hasn't made this distinction, but you might take him to be talking about not just physical gold(?).


I went to look for the particular quote you brought up:

Date: Sat Jan 17 1998 23:19
ANOTHER (THOUGHTS!) ID#60253:

REPLY,

Date: Sat Jan 17 1998 22:40
A.Goose ( Gold for oil... ) ID#20137:

There are many who would take your gold. Read my long post of tonight and place your life in that time. You will feel the threat against your holdings. If it is taken it will be for the good of all. Perhaps it is not bad. In all things, good life is more important.



This refers to a "long post of tonight", which I take to be this one:


Date: Sat Jan 17 1998 20:45
ANOTHER (THOUGHTS!) ID#60253:

For those of simple thought, such as I, gold is good to own. But, for those of need for reason, read from one who speaks to me:

The Cornering of Gold!

The final outcome of "Too Much Oil", "Too little Gold" and "Worldwide Digital Currencies".

For years the governments could create currency out of nothing. But, during the last eight years, the modern currency systems have taken the final step. As digital charges in a computer, they have become but "emotional thoughts" of trading value. This is to say, "a currency unit exists only during the moment of trade". During this time, when real things are in transit, paper currency has value as an expected "trade completion". It exists as a human thought. Complete the transaction and the thought is gone, the currency unit dies.

Think about it? If for a time the world commerce stopped. All would live from what they had for, say a week. During this week, all currencies and the debts that back them would not exist! Without trade, modern currencies have no use, no value, no purpose.

During our modern age, a currency can be anything. Corn, lamps, cars, tables, anything could be used as a concept for a digital currency. You see, it exists in concept only. Even gold could be used as modern money. The real item is not used, only the concept of "how it would be used during the transaction of commerce". "Real value is not needed for modern money, as it is only used as a trading unit"!

What does all of this have to do with oil and gold? For most people, nothing. But for some people, everything! You see, some persons do not want to hold an "operating business" and the present value that represents, as their wealth. Nor do they want to hold encumbered assets or debts of others. Wealth, to these people, is not represented by a "digital trading unit of commerce".

History has shown how many persons, or groups of persons, have tried and failed while trying to corner a commodity. Greed was always the factor, as acquiring real wealth to pass on to family or country was never the aim. Using paper currencies ( or debts of the same ) to purchase these commodities, always brought on the undoing of the scam. During some years, even gold was used as a purchasing unit, as gold was the currency of that time.


(cont)

Clyde Frog said...

(cont)

But, today we come to a different period, with a different factor and circumstance. For during no period of history has an entity used a commodity to corner another commodity! The intent is not to "corner", but the result will be the same. This action is coming about because of a gross, huge mismatch of the value of gold and oil! We are not talking about the price of these items ( in any currency ) . We speak of the total amount of physical gold, worldwide and the total amount of oil worldwide. During the last twenty years, the world has made oil an absolute necessity for life as we know it. During the same time, gold has been degraded to a "kind of commodity that we may need sometime but, I'm not sure". With the public, government and the business community holding these thoughts, it is easy to understand which item is needed first and which would be dumped. In this day, people would sell gold for oil, no contest!

Consider the amount of oil that is used daily. Consider the future value that this consumption places on reserves in the ground. Compare this to the amount of gold consumed daily. Notice I said "consumed daily", not "traded daily". Clearly, the consumption of oil compared to the consumption of gold places a much higher value on oil reserves than gold reserves. With no replacement for the use of oil ( at present to lower prices ) and no "needed" use for gold in today's thought, we have the ingredients for a mismatch in value of epic proportions!

The supply of oil was a problem in the 70s. Several nations actually cut off the supply to make a political point. Many thought that the "embargo" was an attempt at "cornering" the oil market. We may never know the true reasons for the large increase in the price of oil, but one thing is clear. The value of oil in today's economy is of far greater importance to maintaining present "asset values" than at any time in the past. Today, the future value of all commerce is "well bid" into every asset value! Without oil in good supply , at a currency price that allows a reasonable lifestyle, all assets would lose much relative value.

This "need" for supply is not lost to governments or their Central Banks. No single asset class or segment of the economy, by itself is more valuable than the supply of oil. This brings us back full circle, to the problem of "digital currencies" and the "mind set" of much of the simple ( and rich ) third world persons. To many of these people, wealth is the surplus of life's work that you pass on after death. Currency is something you, spend, trade or hold for a few years. It isn't wealth. Gold ( and silver ) is "on the list", so to speak.

This same mindset creates a worry in the back of many a mind in the oil states. It is clear to most, that even a small amount of gold in the asset mix, makes one appear "less western" and therefore "less foolish" when the concept of value and currency are discussed. But, the problem has always been that oil is "so large" in relation to gold that any attempt to convert, even a portion of ones assets creates a distortion in the markets. Of further concern is that; everyone knows that western minds don't like or want gold, but if they think you like it they will trade it up in price for the sake of "sticking it to you".


(cont)

Clyde Frog said...

(cont)

Enter the world of "paper gold".

Yes, gold just like currencies has been "digitized". If you brought gasoline, made from oil sold under $20/bl, you are part of this system! For just as the "digital currencies" are created for trading only, paper gold was created for the trade of oil. In a very broad sense, it was created as an "extra" or "kicker" to allow the purchase of small amounts of cheap gold in return for a full supply of oil. In reality, this gold paper represents the future production of gold ( from the ground ) to balance the reserves of oil ( also in the ground ) . The huge amount of "paper gold" traded and outstanding today is now in excess of all the gold in existence above ground! In essence, it is of the same value as the currencies, "the thoughts of nations, blowing in the wind". The Central Banks gave value to this paper by selling and lending some of their gold stocks. But, as economies became hooked on cheap oil, and demanded more of the same, these same CBs had no choice but to use fractional reserve gold lending" to pump [ed: "inflate"] the gold market.

Now we approach the final act.

There is one oil state that no one will play for a fool. The CBs will sell all of their gold or the nations will nationalize all mines and operate them at a loss. One way or another, most of the paper gold market will be honored. Why? Because oil will bid for gold if they do not! We are not talking about an oil embargo or rising oil prices. Indeed, oil will become very cheap for those that can supply physical gold. This deal will not require the agreement of all oil states. Only one can start this, the others will gladly follow.

A large oil producer, with plenty of reserves and unused capacity, can say: We now value gold at $10, $20 or $30,000/oz.. That is the rate we will use to sell oil. We will go to "full" production and offer at $10.00us/bl.. Pay us in physical gold and USD ( or EUROs ) as a 50% mix to the above rate to equal $10/bl.. [ed: so $5 cash plus say 1/55000oz, per barrel]

It would be a deal like none other! Oil, worldwide, would drop to $10.00/bl and every economy would do very well, IF they had gold. All gold would immediately be arbitraged to the above prices thereby creating a "world oil currency" large enough to handle oil. This creating of a new "specialized currency" will be the result of the first "commodity corner" that ever succeeded!

But what of the current currency/debt structure? We will cover that in a later article.




It sounds to me like it would be not lost to governments or their Central Banks that they need to prise any gold they can get out of the hands of their faithful and civic-minded citizens, even if they have to offer to pay (the local equivalent of) the one oil state's stated new valuation of gold, say $55000/oz (i.e.: through an arbitrage process, all gold everywhere is quickly brought to the same valuation). Paying which seems like it would be no great issue to the governments or their Central Banks, since their local currency is very easy to come by, for them at least.

One could instead choose to interpret this as the governments or their Central Banks will outlaw gold ownership and call it all in under threat of imprisonment. But would everyone simply roll over and hand it all in, or would a large proportion go underground (literally)?

I have to ask myself which approach would be more likely to encourage the greater volume of stock to flow? And also which approach would require the least effort? Would either of these be attempting to fight the tide against the global superorganism, while the other is merely riding the wave?

I'll have to get back to you sometime, perhaps. After I've mulled all this over properly.

Thank you!

JR said...

Hi Victor,

I think you have airballed my point, but lets just leave it at this.

Siegel is not an economist, he is a professor of finance who comments on financial markets.

The data is as the data is. The issue is the conclusions drawn from that data, and in particular the suggestion its economics or that these conclusions well accepted.

The facts are not in dispute, they are well documented. But the conclusions drawn from this data are far from accepted.

It seems this value of 6-6.5% is one of the very few actual constants in the world of economics, called "Siegel's constant", and you can use it to gauge all sorts of other quantities, say, interest on corporate loans, etc.


Seigel's ideas are not economics, not are they "constants" in the worlds of economics.

For example, the ideas are applied in the quote to suggest a relationship between siegel's constant to corporate bond rates -- this is a description of how finance works in the $IMFs. Its very important point to understand, as the premise of this blog is that the $IMFs is ending.

Loosely and real big picture:

Finance - what happens.
Economics - why it happens.

Finance is the study of how people allocate assets over time in the face of uncertainty.

Economics is the study of society and how people allocate scarce resources, or put another way, its the study of human action.

Clyde Frog said...

Ooops!

[ed: so $5 cash plus say 1/55000oz, per barrel]

should have been

[ed: so $5 cash plus say 5/55000oz, per barrel]

What a dummy! :)

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

Jeff Snyder; Are you the same JS who has posted some excellent
articles over at Zero Hedge? Just curious. They were good enough
that I printed them out to save. Cheers!

Jeff Snyder said...

Hi Woland, no, sorry that was not me.

Winters said...

Nice work FOFOA.

It will be interesting to see how it is received. I think the content will go over the heads of most mainstream readers. I read it and grokked it but thats after some serious study of FOFOA material.

If I showed it to my mum she would not really get any of it. This is not a critiscm of FOFOA's presentation but just a sad reflection of the foundation knowledge in these matters of J6P. American Idol is easier to digest.

That said, 2009 me wouldn't have got it either but would have felt that there was something deep there and worth pursuing and reading up on. Observationally though, the desire to understand how things fundamentally work is not widespread among my peers - perhaps they are too busy paying down their mortgages and investment properties. oh the irony :)

Aaron said...

I think the content will go over the heads of most mainstream readers.

It's interesting you should say that Winters. I'd say this interview is one of FOFOA's most accessible pieces to-date. If there's one thing I've noticed over the years it is that with each new essay FOFOA authors he finds new and interesting ways to make exceedingly complex ideas more accessible to the masses using simpler language and relevant allegories (h/t to Beer Holiday). Granted -- Freegold is difficult to grasp given the baggage we all bring to the table, but as far as finding his way around the mess of explaining difficult financial instruments or monetary theory to those with absolutely zero education about economics, I think FOFOA's done a bang-up job of getting the point across -- so much so that even a developmentally challenged J6P would sense something in the economic world around them is amiss -- perhaps even on the brink of collapse.


Ah well, it all comes down to opinion I guess.

Pamplona said...

A question for FOFOA, JR, VtC, Bron, et al.

Gold demand is generally inelastic in currency terms because its primary use is as a wealth reserve. This is in contrast to industrial metals where demand is relatively inelastic in weight terms.


When that happens the mines will be treated in one of three ways: 1. They will be nationalized as gold in the ground will suddenly be viewed as national reserves (unlikely). 2. They will be forced to sell all production to the government at a low "commoditized" price (less likely). 3. They will be able to sell to the public at market prices but will have to pay a windfall profits tax and deal with many restrictions (most likely)

How do we reconcile these two statements with the fact that a significant proportion of current gold supply is a byproduct of copper porphyries? What of the copper projects that depend on their optionality to gold prices to be economically feasible?

Also, what do you make of PM miners disbursing to shareholders rather than selling into the market? How do you suppose the government will enforce taxes on these distributions?

http://finance.yahoo.com/news/gold-corporation-declares-milestone-june-120000134.html

Thanks in advance for your insight.

JR said...

True Winters,

But from another perspective, it was written for Indians (or at least those reading an English language Indian paper), not USAers, and arguably they better get the freegold paradigm than our western minds.

FOA: The gold market is made up of a very broad spectrum of investors. At the very farthest ends of this spectrum lie the persons with the largest influence on the physical bullion. The super wealthy at one end and the "third world no ones" at the other. The middle is occupied, mostly, by the "investors with western thought". The far ends buy bullion. And they don't buy it as a gamble or a game! It is a way of life that has worked, through thick and thin, even before the West was "The West".

Now, on the other hand, this "modern day middle of the spectrum"! Well, they have read why we need gold, but they have never "Experienced" the need for gold! Until that day, when they gain "Experience", most of them will make "A Gamble That They Never Intended To Take". Yes, they do invest in all forms of paper and or leveraged gold and all the while, expounding from the roof tops the coming currency crashes and stock market declines. Even looking for bank closures and bank runs, as they cling dearly to comex options and gold stocks.

...

FOA: This modern paper market is relatively a new concept in world gold trade. It was created by banks, western traders and mine operators themselves over the last 15+ years. They supported this market by buying into it instead of buying and trading only real gold. True, the paper promoters may have been dishonest in presenting the effects of this process, but no one was forced to use it! Without user cash flow giving credibility to these paper derivatives, the market would not exist in it's present form. Yes, it's true that the Euroland and dollar faction agenda, along with oil interest and indeed physical gold traders all benefited from this investors market making cash flow! But this is reality for any investment where a buyer of a contract abrogates the security of present real ownership into a paper position with counterparties risk. Even today, call option buyers give their money away in support of this illusion, instead of buying coins outright. Truly, western gold paper traders and gold stock investors today a have evolved and in no way represent what the term "gold bug" used to mean. Today, physical gold advocates are the real gold bugs as they now posses the real leverage paper players only think they have!

...

FOA: It all comes down to you playing with a paper gold supply that's supposed to represent gold you could conceivably get, if needed. But the closer we get to the "real act" in this play, the more the paper game is inflated with supply that cannot be covered outside a cash settlement. That is a simple position to understand and work from but just look around? The "Western Mind" is stumbling all over itself in an attempt to explain it with a different outcome. In other words: There must be a way this can all work out so as to preserve our dollar and the leverage we own in these paper gold substitutes.


Remember "India's Gold"

Michael H said...

AD,

I think you are correct that most of the physical gold flow today comes from mine supply. There is significant flow from scrap as well.

From the World Gold Council:

http://www.gold.org/investment/statistics/demand_and_supply_statistics/

"In terms of the supply of gold to the market, total supply increased by 5% year-on-year to 1,070.3 tonnes. The first quarter saw modest growth in mine production to 673.8 tonnes, which was slightly offset by a halving of (already minimal) levels of producer hedging, to just 5.0 tonnes. The supply of gold from recycling activity was up 11% year-on-year to 391.5 tonnes."

So (visible) supply is about 2/3 from the mines and 1/3 from scrap.

costata said...

AD,

I'm not surprised you are seeing old coins in the market. Japan, for example, has been a net exporter of gold in the last year or so which could be explained by demographics. Their pension funds are under pressure from the demands of retirees as well.

FOFOA also provided an anecdote about one of the people who was a poster during the time A/FOA were writing who placed all of his retirement funds in gold and has been selling down since then to fund his retirement. The market value of his remaining holding exceeds the original cost of his total purchase.

In some countries, Vietnam for example, if you want to buy a house you have to pay in gold or a hard currency. No one wants the local currency. Life goes on regardless.

Some of the stock must be flowing at any given time.

Beer Holiday said...

AD - Another theory on your old Krügerrands.

Many would have gotten their Krügerrands in the 1980's gold spike. They missed out on that "bubble" as they see it, and they've had them in the back draw until now.

I guess you can prove/disprove this theory easily - are the old years mostly pre early 80's?

Winters said...

@Aaron and @JR
I reread the article and agree I am probably too pesimestic. It is indeed accessible for those who are curious enough. My mum would probably start to glaze over at the mentions of store of value and medium of exchange despite me trying to explain these concepts previously. If she won $1 million today, she'd probably just whack it in a high interest savings account which 'earns income!'

@JR - nice point on the Indian perspective. Perhaps because Australia has had an historically stable currency people here find it totally foreign to worry of the risk of saving your wealth in currency. You may as well try and tell them to buy moon rock - they will look at you the same way!

Nice quote from FOA re: the two ends & middle of the spectrum too.

There don't seem to be any comments on the DNA site yet. I even made an account in case they were only visible to account holders.

Winters said...

Actually moon rock may not be that crazy as a collectible store of value.
Change that bit to 'magic beans'!

victorthecleaner said...

milamber,

as for the audios, I always get "page not found". Does anyone of you have better luck?

Victor

AdvocatusDiaboli said...

costata,
just as I said, what you describes is actually already "Freegold" :P
Greets, AD

AdvocatusDiaboli said...

BH,
yes, statistically more from the 70s. Maybe your thesis is correct on the Krügers. On the Marples I have the feeling that more from the 80s. The Eagles dont have any statistical cluster.
I never made a precise table of the years, so this is just from the gut feeling.
What makes me always wonder, through which and how many hands each of these coins might have gone...
Greets, AD

AdvocatusDiaboli said...

Michael,
thanks for the link. What always makes me wonder on such statistics is the word "demand", especially "investment demand".
As one of the most liquid wealth reserve assets, I guess that the word "demand" is not really applicable. So how can one qualify "demand" in terms of gold and put such a number into the (consumption) table?
I mean, specially one of the messages from this blog is, that gold is not a demand driven commodity like orange juice, such as you can qualify "demand".
Greets, AD

sean said...

Yes AD, you're right. Freegold is already here. No point you staying here any longer then is there? Bye!

costata said...

AD,

If this is Freegold-RPG I can't wait for whatever takes its place.

costata said...

Banking Post Transition

I don't want to delve into a discussion of the current banking system but I think we can avoid that and still talk about some of the possible impacts of the transition. Allow me to describe a few basic parameters based on the Freegold-RPG features that we discuss in these pages and then make some observations on them to kickstart a discussion if anyone is interested in the subject.

1. The preferred vehicle for savings will be gold as opposed to currency.

2. The function of fiat currency will be solely that of an MoE. From an SoV perspective you will be virtually guarranteed an annual loss of purchasing power on, say, your Euro of around 2 per cent (before adding back any interest income you receive and deducting any tax payable).

3. The currency issuer will have objective "oversight" of their currency management through the pricing of their currency by the reference point - gold. (The FOREX market by contrast is completely relativistic at present.)

In relation to the first two parameters, to me, they suggest less currency saving account deposits in the banking system. A fractionally reserved banking system would be in competition with gold for deposits. Perhaps that would be self-regulating. Banks would have to offer a high enough rate of interest to tempt savers to divest gold for currency.

I'm not sure that this would be any better than a gold exchange standard without some kind of flexible secondary media like Real Bills so I'm feeling the gravitational pull of the too hard basket on this notion.

The LTRO program could be a hint of an alternative system that doesn't rely on deposits at all. Provided the collateral is acceptable to the CB a bank could initiate any loan, or securitized debt, they choose and it would always be liquid.

In relation to parameter three it seems to me that the currency issuer would need to have tighter control over the creation of bank credit money in order to manage their currency effectively. I would imagine that overall control of the power to create "money" would be essential (but of course others may disagree). So I'm seeing the bank regulator and the currency issuer being under the same roof if not in the same hands.

Clyde Frog said...

@Gary,

Good morning.

maybe gold held in pension plans and other tax-advantaged places could be 'got at' quite easily.

I understand your concern. Perhaps this is why FOFOA recommends to keep your gold under your own direct physical control where possible, rather than keeping it at arms length. I read somewhere that possession is 9/10th of the law. And as you imply, if a desperate (and short-sighted?) government knows exactly where some gold is, they might (perhaps rashly?) decide to take possession immediately and answer questions later. There is no denying quite how stupid some political decisions can be at times. Fortunately, the markets have a tendancy to enforce global reality before too long I think.

As for pension plans being tax-advantaged, I'm not so sure. They're tax-advantaged when one puts the money in today, but one is taxed when taking it out again later. If things go in any way accord to ones plan, this means you'll probably pay more tax in the end - in addition to locking more money away from circulation until later, thereby helping keep CPI in check for a bit longer. Double win for government?

It is certainly strange reading Another talk about this 'new' gold market, and that it would break by 2000.

My understanding is that Another expected the paper "gold" market to breakdown quickly, because the Europeans had been providing the necessary systemic support until that time, but the 'new' development was they were no longer going to do so. He hadn't bargained on the Chinese wishing to step in for another decade to fill their shoes. Maybe he didn't realise how important it was to them that they be honoured with the USA's most favoured nation label? Or, perhaps more likely now, that they would also be prepared to sacrifice themselves so much, in order to buy additional preparation time for themselves too.

Thank you.

Anand Srivastava said...

I just have trouble understanding, how we are sure that it will be RPG and RPG alone that will be used for international trade.

I would think that SDR is also an option. Not plain SDR, but SDR augmented with Commodity prices. This would be complex and amenable to manipulation. Governments love manipulation. RPG is too simple to be manipulated.

Why would Governments select RPG over augmented SDR?

Are there any conditions that will force the governments to chose RPG instead of SDR?

One possibility is that Gold will be the only acceptable Tier1 Reserve Asset. Currencies with Gold as Tier1 Reserve Asset may become Tier2 assets. Pure Fiat currencies will not be considered acceptable reserve assets.

Gold will then determine the value of these Tier2 asset currencies. Since these will be all the top currencies, the countries would have nothing to gain by having SDR as the mechanism, and they would prefer RPG.

If this is the process by which we get RPG, then the establishment of RPG will require at least China and USA to first move to having a gold centric currency.

USA will anyway have to make a Gold centric currency to recover from the HI. Then China can be the only country that might prevent RPG from being adopted.

The 2009 doc I read here seems to imply that China prefers an Augmented SDR. Is my assumption correct, has it changed in the meantime?

I think China does not have much gold, even though they have been collecting it since 1997. The real problem is that its people were not allowed to hold gold until very recently. So even if they were collecting covertly, it cannot be in several thousand tonnes. Which would be required to have a fairly strong currency based just on gold.

I do agree that China does not need to have gold as it is very very big producer. It could collect gold, over time. But still RPG does not provide it any benefit.

Lisa said...

Victor

Try this link instead:

http://whitehousetapes.net/findingaid/nixon/606

Great to have you posting again on the FOFOA blog

milamber said...

Victor,

I get that too now :(

However, I am able to access them via this link

http://millercenter.org/scripps/archive/presidentialrecordings/nixon/1971/10

And then selecting the 606 tape down the page.

Lots of good stuff here.


Milamber

sean said...

Costata, the latest article by George Monbiot on peak oil may interest you.

Woland said...

Costata:

Permit me to "kick the hornets' nest" if I may: Regarding #1:
"The preferred vehicle for savings will be gold as opposed to
currency".

For me, the understanding of that sentence was crystalized in
the discussion between FOFOA and Ender in Sept. 2008. What
I believe I learned was as follows.

Post transition, trade will be SETTLED in REAL terms: that means
gold. As a result, certain net producers will, within their
currency zone, accumulate gold. That in turn, ceteris paribus,
will mean that gold will become MORE available to that currency
over time, causing its price to fall. The currency will be seen to
but more gold in the future, and so "marginal" savings will be
done in currency, with the prospect of acquiring more gold at a
later date.

The flip side of this is the net consumer society. In their currency
zone, gold is is flowing out, and becoming scarcer, driving up
its' present and future price. The savers in that net consuming
society will want to accumulate gold, as it will be buy more
currency units over time than simply holding the currency. They
will be driving the currency price up.

The equilibrating mechanism is the "currency management"
between the two opposing "net producing" and "net
consuming" currency zones. It could happen, to counteract the
outflow of jobs, that a net producer so inflated his currency as to
counteract the beneficial effects (gold inflow) of his net production:
(think Switzerland) This action, over time, would reverse the flow
of net consumption between the 2 zones. This is quite natural,
actually. The more you save (gold) the more you are tempted to
spend (net consume, in currency). This is from Ender's remarks.
Does that make sense? It does to me.


gold

Woland said...

Typo: "The currency will be seen to buy more gold in the future."

DP said...

Costata,

The LTRO program could be a hint of an alternative system that doesn't rely on deposits at all. Provided the collateral is acceptable to the CB a bank could initiate any loan, or securitized debt, they choose and it would always be liquid.

Commercial banks as loan originators for a pawnbroking Central Bank, ensuring unrestricted (but tightly-controlled) liquidity is always available where and when it's desirable? Weeeeee!

Winters said...

Interesting thought experiment Costata re:banking.
Here are my amateur thoughts

* If savings aren't compelled into fractional reserve -> credit will be much harder to obtain. Housing and other credit bubbles will be smashed and stay down. Maybe it won't be possible to get credit to fund lifestyle habits? Too much competition from those wanting to invest in productivity increasing businesses

* There isn't much gold trading infrastructure currently. Not enough to service a renewed vigour of interest I would think. Banks will get into the gold dealing game?

* I suppose storage requirements won't be too large for people acquiring post transition. Will they store it at home though? Probably not. There will be a massive jump in demand for safe deposit (match)boxes which banks/Chubb will need to construct.

JR said...

Anand Srivastava ,

"Why would Governments select RPG over augmented SDR?"

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.


Unambiguous Wealth 2 – The MF Global Chronicles

cont.

JR said...

cont.

Here is Randy Strauss on the same theme - the strange obsession with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot).

Randy also insightfully notes, similar to FOFOA above, that what IS desperately needed is not another "institutional emission of similar ilk" but a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. The SDR is a unit of account, not a reliable store of value. The lack of unit of account is not the problem - we already have many institutional emissions of similar ilk. The problem is the lack of a sustainable, stable store of wealth - "The debt backing the system is designed to fail."

The news said "...This has led to a rising call for the creation of an alternative to the dollar in the form of a new world currency. It would be an enormous mistake to discount these calls as a sideshow. The odds of a world currency emerging have never been higher.

The calls are coming from many corners. Nobel Prize-winning economist Joseph Stiglitz chaired a United Nations panel that recommended the creation of a global reserve currency. Zhou Xiaochuan, governor of the People’s Bank of China, proposed that the International Monetary Fund take over the global leadership role traditionally ceded to the U.S. And Russian President Dmitry Medvedev handed out minted coin samples of a new world currency at the recent Group of Eight meeting in Italy.

These calls are worth paying attention to for a number of reasons. The arguments for a world currency are much better than you might think. An alternative to the dollar clearly has a promising market that can develop even if it is opposed by the U.S..."

RS Comment: So often in commentaries of this sort that propose a “solution”, the author is strangely obsessed with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot). Their avoidance of any meaningful discussion of the most obvious remedy is almost pathological in the extreme. To be sure, we don’t need to invent any manner of universal reserve currency to fill the role of a unit of account because that role is already served in a fully functional capacity for any given country by its own monetary unit.

What IS desperately needed, however, is a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. And far from needing to be conjured or created by complex international committees, that asset is already in existence and held in goodly store by central bankers and prudent individuals around the world — it’s known as gold. From amid the ruins of a chaotic financial crisis that was brought about by its own complexity, a degree of sanity will prevail, and gold as a freely floating asset will arise in stature as THE important element of global monetary reserves. The floating aspect is the vital evolutionary improvement over all previous structural monetary failures which tried to use a gold standard at a fixed price (i.e., unit of account) perversely joined to the very elastic money supply of any given country’s banking system.


RS view

JR said...

Its all about the store of wealth role. Triffin's dilemma highlights **two dollar flaws,** and solving flaw #1 by severing the link to the nation state doesn't alone resolve the dilemma. The key is solving flaw # 2 - trying to be as good as gold. From The Return to Honest Money

Triffin's dilemma highlights two flaws in the dollar and its use as the global reserve currency. Flaw #1 is the dollar being a national currency and also a supra-national global reserve currency. Flaw #2 is the dollar trying to be as good as gold in the store of value role via US Treasuries. What I mean in flaw #2 is that the dollar's credibility is hurt by a rising price of gold and, therefore, it must systemically manage that threat by backing the fractionally reserved bullion banking system which eases the natural supply constraint of gold.

The euro has eliminated both of these flaws in its fundamental architecture. It is not a national currency and it does not oppose a rising (in the present case) or a free floating (in the future case) price for non-fractional physical gold reserves. I have written extensively on this topic, and the bottom line is that gold is not yet free floating, even today, because its market is encumbered by many forms of gold IOUs that trade at par with the physical stuff through the support of the dollar system.

You can obviously resolve Triffin's dilemma by removing both flaws. But removing #1 alone is not enough, while #2 alone is enough.

Triffin's dilemma observes that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. But this is only the case if that currency does not embrace a "secondary media of exchange" that is allowed to float in value in a quantity not managed by the currency manager (i.e. physical only), and can be purchased and stored in lieu of retaining debt denominated in the primary medium.

Imagine, if you will, the euro supplanting the dollar's role as the globe's super-sovereign currency unit. This is (at this point) merely a conceptual exercise for all you anti-conceptual mentalities. Let's compare the two with regard to Triffin's dilemma.

How often do we hear euro critics repeat that the euro, a currency without a country, has no political union to back it and is therefore worthless? The US dollar has a country, but in its role as the world's currency it also functions just like the euro, without a global political union.

The fundamental difference between these two units of account (the dollar and the euro) is their relationship with gold.

If you have followed my blog at all, you know that the euro has Freegold, the wealth consolidator and "real money" with no country, no links and no political union to back it. So which unit of account (€ or $) is closest to gold? Which currency, of these two, is most likely to be preferred as the global reserve currency next to Freegold in the wealth reserve role?

The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level.

JR said...

Hi Woland,

The more you save (gold) the more you are tempted to spend (net consume, in currency). This is from Ender's remarks.
Does that make sense? It does to me.


Ender! Good stuff - Reminds me of:


Spur and Brake

Once gold is flowing at a high enough price to balance international trade, it will start accumulating in countries that run a trade surplus excluding gold (including gold, trade will balance). Likewise, it will start disappearing from those countries running a trade deficit ex-gold (excluding gold). This is how the spur and brake forces work on an economy in Freegold.

As the gold supply within a "deficit ex-gold" nation dwindles (think: USA), each piece remaining will become more and more dear in terms of other goods and services within that zone. In other words, the purchasing power of gold will rise in the "deficit ex-gold" zone vis-à-vis goods and services in that zone. Likewise, the purchasing power of gold will begin to fall in the "surplus ex-gold" zone (think Germany or China) versus goods and services in that zone because of the large and growing accumulation of gold.

At this point the large quantity of gold in the "surplus zone" will have a lower purchasing power against goods in its own zone, but a higher purchasing power abroad in the "deficit zone" and demand for imported goods will grow while exports will start to fall. This growing demand from abroad will be felt in the "deficit zone" and will be met with new supply. Likewise, the falling demand for imports from the zone with a declining volume of gold will be felt in the "surplus zone" and be met with decreasing supply. Incrementally, the "surplus zone" will slow production and increase consumption while the "deficit zone" experiences the opposite effect. Excluding gold, the balance of trade will shift back and gold will start to flow in the other direction.

Notice, please, that I'm not even talking about the flow of currency or price inflation/deflation in currency terms. Inflation or deflation in currency terms can be happening in either zone depending on how the monetary authority is managing the currency. But what matters in terms of the real trade flow will be the purchasing power of Freegold (not in currency terms, but) vis-à-vis the rest of the trade flow of goods and services.


The Gold Must Flow

Michael H said...

AD,

Yes, the link doesn't really answer your original question. I more posted it for the sources of new 'supply', which is part of the flow but is not the entire flow.

Re-reading your a)-d) options for where the gold flow comes from, I see there should be an option e): giants do dishoard some of their gold, which contributes to the flow.

Perhaps this was option d) which you said was counter to the thesis of this blog, but I wouldn't agree.

There is an estimated 110,000 tons of gold in private hands. Should 2,000 tons change hands over the course of the year, I think that we could still say that gold 'stands very still' overall.

My guess is that a 'giant' operates without a eye to freegold or a gold revaluation. Gold is an asset, unique in its lack of counterparty and its discretion. But should a giant decide that they would rather buy more real estate or companies I don't see why he/she wouldn't dishoard gold to do so.

'Freegold' doesn't mean that people only buy gold and don't sell (at least to me it doesn't; others feel free to contradict me). Freegold means that the function of gold will change. Essentially, much of the store of value role that is currently filled by debt will be largely filled by gold.

At that point, the flow of gold by weight might well increase substantially, from a few thousand tons today to maybe ten thousand tons. However, think of how much currency value must be denominated in that flow, if it is to fill the role currently played by debt.

Have you read FOFOA's "How is that different from Freegold?" post from February 2011?

http://fofoa.blogspot.com/2011/02/how-is-that-different-from-freegold.html

Edwardo said...

Winters wrote:

"she'd probably just whack it in a high interest savings account which 'earns income!"

The fact that there is no such thing as a high interest savings account, but, rather, merely a place to park one's cash where one can only see, at best, a nominal return on that cash, is precisely the place to start when making the case for owning physical gold.

Winters: Mom, you'll lose your savings in that "savings" account.

Winter's Mom. What do you mean?!!

Saving means saving purchasing power. If one can't buy just as many loaves of bread, shoes, household appliances, tubes of toothpaste, etc. etc. at the time one cashes out of a savings account as they could buy when they put their money into the account, one hasn't saved. Have I mentioned physical gold?

costata said...

Hi sean,

Thanks for the Monbiot link. Skimmed, spewed* and will read closely tomorrow.

*Bought one of his books a few years ago and "bought into it" if you know what I mean.

costata said...

DP,

Hear ya!!

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

Hi Costata,

What do you mean by:

A fractionally reserved banking system would be in competition with gold for deposits. Perhaps that would be self-regulating. Banks would have to offer a high enough rate of interest to tempt savers to divest gold for currency.

===================

I'm not sure that this would be any better than a gold exchange standard without some kind of flexible secondary media like Real Bills so I'm feeling the gravitational pull of the too hard basket on this notion.

Which is why we have Freegold as better option, yes?

==================

In relation to parameter three it seems to me that the currency issuer would need to have tighter control over the creation of bank credit money in order to manage their currency effectively.

Why, you just wrote the reason why they won't in the previous sentence:

Provided the collateral is acceptable to the CB a bank could initiate any loan, or securitized debt, they choose and it would always be liquid.

If the CB is not there to act as a proxy for the savers to offload the debt too, then the bank has to bear there own risk of making bad loans, yes?

And why would the CB be there to take their bad loans (aka "collateral") off the books if this CB monetizing can "only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.
The Return to Honest Money

Ultimately, a CB is forced between choosing to kill the currency or letting the improvident banks fail, yes?

Do you see why this is silly:

So I'm seeing the bank regulator and the currency issuer being under the same roof if not in the same hands.

What about your point 1 above - the CB is subject to Mr. Market! So the CBs ability to be bailer of last resort is too, yes?

===============

The need to regulate is because the lender of last resort creates a moral hazard, it insulates banks from Mr. Market and becomes a game of picking winners and losers. But if the CB can't pick winners and losers, then Mr. Market comes to bear on bank.

Michael H said...

Woland,

"Post transition, trade will be SETTLED in REAL terms: that means
gold. As a result, certain net producers will, within their
currency zone, accumulate gold. That in turn, ceteris paribus,
will mean that gold will become MORE available to that currency
over time, causing its price to fall."


I think this is backwards. If a net producer wants to save in gold then he will increase demand for gold in his own currency, making gold less available and thus more expensive in his zone. This will either encourage gold holders to dishoard within the zone, or cause gold to flow into the zone from abroad.

The latter would be the adjustment mechanism between countries where one net-produces and one net-consumes: goods flow one way and gold flows the other.

(Side note: do you compose your comments in a text editor? Perhaps if you disable word wrap prior to copy-pasting into the blogger page, the formatting wouldn't be so messed up)

JR said...

Hi DP,

"Commercial banks as loan originators for a pawnbroking Central Bank, ensuring unrestricted (but tightly-controlled) liquidity is always available where and when it's desirable? "

The CB actions will be limp as a eunuch, the CB is not a saver, so that just pure monetization. And that moentization of nonproductive credit flows into the physical plane and drives up goods and services. So gold bids less for the currency as the currency has less buying power and thus the currency price of gold rises.

The Return to Honest Money

...And an understanding of ABCT provides the context for understanding why Freegold is unfolding. 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.

It is easy to blame this on debt as a principle, but unless you don't mind being wrong, there are some deeper explanations out there. Debt under Freegold will not reach such destructive levels. "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.


That's all you need guys and gals -

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

JR said...

Hi Michael H,

I think that is more the immediate impact, while Woland's point is more that the net-producers saving in gold *over-time* will, all else equal, lead to more gold in the zone and a lower gold price, while consumer countries dishoarding gold will see the gold price rise over time as supply in the zone shrinks.

As a result, certain net producers will, within their
currency zone, accumulate gold. That in turn, ceteris paribus,
will mean that gold will become MORE available to that currency
over time
, causing its price to fall."

JR said...

Another way of looking at it is gold will bid for the well managed currencies with lotsa net-producers, but not so much the consumer countries with lotsa net debtors.

And if gold isn't bidding for your currency, the currency price of gold goes up.

Michael H said...

JR,

How about this:

The immediate effect of a net-producer saving in gold is to drive the gold price higher in his own currency. He is making gold 'less available' in his zone. This will cause either other gold holders in his area to sell their gold for (more) currency, or cause foreigners to sell their gold into our net-producers zone. Gold will accumulate in the zone.

This effect will persist for as long as our net-producer friend saves in gold.

When our net-producer decides to start selling some gold, then gold will become 'more available' in his zone, driving the price down.

"Another way of looking at it is gold will bid for the well managed currencies with lotsa net-producers, but not so much the consumer countries with lotsa net debtors."

Is this conflating two separate issues? That of the presence of net-producers vs. debtors, and the quality of the currency management?

I think there are two different cause-effect relationships that would influence the local price of gold: one haveing to do with investment opportunities in the economy, and the other having to do with the management of the local currency.

Perhaps your statement should be rephrased as:

"Another way of looking at it is gold will bid for the well managed currencies ..., but not so much ... for the poorly managed currencies"

paired with

"Another way of looking at it is gold will (be well) bid (in the countries) with lotsa net-producers, but not so much (in) the consumer countries with lotsa net debtors."

The USD has been one of the 'well managed' (well supported?) currencies, and the US is definitely a "consumer countries with lotsa net debtors."

JR said...

Is this conflating two separate issues? That of the presence of net-producers vs. debtors, and the quality of the currency management?

How can you have quality currency management if you zone is full of debtors. Guess who is lending to them to support that consumption?

Lending for consumption is nonproductive, yes?

All else equal, me lending to a hardworking guy with good collateral and experience and a solid business plan, and you lend to the the unemployed dude who wants a boat?

A key idea from credibility inflation is that a rise in availability in goods and services is deflationary, all else equal, yes? That we want a currency to grow along with goods growth to allow for stable pricing?

Lending to productive folks who make more goods and services available lets you do that.

Lending to consumption clowns lets you devalue the credit but you don't get more goods and services available.

============

The CB can't buy debt at will because it will lead to inflation, and the banks can't do dumb consumer loans because they will go band and the CB won't be there to bail them out (because its limp as a eunuch).

=========

I'm talking about Freegold, not the $IMFs.

Woland said...

Hi JR:

Your last comment from SPUR and BRAKE gave rise to a thought:

Have you ever sat in an underground train which was about to
depart, and while looking out the window, observed another
railcar across the platform. Then, slowly your train begins to
move, or so you think. Moments later, you notice that the column
on the platform hasn't budged, and it is in fact the other train
which has departed.
The saver, in both currency and gold, is like that passenger. He has
no knowledge as to whether or not his currency zone is a net
producer or saver, whether his CB is inflating or deflating his
currency, or whether the gold is flowing in or out of his nation.
He sees only the relative motion (prices) and reacts in his best
interest by accumulating one or another, until the marginal
utility of savings is so small, that he starts to spend. The hardest
think for the shrimp to understand is the Giant for whom the
marginal utility of consumption has reached zero. A good tip
off of when that has occurred is when they start spending their accumulated savings for the benefit of others, IMHO.

DP said...

costata: In relation to parameter three it seems to me that the currency issuer would need to have tighter control over the creation of bank credit money in order to manage their currency effectively.

JR: Why, you just wrote the reason why they won't in the previous sentence:


(quoting costata) Provided the collateral is acceptable to the CB a bank could initiate any loan, or securitized debt, they choose and it would always be liquid.

JR: If the CB is not there to act as a proxy for the savers to offload the debt too, then the bank has to bear there own risk of making bad loans, yes?


Are all loans bad?

And are the banks really offloading risk, if they're going to have to complete the swap down the line, taking back that asset and returning the base money?

If the regulations can describe 'good loans', which are acceptable collateral to the CB and one would hope socially-acceptable (productive) risks, this would be a 'tighter control' over loan issuance (money creation) than under the present arrangements. It wouldn't be so much an 'iron grip' type of control, but the self-interest of the banks would guide them to originate predominantly 'good loans', which would be eligible for maturity transformation via the CB's balance sheet and which they would be happy to retain until maturity (perhaps REPO'ing along the way). To be more wary of 'potentially bad (consumption) loans' that they might find themselves stuck with at an inopportune moment because they couldn't be liquified by the CB, or which will fail and they will have to eat whole.

DP said...

JR: The CB actions will be limp as a eunuch, the CB is not a saver, so that just pure monetization. And that moentization of nonproductive credit flows into the physical plane and drives up goods and services. So gold bids less for the currency as the currency has less buying power and thus the currency price of gold rises.

Again, it appears the assumption we should work with is all credit is bad credit? So are you saying there will be no credit at all under Freegold? Or is your point that CBs will no longer to any degree backstop the liquidity of the banking system, through maturity-transformation for decent assets, even though it's all paper and there is nothing physically barring that path, unlike under a 'gold standard'? Meaning that in a liquidity crisis, the banks (and their depositors) are wholly on their own.

The issue with fractional reserve is always that there can be a liquidity crisis. People with money on deposit already believe their money actually exists and they can take it out (rightly or wrongly), even though it was loaned to a borrower and spent. By temporarily expanding the base further, with an offsetting sufficiently high quality asset, the liquidity issue disappears for all but the most reckless of banks (and their depositors). Plus also the system becomes "more honest", because the size of the base more closely resembles the size of the broad money supply.

Regarding the pure monetization, I thought one of the points of Freegold is that we will have a return to honest money? So if the money supply is expanded by the superorganism through loan issuance, we would no longer pretend the money is something it isn't, but to a much larger extent would convert that credit money into base money, thereby ending up with more honest (higher) prices in goods (including gold) and services? Those higher prices - including (especially) gold - would signal to savers they shouldn't hold cash for so long and instead park value in something else (most likely gold, if they don't actually have a use for something else instead), until such time as they need to mobilize it in some way, or the price of their chosen reserve asset might stabilise/fall and they feel something else is more attractive.

The most honest thing of all would be if all banks had to keep a very high reserve ratio, achieved by constantly REPO'ing their high quality assets at the CB. This would more closely tie the base and broad money supply ratio. If a bank is so reckless that it runs out of high quality assets to pledge for REPO, then it should be closed down, the CB retain the pledged assets that it would then auction off to some other party, which would thereby still bring in and clear down the temporary base money expansion generated at the time of the REPO. Again, the regulations about what is eligible would mean the assets the CB would be stuck with and auctioning off, would be high quality - so they should have willing buyers and any loss should be minimal.

No?

DP said...

See? We haven't all agreed upon one single certain and all-encompassing view of the future. We just generally end up talking over and over about those things that are already fairly widely agreed upon here. Demand holds the cards, and keeps dealing out the same shitty hands.

Thanks, costata, for laying down a nice wildcard for a change.

And thanks, JR, for sharing a bigger slice of your opinion. I'm looking forward to a little more spur and brake shortly I daresay... ;)

Woland said...

Hi DP:

Speaking of wildcards, you gave me a really wild thought:

Not that this would ever happen, but: What if banks were not
limited liability corporations, but instead corporations where
both shareholders, in proportion to their shares, as well as
officers and directors, in proportion to their responsibilities
in loan making, had full unlimited liabilities for losses. Think
Franz Hals paintings of 17th Century Dutchmen sitting
around a table. Where shareholders actually had, are you
ready for it?, RIGHTS and RESPONSIBILITIES! Yikes. Frightening,
eh? You might read that proxy statement if your vote actually
mattered. As of now, all you can do is with your feet.

JMan1959 said...

JR, from your post:

"What I mean in flaw #2 is that the dollar's credibility is hurt by a rising price of gold and, therefore, it must systemically manage that threat by backing the fractionally reserved bullion banking system which eases the natural supply constraint of gold."

Does a rising gold price really "hurt the dollar's credibility", or does it just provide an investment alternative with a more attractive return than US bonds?

Biju said...

JR said
But from another perspective, it was written for Indians (or at least those reading an English language Indian paper), not USAers, and arguably they better get the freegold paradigm than our western minds.


Actually it is illiterate farmers in rural areas who don't believe in paper assets compared to Urban folks who are diversified into paper /real esate also. Illiterate farmers won't be reading this English article but they buy Gold for their daughters/household.

DP said...

Woland,

Quite!

As you said already, is it likely to happen?

Jeff said...

Curious statement, Biju. Why would a paper run an interview for illterates? Those indian housewives in the 60 minutes interview FOFOA linked didn't seem like illterate dirt poor peasants. If those farmers are responsible for Indian gold imports, they must be doing all right. Maybe you should get to know some illerates.

AdvocatusDiaboli said...

Michael,
maybe now you see my doubts, that absolutely nothing fits together in terms of assumptions, interpretations and real obvious traceable events.

So personally I still keep stacking PM from my surplus, because I dont see any other condensed save SoV and I dont know on what else to spend my longterm surplus and the rest I burn on usefull lasting stuff I always wanted to have. People of Europe have been taught by history the tough way: They will get screwed by their governments, they desire it, this is the very nature of the european socialism.
Happend everytime in the last century. And to everybody who has any doubts in that it happens again by seizure is a moron, start reading history and listen to the current zeitgeist instead of interpretating some MTM balance stuff (it is starting already: the ESM passed by parlament, a Tobin like tax is passed, Holland expanded the social welfare state with dramatic property tax increases, Hungary nationalized private pension fonds, Denmark gave a haircut to private accounts of failed banks...inside the EU(ro) almost all and every rule had been broken, Christine Lagarde admits it in the open and is even proud for that). TPTB are already officially working on this, read the piece "Back to Mesopotania" by BCG. They will choose that in favor over leaving the game to Freegold.
So before FOFOAs thesis "The retreat of Socialism" will fulfill, we will see a (national)socialism of epic proportions with an even greater collapse.
BTW: The post "How is that different from Freegold?". I know it very well, probably the one I read most often and I always came back to the conclusion that it is (although nicely written as always) the very weakest and thinest piece every written by FOFOA.
Greets, AD

Jeff Snyder said...

Intersting article linked to by Jesse on the mystery of the US Treasury market:

: "Previously, my own writing has focused upon one particular aspect of this absurdity: the highest prices for U.S. Treasuries at a time of maximum supply. This in itself is an absolute financial contradiction. The highest supply in history directly implies the lowest prices in history, for every market in the world – except U.S. Treasuries.

But that is merely Act One of this Theater of the Absurd. These maximum prices are occurring at the point in history where the U.S. has never been less solvent."

The author contests the view that this "robustness" in the Treasury market is the result of manipulation of interest rate swaps and argues that the only viable explanation is that "that B.S. Bernanke is secretly (and illegally) counterfeiting U.S. dollars – and using those bogus dollars to prop up the U.S. Treasuries market."

Link: http://www.bullionbullscanada.com/us-commentary/25568-the-continuing-mystery-of-the-us-treasuries-market

JR said...

Hi Michael H,

"The immediate effect of a net-producer saving in gold is to drive the gold price higher in his own currency. "

Demand drives the show for sure, so as demand increases, price increases and, ceteris paribus, that arbitrage vis-a-vie elsewhere means more supply finds it way in .

But also keep in mind the "closed circuit of savers" and the "chain of settlement"

The Debtors and the Savers 2012

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

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

[…]

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


Sushi Island Savers Saga - Part 2

The chain of settlement amongst savers which I described in this comment is like a battery system for the storage of economic power. It gains its power and its storage ability from its perpetual nature. Economic power can be deployed or discharged at any time by any saver because there are always new net producers working to join the chain. Without this system of reserves, the surplus production of savers simply gets distributed and used up by whatever activity the debtors are up to at that time, or wherever the central planners want to allocate it. With the Freegold system, the allocation of stored purchasing power becomes a matter of the individual decisions of billions of savers with no reason to hurry.

JR said...

Yeah Woland,

The saver, in both currency and gold, is like that passenger. He has
no knowledge as to whether or not his currency zone is a net
producer or saver, whether his CB is inflating or deflating his
currency, or whether the gold is flowing in or out of his nation.
He sees only the relative motion (prices) and reacts in his best
interest by accumulating one or another, until the marginal
utility of savings is so small, that he starts to spend.


And that is his or her personal utility for saving, because the "savings" medium itself, physical gold, has infinite marginal utility in that role!

This concept of diminishing marginal utility can even be found as far back as the fourth century BC, in Aristotle's "Politics", in which he wrote, "external goods have a limit, like any other instrument, and all things useful are of such a nature that where there is too much of them they must either do harm, or at any rate be of no use."

There is more to this story, but before we proceed, let's take a quick look at the marginal utility of gold as a store of value. Take the man above with $1.5 million in disposable cash. Say he buys himself one $50,000 BMW and one $55,000 gold eagle coin. He has just obtained the full utility of a fine automobile as well as the value preservation of that same purchasing power, for up to thousands of years if he should so choose.

Now say he buys one more $55,000 gold eagle coin, and then another, and another, and so on until all his cash is gone. In the end he will have 26 gold coins. And here's the question: Will that 26th gold coin purchase provide the same utility or diminished (less) utility than the first? Remember, the only utility of gold coins is that they retain their value for thousands of years. That's all they do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money."

The answer is "the same utility," because unlike ANYTHING else, (yes, even silver), gold has INFINITE marginal utility in this particular role.


The Value of Gold

JR said...

Hi DO,

"Are all loans bad?"

No, the key phrase is nonproductive. A priori we can't say what that means, no one can define it in general.

Only the market can through individual actors making loans based on their self interest and subject to market pressures.

Life in the Ant Farm

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.

Savings & Capital Theory Open Forum

Does the $IMFS transmit any price information that is relevant to the Superorganism anymore? The Superorganism is a robust creature. It can work around a badly mismanaged superstructure and still produce marvelous creations. But there comes a point when the signals transmitted by the system become so detrimental to the Superorganism's natural drive toward sustainability that it must be abandoned for good.

See why FOFOA choose Let It Be?

JR said...

Ooooopps, sorry DP

DP said...

JK,

"Are all loans bad?"

No, the key phrase is nonproductive. A priori we can't say what that means, no one can define it in general.

Only the market can through individual actors making loans based on their self interest and subject to market pressures.


Can we agree that the LTRO approach means banks are always liquid, meaning deposits are always available for withdrawal, but they are also always the first in line to take the hit if the loans they originated turn out to be poor judgements?

Perhaps you will care to offer up your own vision of the banking future, to further this discussion?

Cheers!

DO :-)

JR said...

Hi DP,

Can we agree that the LTRO approach means banks are always liquid, meaning deposits are always available for withdrawal, but they are also always the first in line to take the hit if the loans they originated turn out to be poor judgements?

The whole idea of lending deposits is the fatal flaw upon which it appears the LTRO discussion began, so yeah throw it all out its awful.

==============

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

Its not whether the loan is reserved or not or backed fully backed by deposits or fractionally, that is a $IMFS deal where the SoV is what is being lent.

===========================

In Freegold the issue is whether the loan is productive or nonproductive?.

Lending for consumption is nonproductive, yes?

All else equal, I lend to a hardworking guy with good collateral and experience and a solid business plan, and you lend to the the unemployed dude who wants a boat. As a lender, which loan do you wanna hold on your balance sheet as asset?

===========================

A key idea from credibility inflation is that a rise in availability in goods and services is deflationary, all else equal, yes? That we want a currency to grow along with goods growth to allow for stable pricing?

Lending to productive folks who make more goods and services available lets you do that.

Lending to consumption clowns lets you devalue the credit but you don't get more goods and services available.

============

The CB can't buy debt at will because it will lead to inflation, and the banks can't do dumb consumer loans because they will go band and the CB won't be there to bail them out (because its limp as a eunuch).

Have a happy 4th etc. everybody, J.R.

JR said...

Productive credit expansion = Lending to productive folks who make more goods and services available means stable price level.

Nonproductive credit expansion = Lending to consumption clowns lets you devalue the credit but you don't get more goods and services available, so you you get price level inflation.

The point is, all the market wants is a stable currency, not too hot, not too cold. It is like a sleeping giant. Give it a stable currency and it will keep sleeping. Wake it and you (the printer) will lose control of the value of your currency and everything else you try to control. The market is the demand side of the equation. And the market is by far the more powerful of the two sides in this tug-of-war. If this isn't making sense, please read my post linked in the paragraph above because I'm not going to explain it all here.

To summarize, there is a whole menu of options for the aspiring money printer to choose from when stepping into the supply side shoes of the monetary game. And as a supply sider, his job is providing a service to the demand side, the market, which wants one thing and one thing only, a stable currency. And if he wants to keep his job, he'd better give his clients what they want, because if they wake up to an unstable currency, they can easily take the reins of control away from him. So if his mandate is—or evolves into—anything other than a stable currency, he will not be long for this monetary world. And one last thing; instability means quick changes both up and down. The client doesn't want drastic inflation or deflation.


Euro Gold

Woland said...

Hi JR:

re: store of value for gold over (longish) periods:

Remember back prior to 1971 when imported crude was fixed
by contract at $2.20 per bbl and gold was $35 per oz. 15.9/1
ratio.
41 years later, imported crude is $100/bbl and (suppressed by
paper gold) gold is $1620 per bbl. 16.2/1 ratio

Plus ca ne change pas, plus c'est la meme chose, non?

By the way, for the grains, gold's purchasing power gains
dramatically, when WW1 losses and depression gains are
smoothed out over a 100+ year period.

"And that is his or her PERSONAL utility for saving". Yup

Woland said...

Typo #2. $1620 per oz. (per bbl, I could only wish)

JR said...

Hi Woland,

And as the $IMFS is ending, so don't expect that ratio to last!

Comment to Gold is Wealth

Gold has two driving forces. The more powerful of the two is gold's shifting function in society. As I say in the post above, gold is wealth. This force trumps all others as we head into Freegold. Inflation/hyperinflation is a secondary force. Relative to inflation/hyperinflation, gold and oil will rise together, but not relative to gold's paradigm shift. So in answer to your question, no, gold does not rely on oil. Another's very first line in his first post was:

It was once said that "gold and oil can never flow in the same direction". If the current price of oil doesn't change soon we will no doubt run out of gold...

We know that oil is a consumed wealth of a momentary value that is lost in the heat of fire.

The stars blink and it is oil wealth no more!

It has become "the debt of nations" now owed to you [if you hold Treasury's in exchange for your real oil]. Gold on the other hand is not a commodity as many assume, as it is truly "the wealth of nations " meant to last thru the ages! A wise oil nation can strike a deal with the paper printers and in doing so come out on top. Go back a few years to the early 90s. Oil is very high, you offer to lower the US$ price in return for X amount of gold purchasing power. You don't care what the current commodity price of gold is, your future generations will keep it as real wealth to replace the oil that is lost. Before the future arrives gold will be, once again valued as money and can be truly counted on to appropriately represent all oil wealth!


I know it is confusing, but the original oil for gold deal that Another described had the Saudi's replacing their oil at 30 barrels per troy ounce of gold. As the physical market for gold became cornered and illiquid, and large physical exchanges harder to do off market, this price shrunk to 10 barrels of oil per troy ounce of gold.

At this rate, in order to keep the oil flowing at cheap $-denominated prices, the central banks themselves had to become gold suppliers. But this has stopped now. And from here, there is only one possible outcome.

FAIL THIS AND WE WILL PRICE GOLD IN DOLLARS AT THE TRUE VALUE OF OIL TO THE WORLD!

You see, gold is not a commodity. The CBs have used every weapon to keep it's price low . Understand me, Gold is now, today, a devalued currency being used in world trade!

Do you think the CBs are selling gold to keep the dollar strong? They don't have to sell to accomplish that feat! CB gold ( one billion ozs.? ) valued at it's current commodity price is only worth 300 billion, it's nothing in that price range! They know what it's US$ price is worth in terms of oil! They are not stupid as they show.


There is no way for gold and oil to rise in commensurate fashion from here. Gold and oil will rise together under the inflation force, (or hyperinflation), but not under the force of this phase transition, the shift in gold's function. In order for the world's economy to become sustainable (balanced), the oil/gold paradigm will shift. 1 ounce of gold will bring 500 to 1000 barrels of oil. This may seem like a reduction in the price of oil, but think about the offsetting explosion in the value of the gold accumulated up to this point. And from this point forward, gold and oil will remain at that ratio stasis through thick and thin. It will be a fair price for oil, and for gold. It will be a sustainable price.

Did you see my second FFPPDC? It is priced in bbl of oil. Don't expect this particular revaluation to come in ANYTHING else. Only gold. That is why it is called Freegold, and not Freeoil.

JR said...

Some snippets:

ANOTHER: As for the old agreement of oil/gold ratio, it went out the window... a mismatch in value of epic proportions!... Indeed, oil will become very cheap for those that can supply physical gold...

This would require a high value for gold. For gold to trade with oil on a physical basis would also require perhaps a small fraction of gold/bbl.

All would gain from this. The intent is not to destroy the oil market.[...]

In a very real "currency sense", oil will be devalued in terms of gold. As one makes a currency weaker by increasing the money units per ounce of gold. Oil will become very cheap in gold, as the amount of gold paid per barrel will fall dramatically as compared to today's ratio. There will be much more than enough gold worldwide to quantify a "world oil currency"
[...]

After all, it is oil that will be massively devalued by gold.

RJPadavona said...

Great interview, FOFOA.

I thought you did a good job keeping it fairly simple for the average reader. So I emailed my neighbor a link to the interview. Since he lives next to me, he's heard a little about the virtues of gold ownership already. I've sent him links to some of your other posts before, but he never read them. As you well know, the length and content of your work are quite intimidating to everyone but the most ardent of truthseekers.

Anyway, I told him this was a short one and guess what? He read it. Here was his response:

"Well worth it.

Lots of good metaphors (dollar like a bomb shelter rigged to explode when everyone is inside, etc.).

No help at all, though, on timing the "explosion" (probably because he is right about the many, many variables/factors likely to be involved).

Will reread later."



It only takes a spark to get a fire going. Hopefully this interview will light a few fires under some asses. Whether it will resonate with Joe Sixer (Sorry, I refuse to use the term J6P until the Epsilon clones are available at my local Wal-Mart) or not is up for debate. But I think the fact that my neighbor responded so receptively shows that many are capable of seeing the light.

They will all see that golden light one day because it'll shine like the North Star. But so many will wish they had seen it sooner!


RJP

Woland said...

A lengthy essay could be written about that last sentence alone.
Would oil be treated as a hero if it "accepted in payment" a tiny
fraction of "today's gold" in settlement? Probably. Would they
do it if they would not be creating for themselves an epic windfall
because they have cornered gold? Probably not. Will even a tiny
fraction of the population understand any of this? Nope.
If the choice of perceptions was between, "oil massively devalued
by gold" and "gold massively revalued by oil', the former would
be far more politically preferable for all parties concerned. Kinda
like, "I'll give you a big discount for cash" as opposed to "we don't
accept that credit card, sir."

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

A lengthy essay has been written about that; it's still being written, in fact, right here.

Michael dV said...

Just back from 4 days with no electronic contact with the world. I just read the interview and I have to say the guy did a good job with his questions I also wonder if fofoa has been named a patron saint of India yet.
It seemed a good concise explanation of what we discuss here and all without the mention once of Freegold (or Crack Whore gold either)
Michael dV

Indenture said...

Gary: What was the question again? Just the question, pontification unnecessary.

Nickelsaver said...

Gary,

zzzzzzzzzzzzzz

sorry, maybe if you had an argument worth refuting it would garner more of a response.

now who has become the troll, ironic?!

Aaron said...

I don't think he had one Indenture. I believe I just saw Gary walk into the comments and spew large amounts of vomit all over the carpet and then demand someone look at his awful puke and tell him why it is there.

Indenture said...

Aaron: I forgot to look at the carpet, my bad. But on a happy note I added my first Honey Super today. For everyone else besides being a potato farmer (I grow Yukon Gold) I'm also now a bee keeper (Liquid Gold). I also use Gold Bond Medicated Powder but that's getting personal.

Victory said...

...I was rereading 'Moneyness' and starting doing a little digging through the government stats links, anyone care to GUESS what the US's #1 export to its #1 SURPLUS trading partner was last year?

Biju said...

Victory : Wohoo...

US exported $5.9 Billion worth of Gold to Honk Kong in 2011 compared to $4.0 Million in 2002.

Even taking into account the price increase during the 10 yr period, this is solid export growth(mining or scrap ?)

This is to Hong Kong only, how about total Gold exports ?

real estate dreamin said...

How do I interview you on http://Koolagan.com. You have some great knowledge. By phone? By email?

Winters said...

lol aaron.

Edwardo - I have spent a long road trip with my mom trapped in the car with nothing to do but listen to me explain these concepts however it has no effect. For her, bank account = safe. Shiny yellow metal with volatile paper prices that earns no income = WTF?
Unfortunately, if she saw it written in a newspaper she might take more heed! Maybe this is a reflection of my poor presentation skills. ha.

real estate dreamin said...

www.Koolagan.com wants to interview you!!

Winters said...

the obvious point then is that FOFOA is now in newsprint. well she would probably want it to be from some familiar commentator in her local.
Actually this will be a good experiment. I'll send it off now and demand a response!

JR said...

But they used a great adjective "nonmonetary."

Quite an uptick from prior years.

Where it then goes! - big trader still got a vacuum cleaner?

Victory said...

right 'nonmonetary' gold...officer this is 'medical' marijuana - hehe

Michael dV said...

Gary
(please forgive all if I am troll feeding, I have not read that much of Gary's comments).
It seems you are upset that no one has responded to you in 12 hours. It also seems you are a bit rude. I have known a few very smart people (about 3 maybe 4 if you count our host who I have not met). Each of them was incredibly polite and patient until the moment they demolished their victims logic and always made it seem as though it was almost accidental they had made you (me) look rather dull. You might work on that until your innate genius kicks in. Until then just being polite leaves some of us wondering if you might be really smart but are too nice to crush us with your powerful brain.

Herb said...

It has been noted above that gold bullion coins, old and new and from various issuers, are readily available in "an endless flood." The question is: why? I will offer a guess.

Let me start with a bit of history. One of Alexander Pope's biographers wrote that Pope's father, who was Catholic, was deeply distressed when Catholic James II of Britain was driven off the throne in favor of William and Mary, who were Protestants. Pope's father had become wealthy in trade and was ready to retire, but did not want to stow his fortune in any financial instrument that would support the new monarchs.

He decided, therefore, to convert it all into gold coins which he stored in a chest under his bed. Over time he sold the coins, as needed, to support himself and his family.

I would speculate that among the billions of people on this earth there are numerous individuals who, like Pope Sr., don't want to trust anyone with their wealth (for numerous reasons) and therefore just store it away in the form of gold coins, disposing of them from time to time as needed.

This might give the appearance of creating a flood of coins, but would merely be the orderly downstream flow of wealth from generation to generation in an uncertain world. Anyway, that's my guess.

Indenture said...

Gold v paper money: Which should we trust more?

"I think to put your faith in gold as the basis of a country's monetary system would be extremely foolish," says Dr Julius.

I like this one, "The benefits of the current system, say central bankers, is that in times of trouble they can take remedial action, they can lower interest rates which encourage people to spend rather than save - which gives a boost to economic activity." ZIRP doesn't leave much room to lower interest rates. Spend rather than Save.

Nickelsaver said...

Victory,

To me, nonmonetary gold is gold that can't be fractionally reserved, but is instead treated as a pure SoV. Nonmonetary is not the same thing as calling gold just a commodity. It would rather be a Tier 1 asset (perhaps THE tier 1 assest) that serves as THE reserve asset in the physical to all that exists in the monetary plane. A monetary counter-weight

Edwardo said...

Edwardo - I have spent a long road trip with my mom trapped in the car with nothing to do but listen to me explain these concepts however it has no effect. For her, bank account = safe. Shiny yellow metal with volatile paper prices that earns no income = WTF?

You have my sympathies, Winters. I have been as successful as you with certain select family members. Now, having said that, who cares about income when you can achieve capital gains that average close to 20% for over a decade. As for volatility, compared to what? Finally, gold paper isn't anymore gold than owning shares in an agricultural ETF is the same as owning a plot of arable land. Apples and oranges, despite the red paint on the orange.

Texan said...

Edwardo/Winters,

Try 18k gold jewelry. You can tell them how cheap the "jewelry" part is since most of the price is "gold content". If you look hard, you can find premiums are not bad over coins, 10-15% (ie the "jewelry" premium). A beautiful, wearable SoV - now what could be better than that?!?

JR said...

Hi Nickelsaver,

Nonmonetary is an IMF label for gold not held as a reserve asset. Victory and I think its kinda silly, sounds like you do too!

Does Fiat Produce an Endless Sea of Wars?

202. Nonmonetary gold covers exports and imports of
all gold not held as reserve assets (monetary gold) by
the authorities. Nonmonetary gold is treated as any
other commodity and, when feasible, is subdivided into
gold held as a store of value and other (industrial) gold.

438. Monetary gold is gold owned by the authorities
(or by others who are subject to the effective control of
the authorities) and held as a reserve asset.10 Other gold
(nonmonetary gold, possibly including commercial
stocks held for trading purposes by authorities who
also own monetary gold) owned by any entity is
treated in this Manual as any other commodity. Transactions
in monetary gold occur only between monetary
authorities and their counterparts in other economies or
between monetary authorities and international
monetary organizations. Like SDRs (see paragraph 440),
monetary gold is a reserve asset for which there is no
outstanding financial liability.

JR said...

Hi JMan1959,

Credibility inflated in the dollar as described in Credibility Inflation:

Most simply stated, credibility inflation is the expanding confidence in the fiat financial system to always deliver a higher payoff tomorrow than today. And through credibility inflation we ultimately destroy the currency structure by believing it can somehow deliver more than reality will allow.

Credibility inflation is the exact antithesis of price inflations like the 1970's. It is why we saw low consumer price inflation for the last 30 years relative to the massive monetary and financial product inflation. It is partly why we saw gold stagnant or falling for 20 years. Yet it is just as much a product of monetary inflation as regular price inflation is (more on this in a moment). And it is much more catastrophic in the end.

Periods of high credibility inflation are generally not followed by smooth cycles of credibility DEflation. Instead, they tend to SNAP BACK into sudden real price inflation when confidence abates. What happens in the most extreme cases is real price HYPERinflation.


So see why:

Flaw #2 is the dollar trying to be as good as gold in the store of value role via US Treasuries. What I mean in flaw #2 is that the dollar's credibility is hurt by a rising price of gold and, therefore, it must systemically manage that threat by backing the fractionally reserved bullion banking system which eases the natural supply constraint of gold.

The Return to Honest Money

victorthecleaner said...

Gary,

on the question of whether the US can avoid HI if they take the lead (or ask SA) in revaluing gold.

About $5000bn in Treasury debt held abroad. Total amount of dollar assets held abroad in excess of $8000bn. Plus all the private debt inside the country that is not sustainable in real terms. Trade deficit around 5% GDP.

If they use a part of the revalued gold in order to pay off foreign creditors, retain a part of the gold, and then phase out the trade deficit over a 5-year period, 1% GDP every year, how high do you think does the price of gold have to be?

And facing out the trade deficit rapidly (and reducing the govt budget deficit) is something they don't have much practice in.

Btw, depending on how the economy in Europe goes, you might eventually see Ireland and Portugal recover with little budget deficits and no new selling of debt to foreigners. Now *that* would be a statement that it can be done.

Victor

victorthecleaner said...

Ah, here is where the problem is. If the US want to have some significant amount of gold left, they need to get the price *really* high: At $55000/oz, they can sell all of the gold to retire their public debt. Well, you only need to pay of the foreign creditors (the remainder is partly at the Fed now), and so half the gold would do.

But then you still have the trade deficit, and it you abruptly cut it off, your real economy will look like Greece. Its certainly *possible*.

Victor

Nickelsaver said...

JR,

Isn't it interesting how the IMF can say gold is money and gold is not money at the same time. Thankfully, I have a true understanding of what money is now, thanks to this blog. It is a trinity. MoE, UoA, and SoV.

Freegold both breaks the hard link to currency and restores it at the same time, in its perfect role as SoV only.

So ironically, I can say the same thing as the IMF, but I mean something else by it.

Nickelsaver said...

Victor,


Would that peg mean that gold had $55K worth of today's purchasing power; or that the dollar would be devalued to 1/34 of its current purchasing power (or the current purchasing power of gold); or somewhere in between?

Obviously, for debtors, it is a windfall to have such cheaper debt. But for fiat savers, this would be the huge lawn dump all at once. It's just hyperinflation all at one time, no?

And since the USG wouldn't be able to crash its lifestyle, it would need to continue to liberate it's remaining gold, while the US private sector screeches to a halt. Gold bidding for $55K would lead to it bidding for $110K, to not bidding at all because the dollar would be trashed. Or do you think US could peg and hold?

Wouldn't it make more sense for the US to merely print more and more money and hyperinflate the debt away - and keep their gold?

Or better still. Maybe they will just do away with the debt ceiling altogether and just keep piling on debt until someone calls them on it.

Or maybe SDR's. They can kick the can down the road a lot further with those. How perfect, especially if they get the Europe and China to be part of the basket. But wait, then the dollar wouldn't be world reserve currency - i wonder what that would mean for the dollar?

But I'm guessing Gary has the answer. What say you Gary? How will the US do this without hyperinflating the dollar or surrendering their EX PRIV?

Deflation you say? Hey, in deflation dollars are worth more; more purchasing power right? Well heck, my government wouldn't dream of taking advantage of a stronger dollar by printing the crap out of it to maintain its lifestyle would it?

Oh, and in deflation, the fiat savers sure look smart don't they; saving all of those MoE tokens for just the right time in history. Boy they were smart. All those grandmas with stuffed mattresses, they gonna take over the freakin world. Yeah, I can see that happening. Long live the dollar with escalating debt and simultaneously increasing marginal utility.

Nickelsaver said...

Wait, I just figured it out. All the US has to do is go cold turkey on OIL. Then they can become net producers and the GOLD will once again flow back into our zone in droves.

I think I'll start front-running by breeding horses.

Nickelsaver said...

Happy Fourth of July!

tintin said...

This Libor rigging scandal might quicken RPG?

Robert said...

I think Gary is asking fair questions. And I think that some FOFOA disciples have a tendency to either attack anyone who questions A/FOA/FOFOA orthodoxy, or dismissively suggest that someone read this or read that until they "get it." Unfortunately it seems that Gary overreacted in this last post, but I think it would do us all good to take a skeptical view of our strongest convictions. Nobody is ever right about everything, especially when it comes to predicting the future.

costata said...

Happy 4th to all of the contributors stateside.

JR, DP, Woland et al,

Thanks for all of the responses to my "thought experiment" as Winters termed it. The subject appears to have garnered some interest so I'm looking forward to participating in the discussion as time permits.

In regard to the gold exchange reference I was thinking in terms of the conflicts it generates between the various stakeholders in a money/currency system. I'll try to explain in better detail in another comment.

Right off the bat I think I'm on the same page with DP on several points. The scenario of CBs accepting collateral from bankers against cash isn't an excercise in monetization it would be a liquidity excercise - increasing or draining liquidity as the situation demands.

Theoretically the capital adequacy rules and other "Basel rules" of the BIS regulatory framework provide the mechanism for ensuring that the bank providing the collateral is solvent.

On the currency management issue I'm leaning more toward trying to develop a sense of what currency management requires under a Freegold-RPG regime. How does a currency manager respond to the "signals" the RPG is sending?

I don't think it is reasonable to assume that the loans/securities provided as collateral to a CB in this scenario would be based on lending for consumption. For the purpose of this discussion we could simply assume that it is all "good" lending for productive purposes.

If a bank is sufficiently well capitalized then it would be an acceptable counter-party for the CB and the risk weightings could be used to manage risk in the banking system and some (all?) of the flow on effects on the economy overall. The hair cuts and other conditions placed on the acceptance of collateral would perform a similar role in rationing credit to adjusting reserve ratios.

I think it would wrong to assume (if anyone is by now) that this scenario is primarily about fractional reserving of deposits. To be clear I'm positing a scenario where deposits are irrelevant to the banking system. Funding would be coming 100 per cent from the wholesale market as opposed to the wholesale + retail market. If a bank has good collateral then it will always be able to get cash and/or make loans up to the leveraged limit of its capital backing.

Something else to keep in mind. This scenario could make the currency issuers control over interest rates more potent when combined with the other two controls.

Under this scenario you might have to pay the bank to store your currency rather than receiving interest on your deposit if they can get money more cheaply from the CB. A truly bifurcated system where the MoE currency and the SoV gold circulate in separate loops with the only point of contact being where gold is exchanged for currency and vice versa.

There are a few other elements to this thought experiment that I want to put forward in due course (a few more "wild cards" perhaps) and I will try to address anything I missed in the responses to my thought experiment. As I said I'm looking forward to continuing this discussion.

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

NS,

Do you actually know what the issue raised is? I confess to having no idea. I guess I wasn't paying sufficient attention at the time, either that or my mind must be just too simple... :(

But I would say, if the Saudi's raised their price on gold, it would only be on the price of physical GOLD - since they don't want paper "gold"; that's for the Western 'goldbug' trader minds among us. Would the price of "gold" be arbitraged higher along with the physical GOLD that can be used in settlement for oil's trade surplus, at their elevated price? Or would it just bring about a divergence between the paper trading market and physical reality? Leading to a paper collapse as reality dawns on everyone and the rush to convert the copious paper to strictly limited physical is upon us.

And if the Saudi's (or others - Iranian's perhaps?) expose GOLD as the massively more valuable and useful real SoV than $-based instruments that it already quietly is today, wouldn't this do irrepairable damage to not just "gold" but also the dollar's image as the premiere global SoV? Which it requires to maintain, if it is to retain today's massively elevated relative value against other currencies. After all, if oil announces they want Petrogold in settlement rather than today's Petrodollars, why would the RoW need or want to stack up dollar reserves any longer?

In fact, if the RoW's existing Petrodollar reserves are no longer required in order to buy oil in future, why would they want to hold on to those either?

MSC said...

The BBC has produced a 30 minute radio programme examining the merits of gold as a solution to the current economic crisis:

http://www.bbc.co.uk/programmes/b01k9qd8

As banks collapse and governments run out of money, the popular solution is to print more and more and expand bank balance sheets. But is there another way of fixing our economy? Would the financial system be more stable if each pound in our pocket was backed by gold?

So, as you'd expect, the focus of the programme remains a 'gold standard', and the arguments on both sides are quite basic, but it actually wasn't as bad as I thought it would be.

Hopefully the content is accessible outside the UK.

mrbeyond said...

It would be intresting to know how this works in detail. http://www.unzensuriert.at/Content/008508-Bank-den-Arabischen-Emiraten-f-hrt-Goldw-hrung-ein

Motley Fool said...

Gary

Perhaps the reason you have received little response is because your question is nonsensical and is born out of your own lack of understanding.

I went and looked up the context of your quote...it came from this post by ANOTHER :

"ANOTHER (THOUGHTS!) ID#60253:

A Noble Purpose, This Oil For Gold

When one considers the merits of a specialized world oil currency, the thought usually turns immediately to "send in the military and stop them". I must ask, why? If an oil currency is born before or out of the shambles of an financial meltdown, and it offers great benefit to all, again I ask, why stop it? Look at the merits of such a move:"

The context here is - if the euro failed OR if the markets had broken before the euro was in place; with a discussion about the back-room deal made public..to the benefit of all.

I do not know why you would expect reasonable response if you are unable to form questions in the proper context.

TF

mrbeyond said...

Same article in english translated with google. http://goo.gl/oqdCh

sean said...

Gary, ND has already addressed your question, and you insulted him in return, without, it seems, actually thinking about what he wrote. Try reading it again. And then taking a little time to think about it. Also IMHO it wouldn't hurt for you to consider Michael dV's suggestion.

sean said...

NS, sorry, not ND.

Motley Fool said...

Gary

I haven't mentioned, and I should, that you have also implied that FOFOA never gave these words and their meaning any consideration.

Now if your intent was honest, I would think, you would have least have checked to see if FOFOA ever quoted these words.

I direct you to It's the flow stupid

TF

Gary said...
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Motley Fool said...

Gary

That's a interesting sentence.

"if Saudi Arabia with US agreement priced gold at a very very high level, could it save the US from hyperinflation."

Yes.

However. A question.

Why would the USA agree?

Which is better for them, to have gold revalued and then having to hand over a significant percentage of their gold stock to settle their debts OR to hyperinflate their currency, completely destroy their debts, and then have their whole stock revalued and intact?

Is your argument that the USA would prefer the former?

TF

Gary said...
This comment has been removed by the author.
Motley Fool said...

Gary

Are you unable to see that even though it's possible to get through this without HI, that that is what the USA will choose. It is a political inevitability, yes?

Why waste time arguing about extreme unlikelihoods, when the obvious path will be HI?

TF

Gary said...
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Gary said...
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Motley Fool said...

Gary

I miss very little.

The current deal is a fantastic one for the Saudi's. They have no no no incentive to stop it. They are overpaid for their oil..in Gold, I mean good god. :D

And no, the price cannot be set arbitrarily high. They cannot set it to say $500,000 an ounce just to prevent a huge loss of gold to the USA. Remember that others will need to accept this revalued gold in payment for debts in your scenario. That price will be arbitraged down by market forces immediately.

You need to remember that ANY party that unilaterally revalues gold at this stage will be blamed for the ensuing chaos. That is a very high price to pay.

TF

Motley Fool said...

Gary

Also don't forget that there are international legalistic issues around the USA gold stockpile that they would like to forget. For this reason they likely can't revalue their own gold. They are golden outlaws, as FOFOA named them.

I agree that not having HI would be better for the USA populace, however they don't have the power of choice in this regard. A separate entity the USG does..and it will do what is in it's best interest..which is HI.

TF

Gary said...
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Robert said...

MF, the legal implications of what the U.S. can or cannot do with the Treasury gold and the claims that could be made on it -- this is a subject that I would like to know more about, but I have had trouble finding any legal sources. Can the U.S. argue that the claims are stale because too much time has passed? What procedure would a forign government use to prosecute its claims? What has happened to gold outlaw countries in the past?

Gary said...
This comment has been removed by the author.
Motley Fool said...

Gary

That target mentioned is not the target price of gold, it is an entity such as Saudi.

Perhaps it is true that in dealing with the resultant issues there would be no time for the blame game.

However the price of gold in this new SOV function is not arbitrary. Even $100,000 which I think feasible would mean a huge real loss for the USG. Devaluation is the better choice for them, as much as it would suck for us.

TF

Gary said...
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Gary said...
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Motley Fool said...

Gary

You initially said, in that interesting sentence I quoted, that the USA would need to allow the Saudi's to do it. I agreed with that, now seemingly you don't anymore 30 minutes hence.

And no, again, the price is not arbitrary. Gold will reach The price required for it to fulfill it's new function. That price is admittedly a lot higher than the price needed for its current function, but it is by no means arbitrary.

TF

Motley Fool said...

Gary

Yes, I meant HI.

And so? Am I not allowed to argue with Another? :P

I have conceded that maybe his Thoughts were correct that no shooting war would result. I'm not entirely convinced though.

TF

Gary said...
This comment has been removed by the author.
Motley Fool said...

Gary

Heh, sure.

I do still agree with FOFOA that HI is 'inevitble' though. :P

This option you are looking at...it won't be happening, you can bank on it.

But even assuming it does, the end result is the same..after loss of some gold by some parties...Freegold

TF

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

Hi Robert,

FOFOA: Hello Casper,

Yep, those "golden outlaw" comments come from this post. That would be a huge problem and a big risk for the U.S. if it were to ever try another gold confiscation, or another gold standard in which the U.S. tried to fix the price of gold, or any method of controlling gold other than Freegold for all.

And creditors are very interested in the asset side of your balance sheet. If you default, they go after your stated assets in court. So placing them on your balance sheet properly demonstrates that you are a safer credit risk the larger your assets. Hiding or misrepresenting / underrepresenting your assets to your creditors likewise shows you are a poor credit risk. One with significant assets is less likely to default than one who has no assets and only debt.

If Freegold (the end of paper gold) comes about as an exogenous event, the U.S. would have no choice but to resist it, which would end very badly for the dollar. But on the outside chance that the U.S. somehow induced Freegold, things would unfold differently. It would not necessarily be sudden death. Of course this scenario is so unlikely it's not worth wasting much energy on it.

Did you ever come across Ender's "chicken" comments? Here are a few links and snippets:

"If I have a barn full of chickens in the quantity and quality matching my neighbor, yet I have an ounce of gold on reserve for every chicken, does that make my chickens better? As you have seen, I am a simple man that can overly simply complex situations…

"If the gold held on reserve is collateral, then we should look closely at collateral. At Dictionary.com, an interpretation is that collateral is “security pledged for the payment of a loan” (but that is not the only definition).

"…I made reference that in a FreeGold system those administering the currency would have to “commitment to openly use the gold”. It would seem that we view the same picture yet describe it differently. In both cases, there is intent to use gold.

“You are arguing that money should be convertible in gold.” Sort of, I might change this to suggest that gold should be available for purchase just like anything else.

"If a currency can purchase gold,
Then that currency can be converted into wealth,
Which means that currency is usable,
Which gives function to that currency."

Gary said...
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Jeff said...

FOFOA: Well, if the US ever put gold back on the table through another confiscation of its citizens' gold, the BIS would call in all of its outstanding claims in gold at the rate of $42 per ounce. And the BIS would not be alone. Other entities would have legal claims for gold at $20.67 per ounce, and others at $35 per ounce. How much gold was either confiscated or defaulted on without due process of law? Claims of perpetual entities never go away. If the US government ever exposed its own gold (or its citizens' gold through confiscation) to the light of day, it would expose itself to all kinds of claims and an international legal mess. Under international law, the US is still an OUTLAW when it comes to gold!

This is why gold is off the table. This is why we can never go back to a gold backed dollar. It is also why they cannot call in gold AGAIN under the same dollar that they did in 1933. To call in gold at a specific exchange rate now, the US would first have to back the dollar with gold at that rate and then call it in. That would expose the US gold to international legal challenges for redemption. If they simply called in the gold without backing the dollar, the US government would be exposed to thousands of internal law suits. These law suits would rightfully demand a retroactive reversal of 1933 before any new confiscation could take place. They would demand that US official gold be distributed to all citizens at $20 per ounce BEFORE it could be turned back in to the government.

The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!

Gary said...
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Anand Srivastava said...

JR: Thanks for the response.
I am still struggling with the understanding. I guess the light bulb moment is still far ahead. I hope you don't mind :-).

Flaw #2 is the dollar trying to be as good as gold in the store of value role via US Treasuries.

I guess the Flaw #2 applies to Euro and SDR equally. They are both paper currencies and cannot be used as a SOV.

FOFOA has said that after crisis the trading will happen in any currency, which is considered stable and well managed, based on RPG. But still the currencies will not be a SOV. So there will be a need to balance out the transaction via gold exchange. It is expected that the populace will do the actual gold transaction which will balance out the Currencies.

I would think this would apply to SDR as well. As long as people do not save in banks. The only issue is that SDR will not enforce Freegold behavior.

I absolutely agree that Freegold/RPG is absolutely the best mechanism for the future, and many other thinkers also think so.

But the issue is that I don't think that the politicians are very intelligent or knowledgeable. I would think they will trade and come to a compromise. It is possible that the Central Banks will be able to influence the people in power. But I am not 100% sure :-).

I guess this point can only be determined with time. Anyway it doesn't change the beauty of the freegold/RPG concept. And neither does it change the practical aspects for us, ie gold revaluation. Maybe without freegold the peak would not stay very high for very long, and paper gold will arrive, when people start to forget the learnings a couple of generations later.

Robert said...

Yes, Jeff, I remember that post. And the specific propositions that I want to look into are the claims that the BIS can still call in claims at the rate of $42 per ounce, and the statement that "Claims of perpetual entities never go away." I am still skeptical about both statements as propositions of law. What law applies? Who would be the final arbiter? How could such claims realistically be enforced? And is there any chance that many claims were waived or deemed waived sometime after 1971 (by treaty or participation in any multilateral organization?)? I am sure some law professor somewhere has written an article on this subject -- but I am having trouble finding a good legal source. While FOFOA is great at explaining economic concepts, I am not sure that he would hold himself out as an expert on international monetary law.

costata said...

Hi All,

Gary wrote:

it's a fairly simple question: if Saudi Arabia with US agreement priced gold at a very very high level, could it save the US from hyperinflation.

No

Peter said...

@costata: Yes

Jeff said...

Robert, I am not an international attorney, but as for enforcement:

FOFOA: If the coming dollar collapse takes the first waterfall route and hits the riverbed, how would an insane and illogical confiscation play out? Well, if the US dropped out of the BIS to secure sovereignty over its confiscated gold, the BIS would halt all international dollar traffic and probably try to use those dollars to buy gold on the international free market. The dollar would be instantly dead.”

Jeff said...

Of course it doesn't have to be the BIS that bids for gold with dollars. Anyone with enough dollars could press the button if they are unhappy enough with the US, no?

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

Jeff, I am not sure how that answers the question. I never suggested that the U.S. might withdraw from the BIS? Why would it? Even if the BIS kicked the US out, that would not help them recover on their claim. The gold is presumably in the possession of the UST and not in Switzerland. If the BIS (or anyone else) makes a claim on USG gold in US territory, they still need to prevail on their claim before some sort of international tribunal, and that tribunal would have to have the power to issues an enforceable decision. What are the chances of that happening if the US opposes it? And that is even presuming that the claims are not time barred or waived, which the USG would certainly argue.

What is the problem with being a gold outlaw? Can the rest of the world do anything about it other than complain? If they could, wouldn't they have already done so?

Regarding your second post, I suppose anyone with enough dollars can bid up the price, but I don't see how that helps entities like the BIS make enforceable claims on UST gold.

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

Since you know FOFOA's position, the onus is on you to show if those perpetual claims can be ignored, Robert. Then you should explain how the US, sketchy junkie that it is, can repeatedly default on its debts while being supported by the rest of the world, ad infinitum.

I don't think you understand the US dollar position. The only reason the dollar doesn't HI right now is because the rest of the world (collectively) is carrying it just a bit longer. Who do you think is calling the shots here? Did you see that chart of gold exports to China?

Beer Holiday said...

@Anand Srivastava

I think there is significant evidence some Governments are looking to solve the problems in the current system. They are setting up networks of trade to escape the $IMFS settlement system.

costata said...

Gary writes:

Costata, that is a very strong case you make.

Oh, hang on, sorry, you actually just typed your opinion. Groupthinking par excellence.

Again - No. You asked a "simple question":

it's a fairly simple question: if Saudi Arabia with US agreement priced gold at a very very high level, could it save the US from hyperinflation.

No (from me)


I gave you a simple answer. An accurate answer notwithstanding its simplicity - No.

When Gary can understand why the simple, unequivocal answer to his question (above) is "no" he can seek to dictate the discourse in these pages IMVHO. Until then ....

Gary said...
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