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:

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Sarah said...

Just wanted to inform readers here of this India and gold policy article. The author suggests several policy changes on gold for the country -
Might just be easier to read them on the link, but quote is below.

http://www.thehindubusinessline.com/opinion/columns/k-kanagasabapathy/article3606346.ece

"Augment gold reserves: Gold imports are viewed as a drain on foreign currency. But it is equivalent to foreign currency, since it forms part of international reserves. As part of augmenting its reserves, the Reserve Bank of India can purchase gold from the domestic market to augment its reserves base in the face of dwindling foreign currency reserves.

A suggestion has been made earlier that the central bank can deal in gold as part of its market operations. In a way, augmenting gold reserves will help the central bank sell dollars in the domestic market to preserve the value of the rupee, without losing its reserves base.

Encourage gold deposit schemes: Commercial banks, in particular, State Bank of India, offer gold deposit schemes at low rates of interest. Gold savings deposits and term deposits can be encouraged. Here is a ‘good’ Turkish example. Turkey, like India, is a large consumer of gold.

Gold, handed down through families over generations, is hoarded as savings. But in recent months, commercial banks have entered the fray to mobilise gold deposits, encouraged by the central bank policies, according to a Reuters report.

Such deposits have increased four-fold in the past one year. The country’s commercial banks are pouring their technical expertise and marketing resources into offering their customers gold deposit accounts. Customers give their gold to a bank and can make withdrawals from their accounts in gold bars or the lira currency; the accounts offer interest rates that are substantially lower than those on normal time deposits.

Allow banks to hold CRR in gold: Turkey pursued this goal by adjusting reserve requirements, the proportion of deposits that commercial banks must hold at the central bank.

In September 2011 the central bank increased the ratio of lira reserves that could be held in the form of gold from zero to 10 per cent, raising it further to 20 per cent in March 2012 and 25 per cent last month. This had the effect of drastically increasing banks’ appetite for gold.

Allow banks to issue gold bonds to augment capital: In the context of banks facing constraints in augmenting their capital base due to the more stringent Basel III, a possible solution is to allow them to issue long-term gold bonds on a preferential basis to augment their Tier II capital, as part of a host of other innovative products already introduced. In fact, this should provide banks an avenue for mobilising capital at a lower cost. "

Issas Ekeret said...

"I changed the word again (for the benefit of those who can't think):"

XD He's talking to himself now! This just gets better! XD

I love this website!

mr pinnion said...

Beer Holiday
"Pretty sure I was the only one who got suckered, Oh well I can laugh at it now"

You wasnt the only one.
Regarding the realness of 60253, my opinion wasnt as totally correct as it nearly always is, nearly all the time.
Good job my legs made of stone.

Although ,in my defence i did change my opinion when he refused the secret hand shake on the grounds of wanting to stay anonymous, while overlooking the fact that ANOTHER was and still is anonymous.
Sort of like the invisible man refusing to take his clothes off in public because he didnt want to be seen naked.

Regards
Ozzy

costata said...

Our UK friends may need to keep an eye on the Fasten Seatbelts sign.

http://images.moneyandmarkets.com/2461/chart2.gif

The chart is from this post:

http://www.moneyandmarkets.com/uk%E2%80%99s-financial-sector-smack-dab-in-the-crosshairs-and-so-is-the-pound-49954

...the Bank for International Settlements (BIS) — considered the central bank for central bankers — expects the global financial sector to decline in the years to come. This is bad news for all global financial centers. But it’s particularly bad news for London, which is still highly leveraged to global financial services.

Beer Holiday said...

The Californian monorail. I think this project is a good blueprint for how this disaster will play out: spend, spend, spend - Hello hyperinflation - "no one could have seen this coming".

Beer Holiday said...

Blondie, with your perspective of the $IMFS, a world full of misallocated capital projects begins to make sense.

Beer Holiday said...

Jim Richards tweets (h/t VtC)

Purpose of ‪#QE3‬ is to let Congress know they can borrow & spend as much as they like & the ‪#Fed‬ has their back. Monetary-to-fiscal signal

#QE3‬ won’t do anything by itself. Inducing Congress to borrow-and-spend w/o fear of higher rates is the real purpose. ‪#WhateverItTakes‬

USG is stepping on the spending accelerator and won't stop until they do a "Thelma and Louise" over the cliff. Who could have seen this coming Answer: FOFOA for one.

Pointless expensive high speed rail anyone?

costata said...

Monetary Money and Non-Monetary Money

Part 1/3

I sat down to write about discovering the price of gold constructed around the central theme of non-monetary gold and monetary gold. I was going to attempt to explain how this bifurcation could create a fundamental mispricing of gold. A mispricing that is at the core of the Freegold-RPG revaluation we discuss in these pages. As I tried to write that piece I realized I couldn’t do it. At least not yet.

I realized I had to address a related issue, hence the title of this comment. As it happens this dichotomy of monetary money and non-monetary money is also a core reason why there will be hyper-inflation in the US dollar. There’s no politically acceptable solution to get around it unfortunately – it’s a systemic problem. It’s due to design flaws in the system that can’t be fixed. They can only be solved. If you can look at these two “monies” from a different perspective it might be easier to grasp why the two types of gold are on a “collision course” (or perhaps better understood as a fusing in the presence of a catalyst).

Like it or not IF we are going to explore this differentiation of money we have to look at the banking system. Regular readers of the comments section of this blog may have read Uncle costata’s assertion that bankers should be treated like pet cobras. So it may be surprising to some that I’m not going to attack the banking practices which are vilified in some circles. Don’t be surprised.

I think it undermines the sound case for banking reform if we are being uncritical in our thinking and pointing to non-issues in the banking business model. In other words making the wrong diagnosis of the disease. I chose the word disease carefully by the way. Truth to tell the pet cobra label was just Uncle costata being bitchy. The banker’s disease is a lot like alcoholism where the alcoholic is at once victim, self-abuser and victimizer.

So let’s dive in and start by defining monetary money as currency and non-monetary money as bank created credit denominated in currency money. The currency issuer creates money by printing currency and by issuing digital credits that are analogous to the printed currency.

Bankers create money by lending it into existence and thereby creating deposits elsewhere in the banking system. Ultimately these are claims on the currency money backed (mostly) by collateral. All of this “money” functions as a single pool circulating through the economy. The vast majority of the money in this pool is bank created. (Up to 95 per cent at times.)

Continued/

costata said...

/Continued
Part 2/3

There are a number of problems in this system but in Uncle costata’s opinion two problems dwarf all of the others. These two systemic flaws collapse the whole financial system periodically. They are the MMT crowd’s ideas and Murray Rothbard’s ideas. Sorry, that’s just my little joke. Actually the two flaws I’m referring to are non-performing loans (and/or loans un-backed by collateral) and loan to valuation ratios (LTV).

We could call them three separate flaws but non-performing loans and loans un-backed by collateral are two sides of a single coin. This “coin” jams the system eventually by building up claims in the system which cannot be met. If a defaulted loan (asset) also reduced the amount of deposits (liabilities) in the banking system it wouldn’t be a significant problem. Unfortunately it doesn’t unless the defaulted loan and the deposit are on the same bank’s books (and generally they aren’t). Lending without collateral creates an almost identical problem unless it is offset by the lender having an equal amount of his/her own collateral (capital) at risk to back the loan.

The second systemically deadly flaw is LTV ratios. Basically the market price of the collateral and the lenders perception of risk dictates the percentage amount they are willing to lend against the collateral. One of the problems inherent in this LTV lending is that it is pro-cyclical. If an asset class is rising then it encourages lenders to increase their lending to that asset class. Eventually this blows up in the kind of event predicted by Minsky’s ponzi finance theory. I don’t think we need to spend a lot of time discussing other categories of bank lending. Overwhelmingly bankers prefer to lend against existing assets. (It’s less risky, or so they think.)

The inherent problem with LTV is that value is subjective whereas price is objective. These words “value” and “price” are used interchangeably but I would ask you to consider the possibility that they are quite different and apply that perception to economic history. See if it provides some fresh insights to inform your understanding of booms and busts.

You can try to make the case that the boom/bust cycle is solely credit and lender driven but I think it is incumbent on folks who make this claim to answer two questions: Why did the borrowers borrow? and Were they forced/conned into borrowing? If not, then there must be some other, better, explanation. Obviously I’m arguing there is – systemic flaws and a disastrously flawed banking business model that only addresses systemic flaws in one way. By shifting the resulting problems onto someone else.

Continued/

costata said...

/Continued

Part 3/3

Readers who enjoy a challenge may like to put forward some solutions to the flaws I described. As with any “competition” there are conditions of entry to this one. Firstly you have to work with the existing system or show how you would create a bridge between the existing system and your new system that resolves these flaws. We don’t have the luxury of working with a “blank sheet of paper” in crafting a solution. Here’s the second condition. It must be a win-win solution for all of the stakeholders in the existing system – only winners – no losers. Good luck.

I wouldn’t attempt to take up that challenge again. After a long and fruitless search I have been forced to conclude that there is only one way in which these problems can be addressed. Impose a solution that works and accept that there will be winners and losers.

If you want to make bankers and managers of other people’s money the winners I think you will find the following to be the best solution. Produce enough of the currency money to collateralize all of the bad debts in the system. If you have no better delivery system just drive up and dump the cash on their front lawns. In nominal terms everyone will get paid what they are owed. Even if that cash has no purchasing power beyond their front fences the books will still balance.

Of course there will be some “collateral damage” among savers, people on fixed incomes and folks with little or no bargaining power over the price of their labour as a result of the inflation this cash printfest produces. You could label this group the “price takers”. Folks who have to take what they can get. The winners are the price makers. Those with the clout to force through price increases to cover their increasing costs. If the inflation you engender causes a catastrophic loss of confidence in your currency then you’re going to have hyper-inflation.

Let’s return to the central theme that inspired this piece in the first place – non-monetary and monetary gold. This $IMFS has some big problems but one looms larger than all of the others in my opinion. The collateral backing this system is either insufficient or its outright failing to perform. The rot extends right through to the supposedly risk free reserve assets – highly rated sovereign debt. This system, or whatever seeks to replace it, needs collateral to back the debts in unrestricted amounts. As it happens FOFOA may be able to suggest a potential solution to this problem ;).

burningfiat said...

Costata,

Great thoughts!
May I use the opportunity to make a silly proposal to your challenge? Thanks.

How about we just use the existing system, plus enforced MtM of collateral? What we scrap is all the bailout-shenanigans! That way banks who take too big risks and has problems with too big LTV's simply go bankrupt. This means that the banks with the most sound policy gets to live instead of the banks jeopardizing the whole system with risky loans just to get bailed out by taxpayers in the end. Right now, the banks who should survive don't and the banks who should be left to die in a free market, lives.

So sum it up, two small rule changes can save the banking system. MtM of collateral and no bailouts!
Then we will get a sound banking system and everybody's a winner!

No? Please criticize :)

/Burning

Beer Holiday said...

Answers to Costata's homework

Fix LTV ratios and non-performing loans.

Goal: End maturity transformation (h/t Mencius Moldbug) and claim that achieves the above.
Bridge: A) Front lawn dump existing debts away. Either at the banks front lawn or citizens (jubilee)
B) Nominate bad banks for any remaining bad old debts and sink them (sorry losers)
C1) Implement freegold, remove store of value funtion from deposits
C2) Ban maturity transformation and pay out existing deposits in cash (puts on flame suit), why not, we probably have HI anyway at this point.
D) Make a market where savers (who want a return on fiat above gold) and debtors are matched as closely as 1 to 1 as possible. Watch the inflated asset prices fall and interest rates rise to "real" levels.
E) Stop using the fiat currencies that where toasted in the process, bring in new or extend existing successful ones to cover everyone
F?) Can we have the borrowers stump up some gold collateral on their promise or is that totally bad in freegold.

Winners - those who got the cash first
Losers - those who got the cash last and/or had their loans sunk. (lets face it, possible pain for everyone in the short time)

But in the long term everyone is a winner.

Did I scrape by with a C- ?

Jeff said...

container traffic:

http://www.polb.com/economics/stats/latest_teus.asp

burningfiat said...

Did anyone think I was too harsh on the easy money camp in the above answer to Costata's challenge?

In hindsight maybe I was... Just throw in a couple of annual front lawn dumps for good measure (at least in a "bridge"-period).
I don't care, I'm fine here at the All-Inn.

Zenscreamer said...

An explanation of Brown's bottom....

http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/revealed-why-gordon-brown-sold-britains-gold-at-a-knock-down-price/

Is it consistent with ours?

Edwardo said...

Costata, there's a lot more I'd like to say regarding your post, but I'm going to limit my comments to the following.

You wrote:

"Actually the two flaws I’m referring to are non-performing loans (and/or loans un-backed by collateral) and loan to valuation ratios (LTV)."

I take it you have no issue of any sort with fractional reserve banking- sorry to invoke the specter of Rothbard and his ilk - and that you don't differentiate between the operational behavior of large commercial banking, if we can even call what such behemoths engage in "banking" (not really in my view) and the activities of much smaller, community banking, concerns.

Putting all that business aside, the problem with non performing loans suggests, at least to me, a more profound issue, namely that, even now, we operate within an economic paradigm of growth, growth, and more growth. In my view, there was a time when that model made sense, but, without getting into a tedious debate on the relative (de)merits of competing economic systems, the drive for constant growth model now seems, at least to me, to be, at best, questionable on a number of grounds. I apologize if I've thrown something of a monkey wrench into what is meant to be a discussion limited to banking/money. Feel free to ignore my brand of contribution.

burningfiat said...

Zenscreamer,

Thanks a lot for the link.

To sum it up: Brown bailed out TBTF banks that was short gold while screwing the british public for 400T of gold.

Lovely.
But hey, thanks Gordon. You gave the world a prolonged period to acquire gold.

costata said...

burningfiat, BH, Edwardo et al,

All comments and observations welcome. A couple of comments. Firstly I think it's fairly obvious there are no solutions that don't create winners and losers. Secondly I don't think maturity transformation is the problem. That's merely a liquidity issue if the collateral is sound.

Fractional reserving is an interesting topic IMHO. At any level of reserving it limits the volume of loan creation in the banking system given a fixed number of banks and amount of deposits. While all of the "money" pool remains fungible it doesn't matter how it came into existence. But that's just my 0.02!

M said...

@ Burningfiat

You are dead on. That is more or less what happened in the Asian financial crisis.

costata said...

It appears there's a small rift in the debt deflationist mutual admiration society.

http://globaleconomicanalysis.blogspot.com.au/2012/07/steve-keen-goes-off-deep-end-with-debt.html

Edwardo said...

http://brucekrasting.blogspot.com/2012/07/it-aint-priced-in.html

A key passage.

"When Switzerland adopts exchange controls, the rest of Europe will soon follow. What will be the global market response from these measures? It will scare the crap out of capital. I think exchange controls will bring a panic; there is no safe place to hide in a panic. The possibility of this happening is not in the price of assets today."

A few thoughts in relation to the above quote in no order of importance.

1.)Physical, no pun intended, shines in such situations. At present, in the U.S., for example,
one can not legally exit or enter the country with currency in excess of $10,000 without reporting it to the authorities. 6.5 ounces of gold in your pocket requires no such procedure. It will, of course need to be placed on the conveyor belt of the metal detector for all to see, but that's it.

2.) "Assets" as per the quote, are not defined, but I think it's safe to say that, in this case, the primary meaning of assets equates to shares. Physical gold, heavily influenced by paper as it is, will likely continue in its corrective phase.
Technically, if one wants to operate on that plane, it's not a buy. But, by my runes, it will be somewhere between here and (my best guess is) $1400.

costata said...

Japan and China news.

The commenters at the MacroBusiness blog are often well informed so I'm including a comment with this story as well. From the writer of the post:

...month on month Japanese machine orders just fell out of bed, down 14.8% versus expected at -.2.6%

http://www.macrobusiness.com.au/2012/07/japan-machine-orders-tank/

Comment by 'johnyaku':

A lot of Japanese machine orders go to China, helping Chinese factories tool up as they expand their production capacity. This could be a sign that Chinese manufacturers are pulling their horns in, perhaps in response to decline in external demand or credit issues within China. This happened in a big way during the GFC, with significant flow on effects for the rest of the Japanese economy.

Looks like I might have a long holiday (period with little or no work) to look forward to :-(

Tony said...

Edwardo,

with respect to your first point, if I'm not mistaken, you can technically leave the US with 200 ounces of American Gold Eagles. As I understand it, customs goes off of the face value, which is stamped at $50 per coin. Needless to say, 200 ounces of gold makes for more of a spectacle than 6.5 ounces!

Edwardo said...

Yes, that's correct, Tony.

Tony said...

Edwardo,

With respect to your second point, are you asserting gold's corrective phase will continue based on cyclical data alone or are there other factors adding to your rationale?

costata said...

In Nature's Building Blocks: An A-Z Guide to the Element, award-winning science writer John Emsley says the weight of gold in the average person is about 7 milligrams.

http://www.perthmintbullion.com/au/blog/blog/12-07-06/Everyone_Owns_A_Little_Gold_Here_s_How.aspx

If the silverbugs get hold of this what's the betting they will claim there's less silver in everyone?

Michael dV said...

Just for a bit of gold history...from the 30s til 1980 the number one treatment of rheumatoid arthritis was injectable gold. There were 2 types, a solution and colloidal gold. In the late 70s an oral preparation was marketed. It was only marginally effective and as soon as methotrexate was shown to be highly effective gold went the way of other heavy metals used in medicine. Mercury was used as an anti syphilitic ("a night with Venus and a lifetime with Mercury" was a common admonition to sailors on leave). I have been tempted to tell the IRS some of my gold purchases were for 'medicinal puposes'...but I just don't have the nerve.

costata said...

It appears that China didn't get the memo about Iran.

http://www.zerohedge.com/news/china-shuns-us-and-invests-direct-iran-oil-fields

...After ignoring the sanctions and then receiving their exemption, PressTV reports tonight that China is to invest in developing north and south Iranian oil fields (which will produce 700,000 barrels per day of crude).

One of the oil fields, Azadegan, has one of the world’s largest oil deposits, with in-place oil reserves estimated at 42 billion barrels..

Michael dV said...

Eduardo
place small coins in a clamshell coin purse and it will look like you are just a guy who keeps change in a little old lady way. I do this when I travel to multiple countries. I have a few of these marked for the various countries I'm going to visit. I'm certain it would work for gold as well as it does for any foreign coin.

FOFOA said...

Thanks for the nominations to make my comment into a post! I will get to it soon hopefully. Indenture added a fourth nom via email as well, and I agree, so I guess that's five.

Sometimes I spend a great deal of time and effort answering queries by email, and when I do I like to share them with the blog. Today I responded to an email from Lee Quaintance of QBAMCO and, because I spent considerable time on it, I thought I should share it. First, his email:

FOFOA,

You seem to gloss over fractionally-reserved lending as the crux of the battle between debtors and savers here:

http://www.fofoa.blogspot.com/2012_06_01_archive.html

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

Freegold seems to be a very much suboptimal solution to this resolution. If savers (lenders) are using fiat money as their savings medium, I don’t see how their interests are not still very much impinged by fiat money inflation. The resolution really does not materialize with the introduction of Freegold here.

If debtors seek to borrow in the medium which they plan to spend (fiat paper money) and lenders seek to lend (save) only in a medium which they believe will maintain its purchasing power (gold), does not the entire borrowing/lending platform simply break down? This seems to be a manifestation of Gresham’s Law, no?

While I agree that the battle between debtors and savers is the real deal, my belief is that fractionally-reserved lending, supported in time by theoretically infinite supplies of fiat base money, is the battleground worthy of identification, research and debate. That said, Freegold is very much a cause worthy of support for those who elect to not participate in the field of battle.

Can the spending and savings medium truly then be separated if no one is irrational enough to lend in paper money terms? The evolution here seems to be a fast track to the extinction of paper money which, coming full circle, obviates this debate, no?

Thanks for your indulgence here,
Lee Quaintance
CIO & Partner
QB Asset Management Company

Cont…

FOFOA said...

2/7

Hello Lee,

It appears you have stumbled upon what I identified as a difference between us a while ago. So allow me to (attempt to) explain my view. My apologies for the length, but this is a tough perspective to explain to someone as well versed in “the 'problem' with fractional reserve lending” as you.

The reason it seems like I gloss over this issue is because I don’t view it as the crux of the battle. I don’t have a problem with “fractional reserve banking” (or lending). I went into some detail on it in my Honest Money post. It’s a long post (35 pgs), but here are the first couple of paragraphs setting the stage:

"What is honest money?

And what does it mean "to return to honest money?"

The most common answers to these questions have roots in the Austrian School of Economics, developed and made famous by the Austrian economists Carl Menger (1840-1921), Ludwig von Mises (1881-1973) and Friedrich Hayek (1899-1992). At least the most common answers today come from modern followers of the Austrian School. And modern practitioners will tell you that gold and silver are honest money, and that the way to return to honest money is to make money harder and/or to limit or eliminate fractional reserve banking.

But this meme of honest money has been canonized in such a simplistic way that its proliferation has become a bit of a credibility problem for those who promote it, and a source of confusion among their more credulous followers. So I have a slightly different take on honest money that I'd like to share with you."


That old story about how the banker lends out more paper receipts than the gold he has on deposit has done a great deal of damage in the collective understanding of money, in my opinion. This is why FOA spent so much time discussing the pure concept of money, what it is, how we use it, where it came from and how it developed into a modern understanding of money in the hard money camp that’s not consistent with the timeless pure concept. His discussion really begins in Gold Trail III – The Scenic Overview with his post The Gold of Troy and continues onto the next page. I also went into some detail on FOA’s view of money in Moneyness.

The idea that “fractional reserve banking” is bad, wrong, or the flaw in the system, is wrong in my opinion. The way the real economy has always used “the pure concept of money” is, in one simple word, credit. When physical gold emerged as the most versatile item for barter, that was not really the use of money per se. It was still just a barter item, one of many, and simply the best. When it was used as money was when we started trading using credit denominated in it. But that doesn’t mean that there was an ounce of gold for every “ounce of credit” in existence.

Cont…

FOFOA said...

3/7

That early banker who issued more receipts than the gold he had on deposit issued those receipts (lent them out) against the character of the borrower—and his promise to repay the debt. We do this all the time in the real economy—issue credit to our clients and receive credit from our vendors based on their known character and this is what keeps the economy running. There is not a monetary base unit set aside for each unit of credit we extend to our clients. If there had to be, the economy would grind to a standstill.

Centralizing, aggregating and harmonizing this system of credit (money!) was an evolutionary leap in the right direction. Banks could now play the middleman creating a fungible credit system that could be centrally cleared. No longer did I need to extend credit directly to my client (although I still do to some extent), but he could get some of the credit needed to get the job done from the bank and pay me a deposit so that I could give my vendors an up-front deposit.

And this credit is not backed primarily by gold, property or any kind of collateral. It is backed first and foremost by the character of the borrower and his promissory note. Additional backing (like collateral) lowers the risk of loss and thereby lowers the interest rate. But that is not the key element of credit (the pure concept of money).

Here’s a great post by Randy Strauss from my Gold is Money – Part 3 post that was especially revelatory to me:

"The following is a post by Randy (@ The Tower) describing the end of the gold coin standard and the dawn of the Federal Reserve System (in blue).

Continuing our investigation into the meaning/essence of "money"... In 1907 America was on the Gold standard and WITHOUT any central bank. Many modern goldbugs might be inclined to yearn for those "good ol’ days" when "money was money and banking was as it should be!"

However, that year is best known by the Panic of 1907 in which the people's economy was plagued by runs on trust companies, banking panics, and a bear market in stocks. Across the nation, banks were unable (and refused) to deliver gold coins and currency to satisfy the requests of depositors for withdrawals of money from their own accounts -- and 246 banks collapsed. It is not difficult to see how the frustration of depositors unable to obtain currency from banks (even solvent ones!) holding their deposits would lead to pressure for political intervention and change.

For a quick exercise in perspective, imagine what you would do today if faced with the same situation in which your bank could not give you any currency ($1s, $5s, $10s, $20s $50 or $100s) to carry away with you as a representation of the money residing in your bank account. No problem. You would simply write a personal check to meet your spending needs, or perhaps ask for a bank draft, or wire the money wherever it needed to go. Amazing! What IS money??? How did you get yours; where did it come from? How do you know what its value is?? Ponder that, and now we return to our glimpse at history...


Cont…

FOFOA said...

4/7

"In the wake of this banking panic, a National Monetary Commission was formed to undertake a scholarly look at the failings of America's financial system. Of these, the four major flaws cited were that the banks were decentralized, clearing methods were inefficient, the huge cash holdings of the federal government were not distributed where most needed, and the currency supply was inelastic. (Please ponder for a moment how or why the CURRENCY supply would ever be an issue if the amount of MONEY found in banks were at a one-to-one ratio with the currency (gold) that represented it. Surely, in this absence of a central bank there couldn't be more money than gold coin! That's impossible!! ) By 1911, the Commission had recommended a plan for a "Reserve Association of America" as the solution to these defects, giving rise two years later to what became our central bank -- The Federal Reserve System. However, that's another story for another time.

Through the coordinated stabilizing actions of three prominent NY bankers to arrest the banking panic [J.P. Morgan, George F. Baker (First National Bank), and James Stillman (National City Bank / Citibank)], their wealth and power was perhaps made more conspicuous in the eyes of the nation than perhaps it would otherwise have been. A prominent Wall Street lawyer named Samuel Untermyer suggested that there was a "Money Trust", and The Wall Street Journal also took notice of affairs and wrote, "So long as Congress will not give us what every other civilized country possesses, a central bank, it forces Wall Street to improvise something of the kind itself."

The House Banking and Currency Committee formed an investigative subcommittee to determine whether a Money Trust existed in NY. The chief counsel was Sam Untermyer, and I think you might gain some insights about the true nature of money from the testimony delivered by Morgan and Baker before the committee in Washington DC at the beginning of 1913.

In questioning Baker about the proposal for banking reform regarding expanded disclosure of bank assets and investments, Untermyer probed, "Why should not the assets, and the detailed assets, be a matter of public knowledge?"

Baker replied, "Business would come to rather a standstill."

Untermyer demanded, "I want you to explain to the committee why."

Baker declined, "I can not explain it."

Untermyer pressed further, "You mean you can give us no reason?"

Baker admitted, "It would be exposing all the details of that business to the whole world."

After following a sidetrack in questioning, Untermyer returned to this issue, asking, "Why should the public do business on confidence when it can get the facts?"

To which Baker proclaimed, "Mr. Untermyer, THE FUNDAMENTAL PRINCIPLE OF BANKING, perhaps more than some others, is CREDIT." [emphasis added]

It seems that George Baker sensed (rightly?) that the public, familiar with their Currency being a tangible asset (gold coin), would NOT be readily comfortable with the truth about Money. That is to say, that they might struggle to accept the reality that their Money Supply, as represented on the books of the bank, was created by credit, and existed through the grace of confidence. In effect, the tangible Currency had become a mere symbol for the Money (credit) it represented while circulating outside of bank account ledgers.


Cont…

FOFOA said...

5/7

If you don't care to believe my assessment, I have another point for you. When Untermyer had J.P. Morgan on the witness stand, he asked him, "Is not commercial credit based primarily upon money or property?" [In this exchange, it appears that Untermyer ignorantly used the word "money" as equivalent to gold coin, a usage which Morgan plays similarly until his concluding point about granting CREDIT.]

"Morgan responded, "No, sir, the first thing is CHARACTER." [emphasis added]

Untermyer, shocked, reiterated, "Before money or property?"

Morgan reassured, "Before money or anything else. Money cannot buy it. [credit]"

Untermyer remained obstinate against this notion, as though there were communication difficulties, and pressed again on this point.

Morgan then conclusively stated his conviction on the point that commercial CREDIT is based on character: "Because a man I do not trust could not get MONEY from me on all the bonds in Christendom."

From two eminent bankers who surely knew their business, you now have it that the creation or granting of Money (the extension of Credit) has more to do with the creditworthiness of the borrowers than the collateral that secures against possible default. And recall, these comments occurred while on a gold standard AND in total absence of a government-sponsored central bank -- which was authorized (against Baker's preference) a year later.

As you come to understand how Money and Credit are interrelated, the more you will understand the separate Wealth of gold and why you need it now more than ever."


++++++

It might be tempting after reading that to think that the banks, through their “fractional reserve banking”, caused the Panic of 1907. But, again, that would be to misunderstand how the economy has used “money” since the beginning of time. If that’s all you get from Randy’s post, then perhaps you are one who, as George Baker sensed, and because of your hard money education, would NOT be readily comfortable with the truth about Money.

Today all money is credit, even the monetary base. Today we use government credit as a base reference point for the economy’s credit. To view this in the proper light, I like to think of the base, or the government’s credit, as a negative to the system, and the economy’s credit as a positive. When the government borrows to spend it never really pays back in real terms, because governments are always net-consumers.

We put up with some government through taxes, the parts of government which are necessary to a functioning economy, but beyond what the government can get away with through direct taxation, the rest of government is a negative on the monetary system. That’s what I mean by government credit is a negative as opposed to private credit which is economically positive. It’s a tough concept to swallow right now because everything is so messed up on both the government and private banking sides, but that’s really the gist of it.

Cont…

FOFOA said...

6/7

What allowed it all to get so out of whack to the point it is today is very simply the inclusion of savers’ savings in the process. This can be most clearly seen with the emergence of securitization in the 70s and 80s. Banks extend credit, but securitization allowed them to offload that risk to savers for a fee. This cleared their books for more lending. Eventually lending standards had to be reduced in order to feed the demand for securitized debt from the savers. The added risk of lower lending standards wasn’t a big concern because the banks never planned to sit on that risk; they planned to offload it to savers, China and German pension funds. This led to sub-prime and ultimately to collapse.

But it’s more than just securitized debt held by savers. It is systemic in that our trading partners like China stack up our debt rather than settling any trade imbalance by purchasing gold with the left-over currency on the open market. It is the stacking of debt which allowed for the non-inflationary expansion of the USG just like the stacking of MBS by savers allowed for the non-inflationary expansion of sub-prime and consumption-based debt. This led to a USG currently addicted to its present rate of consumption which led to QE once the USG deficit spending exceeded the trade deficit.

There is no need for bank deposits to be any more than the money we all earn and then spend within a normal period of a month or two. That’s still all of the money. It’s all of the debtors’ money because they don’t save, and it’s maybe 95% of our earnings (if we save at a rate of 5%). And if no one is sitting on “money” (credit) for more than a month or two between the time of earning it and spending it, then mild inflation is not only inconsequential, but it becomes economically beneficial and desirable. I’m talking 2% to 3% inflation.

The inclusion of the savers’ savings in this process only damages the savers disproportionately to everyone else. And it damages the savers more the more they save. Inflation “taxes” savers disproportionately. But not in Freegold.

Thinking about the classic bank runs of the 1930s in terms of fractional reserve banking is interesting. It certainly was a problem in 1933, and it was precisely this problem that was the reason behind the FDR confiscation—to stem the tide of bank runs. Today that kind of a bank run is a thing of the past. That’s not to say it cannot happen, but that even if it did happen, everyone would get their money in the end, unlike the 30s. And that is because today the CB can create the commercial bank reserves at will in extremis.

Opponents of fractional reserve banking (FRB) would blame the banks and the practice of FRB for the shortage of reserves in the 30s. But I think that misses the bigger issue. If the system’s store of value simply floated in value and was available to anyone at any time, the runs would have never occurred. They occurred precisely because money (credit) was denominated in the store of value, the system’s reserves. It is the lending of the reserves that is the problem.

Today we have a better system. Floating gold as reserves behind the CB money (Eurosystem model) and the CB money as reserves behind the economy’s money (bank credit). So the ultimate reserves in the system float, and are therefore available to anyone, anywhere, anytime.

Try to imagine the gold coins at the banks in the 30s floating in value relative to paper dollars rather than being fixed in value. You have a deposit of $X,XXX, but that’s only a fixed number of paper dollars, not a fixed number of gold coins. If everyone wants to withdraw their deposits in gold, then the price of gold will simply rise.

I’ll conclude (for now) with another excerpt from my Honest Money post:

Cont…

FOFOA said...

7/7

"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.
________________________________________________________
Sidebar:

For more about why FRB and time deposit maturity transformation are not the root of the problem—the root is simply the lending of the monetary reserve, a problem that would still exist even with Rothbard's 100% reserve banking—please see my Reply to Bron. Here's a short excerpt:

** Spending Gold into the marketplace, whether by the owner or by a borrower, would tend to result in prices "that weigh more"--cost more Gold, that is.

** As ever more Gold is borrowed out of other people's savings to be spent into the economy, the Gold's purchasing power is lessened from what it otherwise would be...hurting those who have elected to hold their Gold instead of risking it by lending it out as a source of income.

[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]

** For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent! [Gresham's law alone is adequate to achieve this.]"


Sincerely,
FOFOA

tintin said...

Rick Ackerman's latest:
Negative Yields Tighten Deflation’s Grip:

http://www.rickackerman.com/2012/07/negative-yields-tighten-deflation%E2%80%99s-grip/#more-48425

"Although we have been in the hard-core deflationist camp since the early 1990s and have written on the topic for publications including Barron’s and the San Francisco Examiner, we were persuaded more recently by the excellent arguments at FOFOA blogspot that hyperinflation was indeed possible if not inevitable. But for now the argument is moot, since it is clear that deflation is overwhelming the central banks’ collective efforts to keep the economies of the world from collapsing. As this drama unfolds, perhaps the best way to understand the hyperinflation/deflation conundrum is to think of the latter not as a decrease in the money supply as most economists do, but as an increase in the real burden of debt. In this respect, debt deflation is close to suffocating Europe’s economy and seems well capable of doing the same to America’s if the Fed should even hint that it might back off the credit throttle."

It seems so very hard to cross the bridge.

tintin said...

From financialsense:

U.S Gold Net Exports Increased Substantially During First Quarter 2012:

during the first three months of 2012, the U.S. imported only 75.1 metric tonnes, but exported 178 metric tonnes. Thus, the United States was a net exporter of 103 metric tonnes of gold during the first quarter of 2012.

Of the total 178 metric tonnes of gold exported from the U.S. during Q1 of 2012, Hong Kong, the United Kingdom and Switzerland acquired 161.7 metric tonnes or 91% of the total amount. If the rumors are correct, the majority of this gold is being shipped to these countries and being purchased by the Big Eastern Buyers.

Retail Investment Demand Is a Mere Pittance.

Gold Eagle sales in the first half of the year were 343,500 ounces (down 40% yoy), while U.S. gold net exports were over 3.3 million ounces from Jan-Mar 2012. If this trend of U.S. gold exports continues, half year figures could reach 5-6 million ounces. This would mean that retail Gold Eagle demand may only account for 6-7% of the forecasted 5-6 million ounces of U.S. gold net exports.

This proves the case that the majority of Americans are still quite clueless when it comes to understanding gold’s role as money. As the world financial system continues to crumble, the large Eastern buyers and a small minority of Europeans are rapidly exchanging fiat paper notes for gold.

At some point in time the game of music gold chairs will end and the public may not have the opportunity to buy physical gold…. even if they had the means to do so.

Got gold?

http://www.financialsense.com/contributors/steve-angelo/u-s-gold-net-exports-increased-substantially-during-first-quarter-2012

FOFOA said...

Great new vid from FreegoldTube! Thanks, nice job! http://youtu.be/SKjpyWeSros

Robert said...

Did anyone listen in on the Paul Brodsky interview over on Chris Martensen's site? Sounds a lot like Freegold to me:

"The point here is you can either monetize debt or you can monetize (sell) assets. Or you revalue an asset on the balance sheet already of the Treasury or the Fed. And obviously that asset, we think, is gold. And that is the monetary asset that they have always reverted in the past. And that is the one we think that currencies, currently baseless currencies will be devalued against."

"And so that we think is the mechanism that is ultimately going to play out whether in the marketplace or through some policy administered devaluation. Currencies are going to be devalued and that is where we sit right now. Timing this is impossible. We think the amount it would have to be devalued by, getting back to your original question, has got to be the amount of or something close to the amount of the gap (tens of US$ trillions) between bank assets and bank reserves. So it is a significant number."

"And Treasury ministries, being the ultimate issuers of obligors on the hook for currency repayment, we see them as lending the gold to their central banks so that this mechanism, this asset monetization devaluation can take place. And so we think it is the only way out ultimately. And we will see that happen either in the marketplace or through proclamation at some point. And it is really what has to happen."

"And so there is no physical limitation on the amount of currency that central banks may manufacture. And so this is a completely viable way to deleverage the system -- by purely destroying the currency that we have. It is debt currency, so we are going to destroy the debt in real terms behind them but not destroy them in nominal terms. That is the net effect of all this."

http://www.peakprosperity.com/podcast/79208/paul-brodsky-central-banks-are-nearing-inflate-or-die-stage

M said...

Warren Buffet and his gold delusions.

http://freegoldobserver.blogspot.ca/

KnallGold said...

Gold and Silver Have More to Fall: Kee

http://finance.yahoo.com/blogs/breakout/gold-silver-more-fall-kee-172808975.html

KG: at least this is funny...


@FOFOA: really liked the last songs from Freegoldtube, and particularly the two simple Gold coins appearing with a "FG" resp. "flag" on top. They should be available, in whatever small size...the KISS "keep it simple stupid " approach...

Motley Fool said...

FOFOA

Nice response. Myself, I would have used less words and likely not have gotten the point across.

"If savers (lenders) are using fiat money as their savings medium, I don’t see how their interests are not still very much impinged by fiat money inflation."

Yep, but they won't be. Savers will be saving in gold.

"If debtors seek to borrow in the medium which they plan to spend (fiat paper money) and lenders seek to lend (save) only in a medium which they believe will maintain its purchasing power (gold), does not the entire borrowing/lending platform simply break down?"

Nope, extending credit aka lending money has never depended on the money supply. The money of the people has always been credit. See : Debt : The first 5000 years

...

Perhaps some like the short and sweet more. :P

TF

Ps. Gary...you had one too many zeroes, which kinda demolished the thrust of your argument....not that the approach had much merit.

Edwardo said...

Tony, my "forecast" is technically based, and by technical I am including cycles. In this case the cycle derives from a Gann date that calls for a low in commodities later this year. (It is, of course, debatable whether gold is a commodity. It's certainly a unique commodity in any case) My call is also based on more meat and potatoes TA that says the almost year long correction/consolidation in gold is not complete. In the meantime, I'm trying to square what I'm looking at with the sort of revaluation event that has been under discussion here for quite some time.

FWIW, I can envision, without undue strain, a scenario where the forecast I have in mind involves a reval.

mr pinnion said...

Costata

I happen to own a copy of the book you referred to and it informs me that there is less than 0.2 milligrams of gold in the human body.

Silver comes out as approx 2 milligrams

Well there you go.Who de av thought it.

Regards
Ozzy

Edwardo said...

Yes, Robert it seems to dovetail with freegold, which is especially interesting given that Lee Quaintance is Brodsky's business partner.

DP said...

It almost feels like Brodsky's been getting a little #PrivateEd action for a few months.

Jeff said...

And Ackerman has flunked out of freegold U. No FOFOA shirt for him.

Tony said...

Thanks for posting the link, Robert. As for Chris Martenson, as far as I know, he has never uttered the word "freegold", but he's used the scenario of a major gold revaluation as his rationale for holding the majority of his assets in the form of gold. It's beyond just serving as a safe haven for him, from what I've read in his writings. On a side note, he acknowleges "speculating" by continuing to hold 20-25% of PMs in silver.

Tony said...

Nice find, Edwardo. Lee Quaintance's "Who is John Galt" essay (http://www.gata.org/files/QBAMCO_Who_is_John_Galt.pdf), in spite of a few restraints (e.g., Bretton Woods gold valuation), does share some basic freegold commonalities. From Brodsky's interview, it sounds as though their view might be evolving.

Alan2102 said...
This comment has been removed by the author.
jojo said...

Jeff,

Why do you say Ackerman flunked out?

My take is by adding his little FOFOA admonition, it is his way of retaining value to his crowd.
( I think I've seen him do that a couple times since he was schooled last year)
The guy has built his castle on deflationary sands. He can't just let the waves wipe that out and start a freegold castle now can he?

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

Speaking of John Galt,

I finished Atlas Shrugged a few days ago and I'm curious how an Ayn Rand disciple (if you will) ends up being one of the "bad guys". I've seen some more recent quotes where Greenspan seems to at least be trying to save face- seems he thinks he was forced to do it ;)- but if anyone here has written on this or knows of some good links, I'd like to check them out I just don't have the time to commit to this curiosity now.

I mean how absurd! Am I wrong??

Aquilus said...

Jojo,

You're not the only one. Boefke had the same question: Alan Greenspan or Francisco D'Anconia?

jojo said...

I mean how can you go wrong? Yes, you can have it both ways!
"Although we have been in the hard-core deflationist camp since the early 1990s and have written on the topic for publications including Barron’s and the San Francisco Examiner, we were persuaded more recently by the excellent arguments at FOFOA blogspot that hyperinflation was indeed possible if not inevitable. But for now the argument is moot, since it is clear that deflation is overwhelming the central banks"


I want his job. Reminds me of a weatherman.

jojo said...

Thanks mucho Aquilas! I'll check it out later.

Indenture said...

Thanks FreeGoldTube for your time and effort.
Million Pieces (Song for the Savers)

My favorite moment in the video is this

costata said...

Jim Sinclair writes today (my emphasis):

Inside the Euro crisis is an undertone of a different end that almost every analyst on the planet labels "hog wash." Before you write the euro off due to the fact that all Eurosnobs hate each other, leave open the possibility that the final euro of this drama might be better than the entire concept ever was.

This is Jim's introduction to a story headed:

Eurozone officials move on bank watchdog, to report to ECB

by: Matina Stevis and Stephen Fidler
From: The Wall Street Journal
July 09, 2012 8:06AM

First paragraph:

SENIOR eurozone finance officials, moving ahead on a plan to create a single overarching bank supervisor for all the countries in the 17-nation currency bloc, are settling on a framework that would create a new agency reporting to the European Central Bank (ECB) to police the largest banks in the currency union, people involved in the discussions said.

Mr. Gold gets it alright!

Edwardo said...

jojo,

I think if you read Ayn Rand's comments on The Maestro, before he was the Maestro, of course, things may become clearer. Here's an example:

"Oh, Alan, he's so brilliant, but he's such a social climber."

Now, having said all that, Ayn Rand, was anything but a sweetheart.

fonoah said...

Hi Jojo - another perspective on Greenspan you might find interesting:

http://www.safehaven.com/article/25622/color-commentary

Aaron said...

FOFOA -- excellent post as only you can produce. You have yet again broken a new barrier with your writing finding a new way to explain the amazingly complex as amazingly simple.

FOFOA said:

"Today all money is credit, even the monetary base."

Let’s pause right there and think about that very short but incredibly significant sentence for a moment.

"Today all money is credit, even the monetary base."

Our paper money is credit? How can that be?

KindofBlue said...

Aaron

I wonder if we can go one step further and add a corollary to FOFOA's

'Today all money is credit, even the monetary base.'

with

Capital... is always... at risk.

This is why gold is hoarded.

This is why competition in enterprise is eliminated and/or cartels are forged, why credit relationships are coveted, and why gold is - by necessity - so uniquely useful.

My two cents.

Blondie said...

That value in gold is credit too, don't you know.

It is the credibility of those who produced the value. The difference is that the credit in gold is for value already produced, while the credit in currency is but a promise of value to come. Both however are intangible.

The value a net-producer (especially a super-producer) stores in gold is their credibility in that the producer chose to store it in an asset no one else uses, thereby depriving no one else of their own sovereignty. The holder of much excess value does always have the option of using that value to corner/control/monopolise goods others require, thereby effectively controlling those others; but by placing that value instead in gold they are not exercising that option.

JR said...

Hi JoJo,

FOA liked what Poor old Solomon thought:

FOA (3/17/2000; 9:16:57MT - usagold.com msg#13)
A Fireside Talk (last one before we hike the trail in "real - time" context)[...]

This second post is from Mr. Solomon, who offers up a wisdom that is so very relevant to this fireside talk.[...]


I think we all have to consider that (all paradigms aside) humanity has entered into a world where the physical survival of 50% of our population requires the continuing functioning of a very complex set of physical and economic flows. These folks live in a derivative world. Milk is in cartons. Heat comes in over wires. Wheat arrives baked.

We see the rumblings of reemergence hard-liners in China and Russia and the "idea" of future wars is discussed....The problem with this is that with so much of our ability to create wealth tied to knowledge (techknowledge), invasion of the rich no longer generate the spoils they did before. I think that if we are honest, we will recognize that the extended use of emergency executive orders by the President would accomplish the same thing as having America invaded.

Would any President really want to be the one to do this? When Roosevelt called the bank holiday in the 30's and confiscated gold, does anyone think he wanted this???? He was a decisive man, stepping into a new office where he realized we needed some real bitter medicine. Gold was targeted because it was the "accepted" place for people of all nations to "park their wealth" in pockets "outside of the formal banking system". Back then, there was no highspeed digital money,and a large portion of money was cash....today, when you move money it goes from "your bank" to "counterparties bank". It is almost a pure derivative money. Even if gold were to rise in value such that it could be valued close to the same as today's fiat pool, most of us would die quickly if the digital fiat system did not work.

We look at the divergent paths of gold metal vs. gold paper. When gold paper becomes worthless, gold metal will have value because it holds inherent credibility. But given its very scarcity, that gold metal will need "another currency" to move its value into in order to transact purchases. In a dollar crisis in a digital world, there is really nothing to gain by "confiscating gold"....the primary concern should be to keep the "remnant of the dollar economy" stabile enough that "gold will flow back into it". Perhaps I am naive to believe that our leaders will understand this...if they don't then they are not only fools they are derivatives of fools. I like to hope that this might be one of the reasons why the very intellectually astute monetary mind of Mr. Greenspan decided to stay in power...I think he may be one of the few who understand the problems of foolishness (particularly when viewed in the magic mirror made of gold).

Poor old Solomon

JR said...

FOA on and why Greenspan gave way to Ben.B.:

FOA (08/24/01; 10:54:30MT - usagold.com msg#101)
Part 2

[...]

In all of this Alan Greenspan will say good by. A gentleman of his ability and stature will find no use for a position he cannot change from; a good general does not only retreat. Any lesser player can buy public and treasury debt for the purpose of constant hyper inflation; there is no policy strategy or gamesmanship in this.


http://www.usagold.com/goldtrail/archives/goldtrailfive.html

JR said...

One more:

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)
PIZZA,,,, Bronco's,,,,,, Tonne of Yellow Metal,,,, and USAGOLD: Ha Ha,,, a gold advocates dream come true (ssssmile)

[...]

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work these items don't need to really perform "dollar price movements" in the holders favor as much as they are present in the portfolio to act as insurance stickers.


======

FOA (10/15/01; 07:49:09MT - usagold.com msg#120)
Continuing from my last talk:

[...]

It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. ( It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, a decade ago, noone was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline to early; we had missed the mark.

The US could not physically save the dollar, then, with gold backing or the production and sale of real goods. In the course of all the previous dollar expansion, the gross liabilities of taking dollar asset conversion into anything real, and originated locally in the US, would have made us economic slaves to the world for decades. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing. This includes all the old Euro moneys and the Swiss and British etc.. Thus, in time, derivative use supplanted IMF protocols and SDR functions; sidestepping the whole basic structure of controls built upon the old dollar based system.

This derivative buildup has effectively removed US fed policy from being a controlling factor in dollar use and expansion. Gone were the days when the Fed could force everyone to disinflate with us. Today, if we slow our money printing, the outside liabilities would crush our banking and ,therefore, our economic way of life.

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity.
All as a means of protecting dollar originators; the US banking system.


http://www.usagold.com/goldtrail/

JR said...

If this paper gold market as the key part of the derivative hedge that props up the dollar doesn't click too clearly maybe check out Gold: The Ultimate Hedge Fund

In the early 90's, the dollar saw its match as the Euro was taking shape. To counter this threat it promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar system beyond its ability to serve as a real fiat money system. The whole dollar landscape become just a trading asset arena, evolving away from any meaningful currency use to trade for real goods. It can head in no other direction now because our local economy, the US economic base, cannot possibly service even a tiny fraction of the purchasing power currently held in dollars worldwide....

The dollar's structural support system, its very skeleton, its integrated hedging operation has failed. It is no longer a matter of time, it is only a matter of recognition....

Harvard's story is not part of the cause of the ongoing systemic collapse, but it is a visible symptom of the rot which has permeated the dollar's structural skeleton. Today's dollar is so brittle that it requires a hedging mega-structure so leveraged, so large, and so unstable that it must... MUST collapse under its own weight. Some of it will be replaced with titanium implants (monetized) in an effort to save the banks, much like AIG was "rescued". Other parts will be dumped into a market that wants nothing to do with them in an effort to extract pennies on the dollar. Net effect -- dollar disintegration.

A fiat system cannot exist without a functioning counterweight, and today's mountain of derivatives is failing at this task.

So where does gold fit into all of this?

Well, the gold market is part of this massive derivative complex that is currently counterbalancing and supporting the dollar...

freegoldtube said...

I wonder if we can go one step further and add a corollary to FOFOA's

'Today all money is credit, even the monetary base.'


How about a Coronary?

Jeff said...

Some thought that Greenspan was on the old Kitco board as the poster the Oracle, and that ANOTHER began posting as a way to communicate with him. Who knows?

Jeff said...

The St Louis Fed has added six daily gold prices in their FRED database. The prices are all from the LBMA.

http://news.research.stlouisfed.org/2012/07/6-daily-gold-prices-added-to-fred/

KnallGold said...

Why Gold and Treasuries Are Losing Safe Haven Status

http://finance.yahoo.com/blogs/breakout/why-gold-treasuries-losing-safe-haven-status-181046099.html

and the guy goes on to say we should better buy stocks of McDonalds!

KnallGold roflmaos ...

e_r said...

Blondie,

/* thereby depriving no one else of their own sovereignty. The holder of much excess value does always have the option of using that value to corner/control/monopolise goods others require, thereby effectively controlling those others; but by placing that value instead in gold they are not exercising that option. */

In essence, they are deferring their consumption of wealth/investment (wealth at risk) and the preservation of their wealth for the future time is guaranteed by the value everyone places on gold.

Aren't the massive hoarders of gold cornering/monopolizing the gold market, therefore control others by placing that value in gold, to exercise the controlling option in the future ?

After all, gold's highest use is in the widest distribution .

e_r said...

KindofBlue,

/* Capital... is always... at risk. */

Certainly. Looks like we have another MF Global in PFGBest. See here.

$220 million in customer segregation short fall.

Jeff said...

E_r,

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".

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!



FOFOA: The physical portion of the paper gold market is cornered, plain and simple. Too many dollars out there in the world, not enough physical at these prices. It is opinions like the one that believes physical supply is subservient to the popularity of paper GLD that enable the physical to flow out of the West at ridiculous prices."

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.

This flow will continue reversing back and forth forever, as it should be, because there is no such thing as a perfect equilibrium. And again, I want to draw your attention to the fact that I'm dealing only in the physical plane, ignoring the monetary plane. This is what Freegold does.

Edwardo said...

Greenspan gave way to The Bernank because The Maestro was as old as dirt.

jojo said...

Real good stuff. Thanks Edwardo, JR, Fonoah, and Jeff.

Very interesting.

e_r said...

Jeff,



Thank you for the excerpts.

Blondie: producer chose to store it in an asset no one else uses, thereby depriving no one else of their own sovereignty .

That statement does not square with reality. So are we to believe that the Saudi Kingdom (who own the entire oil wealth in the ground) are not depriving anybody of their sovereignty?

Aren't they impoverishing their citizens by subjecting them to dictatorship and tyranny? Why do you think they can continue to be dictators?

Wealth is tied to power, always.

Secondly, my key point was that a freely floating gold price at the international level does not immediately lead to or correlate with gold at its highest use and widest distribution.

While the spur-and-brake behavior of the economy under a freeegold paradigm balances international trade, it does not directly translate to gold at its widest distribution.

Jeff said...

Widest distribution doesn't mean everyone has gold. Only savers need gold; its a wealth consolidator. No wealth, no need.

FOFOA: Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

"Gold the wealth reserve" means A) only physical gold, and B) in its widest distribution… "which requires a much higher valuation than it has right now." "Correlation does not imply causation." Gold in its most valuable role correlates with it being in wide distribution, but it is not necessarily caused by that. Are you starting to see yet? Perhaps gold's functional change will cause its widest distribution, not the other way around.

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.

It would certainly be massively inflationary if we went from no debt to all of a sudden everyone borrowing at the same time. But in reality, there is someone working off his past debt whenever a new debtor goes into new debt. Of course old debtors and new ones don’t precisely offset each other, but that’s okay, because gold savings first float against the currency, and then they also float in their isolated circuit of choices made by savers based on the changing purchasing power of gold (not its currency price, but its purchasing power).

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.

Jeff said...

Think in terms of aggregate net consumers and producers.

FOFOA: If both public and private paper savings contribute to the expansion of malinvestment, net-consumption and systemic capital destruction, what is a net producer to do? If one wants to produce more capital than he consumes—for the good of the economy—yet he doesn't want to work for free, what is he to do? Or if one wants to produce more than she consumes—for the good of her retirement years and her family's future—what is she to do?

The monetary plane, the modern dollar-based global financial system, has failed these individuals. So what is left? The physical plane? If these individuals trade their earned marketplace credits in for physical capital without employing that capital in productive enterprise, then they are either consuming that capital (capital destruction) or denying other producers the use of it (hoarding, also destructive to the capital creation process). This is not only detrimental to society at large, but also to the future value of your savings that depends on new capital being plentiful in the marketplace when you deploy your savings in the future.

But of course there is one item, one physical asset, that stands out above all the rest. And this isn't some new discovery by FOFOA. Man discovered that this was gold's highest and best use thousands of years ago...

No, you want to choose something that both rises in price (rather than expanding in volume) and also something that does not infringe on others or economically impede the capital creation process that feeds value to your savings. And as an added bonus, if everyone chooses the same thing, it works extra well. This is called the focal point.

But for gold to fulfill this vital function in the capital creation process, it needs to trade in a fixed (or at least constrained) quantity that will allow its price to rise every time a new capital net-increase is contributed to the marketplace.

Michael dV said...

apologies if this has been answered (several) times but where do we get the 10k+ tonnes of ECB gold holdings? I know they use it in the quarterly MTM statement but I frequently numbers like these:
http://www.zerohedge.com/news/china-imports-more-gold-hong-kong-five-months-all-uk-combined-gold-holdings
bandied about...
thanks

Jeff said...

Here you go Michael:

http://www.ecb.int/press/pr/wfs/2012/html/fs120704.en.html

Jeff said...

FOFOA: The ECB is simply the core of the Eurosystem. Actually, there are two systems. The ESCB or the 'European System of Central Banks' which is comprised of all the CBs in the EU, even those not using the euro as their currency. And then there's the Eurosystem which is comprised of all the CBs using the euro, with the ECB at its operational core.

The ConFinStat, put out weekly with quarterly MTM revaluation, is the balance sheet of the whole Eurosystem which includes all of the NCBs using the euro. It is not the balance sheet of the ECB. If you'd like to see the ECB's balance sheet, you can find it in the Annual Report for the ESCB and the Eurosystem which is published every year at the end of the first quarter to be presented to the European Council, Parliament and Commission.

AdvocatusDiaboli said...

MdV,
"where do we get the 10k+ tonnes of ECB gold holdings"
you dont get that gold, when holding euro. Simple as that. Because gold is only good if you hold it in your hand.
By now probably everybody is aware that the ECB does not "own" that gold, since none of the memember states have it at anywhere near >90% in physical possesion/reach, but still looking at it at the balance sheet gives some people a warm feeling.
Greets, AD

jojo said...

Thanks AD. That cleared it all up for me. Quite a light bulb moment.

Greets!

Aquilus said...

I just want to make one observation regarding how much gold this and that CB have in stock.

This is one of the pieces of baggage that was very hard for me to let go of when I started reading FOFOA.

Why? Because having read all about the previous gold standards and having read up on Austrian econ, it was natural to me (before FOFOA) to think that I would exchange my $ for TREASURY/Government gold.

But if you read FO/FO/A, how much gold a CB has is irrelevant.

What matters is the ability to purchase gold in general with the currency in circulation. Not from the government necessarily! Most of it should come from private sources if gold is priced such that in that currency it makes sense for holders (such as AD :-) ) to sell it for cash.

Today we have 176000T of gold somewhere in the world, yet only about 2800T (including mining) of physical are coaxed out. Why? Obviously holders think that the price in currency is not right and gold does not come out of hiding.

But I digress a bit. The point is, it is not how much a CB has that matters since it should never be the CB that has to fill the role of gold seller of last resort.

You see, how much gold the state has is irrelevant. "Is gold freely available for purchase?" is the real question.

Blondie said...

e_r said:
”Aren't the massive hoarders of gold cornering/monopolizing the gold market, therefore control others by placing that value in gold, to exercise the controlling option in the future ?
After all, gold's highest use is in the widest distribution .“



Gold only becomes concentrated when it is not valued correctly, and by correctly I mean when it is not in a free market where all participants have a full understanding/feeling for gold’s crucial function in their market… if one party continually overvalues gold or another continually undervalues it (whether by ignorance or design), or gold is not otherwise free to move where it will, it will become concentrated.

If gold was widely and correctly understood and thus free to trade unencumbered, as any participant developed a large position and continued to buy the price would rise toward infinity the closer that participant got to a corner, meaning that they could never complete the corner.

Gold always moves to where it is valued most highly.

Remember, the key differences between gold and other goods are that it is not consumed, nor does it decay, so hoarding it is neither limited by time nor injurious to others. The other is that it is not subject to diminishing marginal utility.

Reread Another’s Thoughts on the cornering of gold (as partially quoted above by Jeff) and the mismatch in value between gold and oil… if gold were valued properly we can easily see where the motivation to find alternatives to oil will be found… and we see why Oil is in no hurry to initiate change in the current arrangement.

If, for example, Oil were to advance toward a corner of gold in a freegold market, as the value of gold rose so oil would become, gradually, subject to diminishing marginal utility itself(!), because the price would simply become to high, again gradually. We have just spent 50 odd years circumventing this process to enjoy the benefits of oil without the diminishing marginal utility. This current system will end for the simple reason that gold will not be offered for oil at the current value forever: we run out of cheap (aka sacrificial and/or ignorant) gold eventually. This occurred around 2001, beginning the current “bull market”.

The current gold bull cannot end while we still value oil. Not in REAL terms. We advance toward gold's real value, relentlessly. You can take that to the bank.



As long as gold trades unencumbered in a free market whose participants understand its function, gold naturally achieves its widest distribution as a function of its value and the accompanying effects of diminishing marginal utility on all other goods.

M said...

More on Warren Buffets delusions on gold. Gold or Exxon Mobile shares ?

http://freegoldobserver.blogspot.ca/2012/07/warren-buffet-and-his-gold-delusions.html

Blondie said...

e_r,

”my key point was that a freely floating gold price at the international level does not immediately lead to or correlate with gold at its highest use and widest distribution.
While the spur-and-brake behavior of the economy under a freeegold paradigm balances international trade, it does not directly translate to gold at its widest distribution.“


Gold’s widest distribution cannot be found with freegold. I think I addressed this in my last comment. Sorry if this is piecemeal, I'm just replying to comments as I read them.

Blondie said...

e_r,

Blondie: producer chose to store it in an asset no one else uses, thereby depriving no one else of their own sovereignty .

[e_r]: That statement does not square with reality. So are we to believe that the Saudi Kingdom (who own the entire oil wealth in the ground) are not depriving anybody of their sovereignty?

Aren't they impoverishing their citizens by subjecting them to dictatorship and tyranny? Why do you think they can continue to be dictators?

Wealth is tied to power, always.“


Whether or not a people collectively cede their sovereignty is beside my point. Do the people of SA enjoy a better life as a collective under the rule of the House of Saud, or when organised differently? Who am I (or you) to say? Whether or not the citizens are being impoverished or enriched is for them to decide, no?

Nowhere did I say I thought anyone could continue to be dictators. You are reading things into my words which simply are not there.

My point was that any sovereign entity, by placing their surplus value in gold (an otherwise useless good), has not impinged upon the sovereignty of any other sovereign entity, whereas they would be if they were to instead purchase any other good for which they had no greater utility. In fact the buying of any other good outside of gold for which one has no actual need except to exchange your surplus for is to artificially alter the stock, the demand and thereby the price of that good. This is impinging upon the rights of other sovereigns. This is not natural supply and demand. This sends arbitrary signals into the marketplace, and causes subsequent misallocation of capital.

The marketplace only functions properly for all participants when surplus value is channelled into its best store until such time as its owner finds better utility for it. Anything else distorts the entire pricing structure, destroying the security the otherwise stable and transparent market supplies all its participants. The Golden Rule. This is a Nash equilibrium.

How exactly individuals decide to collectivise their sovereignty, should they decide this would even be beneficial, is beside the point.

I think a freegold paradigm would act upon these choices from numerous angles, and the direction in which this change would naturally proceed is clear, if not counter-intuitive. Only by becoming its constituents becoming individually responsible (sovereign) does the human super-organism achieve full health. Functioning gold is the DNA.

Winters said...

Not particularly on topic but in the realm of interest:

I know everyone keeps their stash in their sock drawer - but here is an interesting article about the evolution of safe construction and cracking technologies that I came across

http://www.timhunkin.com/94_illegal_engineering.htm

Jeff said...

Of course AD ignores the fact that 10k tonnes of gold is not meant to be sold off. He creates a strawfreegold and beats it to death. The eurozone doesn't even run a sizable trade defecit, so it isn't much of a transgressor. USA on the other hand...

FOFOA: And the realization that I have personally come to is that the market wants to recapitalize the world, default some of the global debt and settle the rest of it after recapitalization. This is not a human-managed restructuring I am talking about. It is "the mountain coming down" via gravity. So in very rough terms I am looking for the worst transgressors to have to part with roughly half of their gold after revaluation. This will leave them with enough real capital to rebuild within the new, emergent meritocracy... the reluctant state of “Accidental Virtue”.

Does gold's "future price" need to suffice at a "gold window" in exchange for dollars? No. So does it need to relate to the $5T in existing monetary base? No. Does it need to credibly establish convertibility with all existing debt? Yes! And how much of the world's gold needs to establish this credibility? All of it? The stock... the flow? The answer is that the global stock doesn't matter. And present flow is irrelevant. What matters most is future flow and the existing stock of the biggest debtors.

Yes, the U.S. will ultimately mobilize its gold in defense of its failing transactional dollar, as I intimated in the post. But that will be at a much higher price of gold relative to "April 2011 constant dollars". So the gold will go a lot further than it would if we mobilized (physically sold) it today. But it will also be during a crash in the dollar relative to real necessities like food and oil. FOA wrote about this.

Jeff said...

FOFOA: If you want to create a currency where your CB gold reserves will NOT disappear, you simply let the price of gold float freely against your currency! This will make it so that anyone anywhere can always exchange their fiat for gold because the price will be such that the market supply always meets the market demand. No need to EVER tap into the official stockpile! The severed LINK!

An additional benefit (if you have a 15% gold reserve to start) is that as the price of gold rises, so does the value of your reserves sitting behind your currency! This acts as a levered balance which protects the value of your currency.

Allowing gold to float freely against fiat currency is the way to make fiat sustainable once again! Anyone, anywhere, will always be able to exit their fiat position for the durability and value of physical gold! Freegold! Just like pre-1933, only SUSTAINABLE!

Edwardo said...

Au Contraire, Charles. There's collateral and then there's physical.

http://www.oftwominds.com/blogjuly12/leverage7-12.html

costata said...

China's Banking System

The article linked below provides a very succinct outline of China's banking system. Some readers may find it instructive. There are three reasons why I'm interested in China as a banking case study. Firstly the Yuan is not fully convertible and secondly they operate a "soft peg" or what is sometimes called a "managed float".

These unusual features of their system diminish the "noise" from FOREX markets and hot money capital flows. It makes it a little easier to see the levers being moved and the effect of moving those levers.

For a stark contrast you could look at, say, Brazil where efforts to manage their currency and regulate their banking system are massively complicated by these two additional influences.

Thirdly China uses all of the tools that have been employed traditionally by CBs to regulate a banking system whereas other countries do not. For example they impose reserve ratio requirements on banks whereas several OECD countries had/have no formal reserve requirement ratios (RRR). BTW I suspect that some people confuse RRR with loan loss reserves perhaps due to the way they are presented on bank balance sheets.

The writer of this piece makes some predictions about the potential course of debt deflation in China which I don't endorse but overall I think this is a good primer on China's banking system and it touches on some important points about sterilizing trade surpluses and managing liquidity in a banking system.

http://www.macrobusiness.com.au/2012/07/the-mysterious-tools-of-chinese-monetary-policy/

Cheers

victorthecleaner said...

Europe with the next move (Financial Times):

European authorities are pressing Spain to inflict billions of euros of losses on small savers by wiping out certain types of bank debt before its financial institutions are recapitalised using eurozone rescue funds.

The bailout conditions for Spain’s banks would force any lender taking aid fully to write off their preferred shares and subordinated bonds, according to a draft memorandum of understanding seen by the Financial Times.

“Banks and their shareholders will take losses before state aid measures are granted and ensure loss absorption of equity and hybrid capital instruments to the full extent possible,” the document says.

Spanish banks have €67bn of subordinated and hybrid debt outstanding, according to Bank of Spain, much of which was sold to retail investors as savings products.

[...]

It seems debt is not safe.

El Pais has the draft document.

Victor

burningfiat said...

Spanish banks have €67bn of subordinated and hybrid debt outstanding, according to Bank of Spain, much of which was sold to retail investors as savings products.

LOL @ savings products

My saving products must have a density of 19.3 g/cm^3 and be shiny.

AdvocatusDiaboli said...

Just a quick update, on how the german government considers to solve the Euro problem. Published by the 100% government financed think tank DIW:
http://www.handelsblatt.com/politik/deutschland/diw-studie-reiche-sollen-fuer-krisenlaender-bluten/6862502.html

See, the major problem with the Euro is, that the germans are the most stupid f*cking morons ever walking on this planet: None of the PIIGFS would never ever even consider to seize their own citizens and have them work after they die, in order to have the other party with <60yrs. of retirement, in order to finance the germans, but the other way around, it appears to be normal, obligatory.

costata said...

AD,

Just a quick update, on how the german government considers to solve the Euro problem.

The Euro problem or the bank debt problem?

And:

..the germans are the most stupid f*cking morons ever walking on this planet..

Only the German blokes apparently. Ask any German woman. They'll tell you that. But if you press the question they will also tell you it applies to blokes everywhere.

AdvocatusDiaboli said...

costata,
if you go to the official Website of the DIW, you can read the complete study and see why and whom to "save".
Already given in the beginning: "In order to stabelize the neighouring countries and to prevent an inflationary tendency of the credit creation by the ECB..."

Bascially what I stated some month ago, but nobody wanted to acknowledge, calling me a conspiratist retard: You give money value, by stealing from the productive.

Further on in the study, they give you a really worthy look back in german history titleing it: "Historic ideals on wealth seizures in Germany".
This historic lecture is specially interesting for the freegoldes to learn from history on how you give a new currency "value": You dont need any gold at all!

Greets, AD

enough said...

LIE-BOR

PFG / MFG ....segregated customer assets "vaporized"

REGULATORY CAPTURE

confidence in the banking system and regulatory authority's interest in regulating is non existent.

I repeat my statement from a week ago........

IMHO, this is it boys and girls. Cash settlement right around the corner....

Any saver that has amassed such fortune to own lots of gold, worries and understands about current state of play as he/she probably has a brain or advisors that do.

Who in their right mind would continue to hold either unallocated or allocated gold at a bullion bank? answer, very few......

"time has come today"

http://www.youtube.com/watch?v=uHfB63ln1Ig

Aquilus said...

So your point is that complete failure will be endlessly repeated even though the link between the state and money has been broken and we witness that in front of our eyes.

Have you seen the central bank's actions? Not politician's words. The countries don't have the monetary power today and it shows. But that does not prevent them putting on a grand show for you you.
The politicians are great at it, and you run here every time with their latest showing that is irrelevant for the crisis as a whole.

Aquilus said...

The above rant was for "greets" not for enough.

AdvocatusDiaboli said...

"But that does not prevent them putting on a grand show for you."
You call it a sideshow, just by those dumb politians.... I guess the germans felt that "sideshow" quite intense the last couple of times in less than the last 100yrs. But again, if you dont wanna read and ignore that piece or history, stay captured in your la-la-land of arrogancy.

Aquilus said...

All you've done for months is to present the obvious: "the coercive power of the government is remarkable". Of course it is.And it will get much more coercive before the crisis is over. Much more and in different ways than you and I imagine.

So how does that change the realistic way to solve this GLOBAL MONETARY CRISIS? Your vision is that of governments enslaving and forcing people forever. It is you who ignore history.

No government has EVER stayed in power for long when hated by a majority of its people. Not one.

So sure, tell me how stupid Germans are, but you have not given a logical solution out of this global crisis. If you have one, I'm listening. Otherwise, greets!

Jeff said...

Think the Giants have had enough of vaporizing account balances, suicidal thieving futures brokers and untrustworthy counterparites, enough? Maybe.

FOFOA: It is very difficult for shrimps to think like Giants. Usually we just follow in their footsteps. But there's something very important that you really REALLY need to understand—right now—about people with really big money. And that is that they are much quicker to panic than we are. Big money is nervous money. Always. They live much closer to the panic end of the panic-calm spectrum. While we shrimps sleep soundly, big money wakes up in the middle of the night with cold sweats.

We talk about making a return on our money. But the truly wealthy are first and foremost concerned with preserving their capital. Earning a return is a secondary concern. Big money stays invested mainly because they are not losing money. How many fund managers beat the index in the long term? Nary a one. Yet their clients stay "invested" as long as (at least) they aren't losing money.

MF Global and rehypothecation will move these people ever closer to the panic button. It merely requires time for the implications to sink in. Apparently they are not invested in the location they think they are. Their wealth is not parked where they think it is parked. Think of it like a valet. What if you took your claim ticket and tried to fetch the car yourself? What if you found an empty space where your Bentley was supposed to be parked?

was emailing with a friend yesterday about this whole MF Global thing, and he had a great analogy for this. Compare these big money folks to the average guy who rides the bus. You miss a bus, so what? It's inconvenient but another bus will come. It takes a long time to sink in that another bus isn't coming. It's not until there is such a big crowd waiting at the bus stop for the next bus that people start thinking "even if a bus comes there are too many people to fit on one bus." In that mindset the surest way to cause a riot is to send one bus i.e., not enough buses. You have to fight to get to the front of the queue. This is a bank run mentality.

And this is a key difference between the average guy and the big money. Big money isn't used to being kept waiting. Big money owns the "bus company". They know the buses aren't going to run before the little guy. They panic early.

Jeff said...

At least those futures brokers aren't burdened with undue regulation; Ayn Rand would love it, until her account went missing.

ForLiberty said...

FOFOA, thank you for your lengthy response. Your point was too diluted again and I can't argue one anything particular. I still think that selling paper gold and selling paper tomatoes is the same thing, no difference, no difference.

More questions for you though (crossing fingers they are important enough to get an answer)

1. if all supply of paper gold could disapear overnight, do you think you would have the same overall demand for gold? In other words, don't you think that some of the demand is for PAPER GOLD ONLY! Some people just want to speculate and would never get dirty with actual delivery.

2. If the bullion banks provide paper gold knowing that there is trouble ahead - why would they voluntarily sign up for losses and trouble? I believe everyone acts of self interest, the people, the government, the bullion banks, and those interests are all different. Don't you? What is the motive of a BB to provide paper gold if it expects that to bring trouble.

Nickelsaver said...

Aquilus,

AD's 'disdain for' government really reveals his 'hope for' government. Which is why he cannot accept or even comprehend a monetary system which castrates it.

Edwardo said...

http://news.yahoo.com/hoard-gold-coins-found-israel-crusades-114326841.html

AdvocatusDiaboli said...

A,
"So how does that change the realistic way to solve this GLOBAL MONETARY CRISIS?"
How about that first: Try to see the world like it is, not like you want it to be?
Sure, those political interference does not solve anything at all. On the other hand: Does anybody from TPTB have serious interest to solve anything at all anyway in the first place? That is the one and only question and the answer is a simple NO!!!1111
Do you seriously think, that the government has any interest in your "tokens"? NO!!!111 They want your slave labor to stay in power. They will do find a way to screw the stupid working drones. Do you think the financial sector has any interest in a (FG) balance? NO!!!111 Because only due to an unbalance they earn money. So whatever threats those two interests you can be 100% sure, that the two of them will prevent it.
Why I still hold gold anyway? I better throw it to the ocean or die with it, than handing my precious over to the crooks, simple as that. And therefore I suggest also to diversify into other stuff.
Greets, AD

P.S. And stop pointing out to some economists, who supposed to know it all (e.g. like BH did about Mundell), they dont, thats why they are economists and dont work, why not just call them useless eaters.

enough said...

Jeff,

If you are a S, M, L, XL, or XXL sized giant......

You dont need to be one to know that these guys are getting their gold out of bullion bank unallocated and allocated storage....

I'm sure they can afford to secure it themselves......

Edwardo said...

Interesting, wouldn't you say?

http://thechronicleherald.ca/opinion/109531-nova-scotia-open-for-what-kind-of-business

enough said...

The question is....

Do the BB's have the physical gold they contracted to store or not?

They had better have alot more than 1% number banded about because that's gonna run dry any day now.....

Jeff said...

Are you saying there is a classic bank run going on, enough? ;)

FOFOA: We cannot know the actual state of the BBs' books from what is visible for analysis. So how fast could all of the physical gold reserves be spoken for? As frightening as it sounds, worst case, they may already be. When I think about Jim Rickards' second-hand account combined with the fact that someone is draining GLD, it seems like we could be in the final stage of "extend and pretend that there is not a run on the bullion bank reserves."

We shrimps should have gold available for purchase until some small or medium-sized Giant is denied allocated bullion. Several people asked after my last post, "What if all the APs won't play ball and redeem your basket?" My answer was, "Well, then it is game over for Bullion Banking!" Gold is going into hiding. When a small Giant runs out of one of the Bullion Bank's front door announcing "the bank is out of gold," as Fekete puts it, all offers to sell gold against irredeemable paper currency will be abruptly and simultaneously withdrawn.

Jeff said...

And all those paper gold owner friends of Forliberty will get some exposure to the price of...paper, not gold.

More from FOA:

The "virtual wealth" in gold, saved over years by patient investors, will also be priced to market in this process.

Never mind that during the Dow years paper gold markets could not work in parallel with all the other asset gains; it couldn't. Hard money players, trying to somehow play the Dow's game, never caught on to what was happening. Instead of buying "virtual wealth" by saving real gold; they bought leveraged bets that gold would be priced correctly during the "paper asset" years.

Obviously, this "trade" failed hard money players as the waves of value from other paper gains and derivatives leverage were employed against their every long bet on gold. Not only that; the "virtual wealth" in gold was never opened for them with the super price inflation they all thought was coming during that era!

Now that the paper game is about to stop for the Dow, it will also cut off the leverage of gold bets. Just as the real game begins.

The reason for this is that our massive, decades-long gains in our stock markets did not bankrupt the leverage in the money system. Whereas any massive rise in physical gold values cannot be priced into "derivative gold" without crashing the system.

Remember; in political inflations, money is printed to save the assets as they are currently priced; not create new loses by liquefying the leverage that's countering your play!

This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed.

JR said...

Hi ForLiberty,

And idea to simmer on with regard to point #2 is Moral Hazard

In economic theory, a moral hazard is a situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk... A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party isolated from risk behaves differently from how it would if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.

===========

FOFOA: GLD Talk Continued

A/FOA said the ECB/BIS strategy was to “expand and support” the dollar paper gold market so the dollar would eventually “bankrupt itself” just to keep the gold market going and stay in the game with the euro.

FOA (08/13/01; 07:24:30MT - usagold.com msg#96)

A very large part of that war strategy, employed by the ECB/BIS, was to let the dollar / IMF faction hang themselves by expanding and supporting the whole arena of this dollar paper gold market [the ECB/BIS is supporting and expanding paper gold as a strategy]. Inflating the gold market place with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.
[...]

So it seems that as the war switched from dollar v. gold to dollar v. euro, the euro side helped make the dollar gold market TBTF. But with a rising physical gold price/demand, the dollar paper gold market has to keep up because it’s TBTF now. Too many of those “gold” FDIC stickers out there! If those stickers fail, the dollar loses. So the “gold” market is TBTF. Remember this from FOA?

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because worldwide dollar expansion reached its "non-hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work these items don't need to really perform "dollar price movements" in the holders favor as much as they are present in the portfolio to act as insurance stickers.
[...]

So the paper gold of the bullion banks is now TBTF.

JR said...

From Another's first post at the Gold Trail:

Date: Sun Oct 05 1997 21:29
ANOTHER ( THOUGHTS! ) ID#60253:

Everyone knows where we have been. Let's see where we are going![...]

People wondered how the physical gold market could be "cornered" when it's currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up.[...]

To avoid a spiking oil price the CBs first freed up the publics gold thru the issuance of various types of "paper future gold". As that selling dried up they did the only thing they could, become primary suppliers


====


Date: Tue Oct 07 1997 22:37
ANOTHER (THOUGHTS!) ID#60253:[...]

All this year physical gold volume kept drying up as paper short volume exploded. But,each time before a squeeze started to run the price the CBs would sell thru LBMA . You see, when paper trading ( of anything ) volume dries up it's a bearish sign but when real physical gold volume drops it's bullish! Thats because gold is being cornered on a scale never seen in history. LBMA is doing it's best to show real volume exists! The problem is, "if the CBs don't expand their roll as "primary suppliers" LBMA will implode and in the process create the greatest bull market in oil and gold the world has ever seen.


=======

Date: Thu Oct 09 1997 19:00
ANOTHER ( THOUGHTS! ) ID#60253:[...]

Gold is cornered. Plain and simple. No complicated theories, no options problems. The commodity value of gold was forced so low in paper currency terms that all of the new mined gold, going out some 10 years is spoken for. Between the third world buying physical gold and the jewelry industry ( same people buying ) there is none left for the oil states! They do value oil in terms of gold, but not IN the paper currency price of gold! How much is gold worth in terms of oil value? Just stop supplying gold to them in ultra cheep US$ terms and you will find out by watching the currency price of oil! In any event, LBMA has traded so much paper/oil/gold that any rise in the currency price of gold will implode them. The CBs must become the full primary suppliers of gold or the system as we know it is done.

JR said...

Hi ForLiberty,

Here is a thought with regard to point # 1, or " if all supply of paper gold could disapear overnight, do you think you would have the same overall demand for gold?"

The demand for that paper gold as an investment would wane, indeed.

But what of the demand for a stable store of wealth? Have you thought about the extra demand that might arise?

Currently, that demand for a stable storage medium has nowhere to go in today's pedal-to-the-metal consumption binge thrill ride toward economic collapse that is the $IMFS. The $IMFS's faulty storage mediim - $ debt - certainly dissuades savings, yes? Why save I save if it won't be saved, if the fruits of my current production won't be available in the future when I need them?

FOFOA: How Can We Possibly Calculate the Future Value of Gold?

Let's suppose that I am similar to Bill Gates, only much more necessary to the human race. Yes, I have moral charity obligations that come with my significant wealth, but do I not also have the right to store some of it for future use? Should it be illegal for me to store my productive effort so that my descendants could benefit from it for generations to come? If you make such a thing illegal or impossible I will likely not produce as much of what everyone wants and needs! Is this a good economic strategy? Or is it an economically limiting (perhaps even deflationary) strategy spawned only by envy?

You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people. This is perfectly understandable. But does this mean that I should forfeit the fruits of my labor after some point in time or at some maximum? Of course not! That would be socialist nonsense. As long as my storage of wealth medium does not infringe on anyone else's industrial growth, then my accumulation actually contributes to economic expansion.

The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless. The only thing that limits its potential is a faulty storage medium, which limits the collective confidence in its ability to preserve wealth over time.

With a faulty storage medium I will not be as eager to store the fruits of my labor for deployment so far into the future. For I will recognize that at some point in time the medium will fail and my efforts will have been for naught. So I will be more likely to "spend" my considerable wealth in the here and now. Not right now, but you know what I mean. I'll probably build a 70,000 sq. ft. high tech castle on a lake for me and my wife and things like that.

And an interesting side effect of spending my considerable wealth in the here and now is that it not only reduces the purchasing power of the rest of my wealth, but also everyone else's who holds a similar medium as me. In aggregate, a faulty storage medium is self-limiting.

So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

I say this is the rough limit because it represents the emergency exit from said flawed medium.

costata said...

Axel Merk asks:

..has anyone noticed that, of the major currencies, the euro has had the highest correlation to the price of gold, not the so-called commodity currencies?

http://www.merkfunds.com/merk-perspective/insights/2012-07-11.html?registered=yes

enough said...

Jeff,

I am saying that I would be SHOCKED, SHOCKED, if there was not....

Even drugged up hippy descendants with inherited wealth now realize that there is no way one can trust the BB's, regulators, exchanges.

The burden of proof is now on those that say a particular mkt is NOT manipulated. Tin foil hat crowd are now those that think everything is on the up and up.

You dont have to dig deep into alt. media to get a good dose of in your face systemic fraud.

Paper gold acts like toilet paper even with China's astonishing import figures.

If news came out that China increased it's copper imports or oil by 15 fold in Q1, what would those "commodities" do?

Motley Fool said...

FOFOA is quoted on page 25 of this report...dunno if he is quoted again...interesting report either way.

http://www.zerohedge.com/news/gold-report-2012-erstes-comprehensive-summary-gold-space-and-where-yellow-metal-going

fonoah said...

Jeff said "At least those futures brokers aren't burdened with undue regulation; Ayn Rand would love it, until her account went missing".

Rand believed in taking personal responsibilty, so if she lost her account with MFG (very unlikely, as she would have been 100% invested in physical gold anyway) her first response would have been "How/why did I screw up that one?" - not "we need others to fix these problems to protect me in the future".

In We The Living, Kira was just about to cash in all her chips when her "account went missing". Read the book to find out how an Objectivist views these sorts of outcomes.

FoNoah

enough said...

I'm sure that this huge physical gold "flow" being hoovered up by China, Turkey etc. is coming from many an unwitting allocated account in the west. China alone is IMPORTING nearly 100 tonnes per month. Fagedabout unallocated acct owners....there's nothing in the cookie jar for them............

Jeff said...

Hello fonoah,

I don't see the victim of a swindle as automatically being someone who lacks personal responsibility. Taken to an extreme, that view would seem to invalidate all contracts.

I've read some of her writing, and I've read criticism of her also. I don't see her as a hypocrite because she took social security and medicare payments; no man or Objectivist is an island, much as they might wish to be. I'll pass on reading that book, though.

Motley Fool said...

Hi fonoah

Here is something you need to accept, and it was a big personal stumbling block in my own understanding of FG.., that even though she, you and I may be willing to bite that bullet and accept responsibility, many others would not. I estimate more than half the people at present, easily.

One needs to factor that reality into understanding what form a solution might take.

TF

Aquilus said...

AD,

It's nice to read you when you write without your usual extra rage.

Let me focus on the premises. Your vision of the world never ceases to amaze me. You have the "whip and enslave" mentality, the SuperOrganism killer one.

That and the unshakable belief that more tyranny will win the day.

And you also seem to believe that oppression IN THE LONG RUN, and the in face of currency collapse is still the easy way out for ALL governments to take. That ALL governments see more benefit in taxing diminishing productivity (because of coercion) a lot, instead of taxing increasing productivity (entrepreneurship set free - as in case of freegold).

I am in agreement that before currency collapse, government coercion will intensify drastically.

But I do not see in the best interest of Governments or elites (as their wealth is repriced) to choose coercion over growing trade in a freegold environment.

No government has ever survived without the support of the population (more than short periods). Not one.

Like I said, premises. Short and long term premises. Mine and yours are different. I believe that is where the root of our disagreement lies.

Greets,
Aquilus

P.S. I'm glad to see you read my Tweets also since you got my motto from there in your comment. Cheers!

Indenture said...

Picosecond Programmable Laser

fonoah said...

Hi Jeff,

Someone recently canvassed whether most of the regular commenters around here were of a religious persuasion. At the time I thought “Hmm . . . not sure, but I bet most are followers of Ayn Rand”. After all Fekete’s first lecture is a “Hymn to Gold by Ayn Rand”, and I know that Fofoa and Blondie have certainly quoted her (in a positive light) on a few occasions. I know Objectivism and Freegold both resonate very deeply for me – and I suspect for a good few others around here too . . . .

As a relative newbie, you are one of the regular commenters I respect and admire (and have learned a great deal from – thanks!), so I was taken by surprise when you seemed to take a swipe at Rand somewhat from left field it seemed. I guess I should have just asked “Geez Jeff – what’s your beef with Ayn? I’m surprised you feel that way?”

My friends all tell me that my downfall is I’ve never been able to get past Ayn Rand since I discovered her over 40 years ago. Maybe so - but in a very strange way I feel that FG now brings everything that I have believed in intellectually over all these years together in a very real and tangible way.

The Grand Unification Theory = Objectivism + Freegold

Regards - FoNoah

Edwardo said...

Enough wrote,

"If news came out that China increased it's copper imports or oil by 15 fold in Q1, what would those "commodities" do?"

They'd have already done it. And so would the paper proxies, (i.e. shares) for those commodities. And though you didn't put it the way I'm about to, I agree with you that the burden of proof is now on those who think otherwise to demonstrate that markets are not egregiously manipulated, managed and mis-priced, and that banking and so called investment banks and brokerages are now routinely the territory of massive control fraud even as the farces of law and order cast a blind eye on the monetary mayhem.

As for the hippie descendant's awareness of the aforesaid dreadful condition of markets, and the resulting precariousness of their holdings-do they, in fact, still hold them- I'm not nearly as confident as you that these folks are are on top of the situation and acting accordingly. We shall see.

victorthecleaner said...

Aquilus,

No government has ever survived without the support of the population (more than short periods). Not one.

Make that about 75 years for the Soviet Union. I don't want to support AD's ideas here, but that would be too long for me, personally.

Victor

fonoah said...

Hello MF - I was surprised (and honoured) you responded to my comment. I am very new to the world of high finance and Central Banking etc (I'm an Engineer). So I take much more from here than I can possibly give back.

You are one of the wise and "deep" guys around here - so I shall ponder your words carefully. "Think long and hard" as they say

Thanks - FoNoah

Aquilus said...

Victor,

Yes, you got me for not qualifying my statement enough. You could have gotten me with North Korea and Cuba as well, while we're at it.

Ok, how about, no government that recognizes private ownership/property? Better?

Aquilus said...

Here's an interview with Ronald Stoeferle
(the guy from Erste that publishes The Gold Report 2012 - In gold we trust ).

Motley Fool mentioned that FOFOA is cited on page 25 of this year report (bottom, left).

Many parts of this interview also have a lot of FOFOA ideas/wording in them:


The Seeds For An Even Bigger Crisis Have Been Sown

victorthecleaner said...

Aquilus,

again, I don't want to do AD's work here, but still

Ok, how about, no government that recognizes private ownership/property? Better?

This can also change more quickly than you would wish. Think of the kulaks in the 1920s.

I do think that the world would benefit if someone pressed the red button rather soon. The more the real economy deteriorates, the less predictable the outcome.

Victor

Aquilus said...

@Victor

Yes, the kulaks did not enjoy their property much after the Soviet revolution. By the end of the 20s:


Stalin declared:

In order to oust the 'kulaks' as a class, the resistance of this class must be smashed in open battle and it must be deprived of the productive sources of its existence and development... That is a turn towards the policy of eliminating the kulaks as a class.[11] The Communist party agreed to the use of force in the collectivization and dekulakization efforts. They intended to eliminate the kulaks as a class by the following: death sentence, labor settlements (not to be confused with labor camps, although the former were also managed by the GULAG); or deportation "out of regions of total collectivization of the agriculture". Tens of thousands of kulaks were executed, property was expropriated to form collective farms, and many families were deported to unpopulated areas of Siberia and Soviet Central Asia.


The state sure can be coercive... Hopefully there's no need to reach these levels in this crisis. There is a more straight forward solution after all. As to when, and who pushes the red button, I confess I have only poor guesses.

e_r said...

Costata,

Excellent link from Axel Merk.

Specifically I liked:

In our analysis, currencies of countries with a current account deficit are more vulnerable, because such countries are dependent on inflows from foreigners to finance the current account.

FOFOA: The USG may be a dealer in the monetary plane, but it is most definitely a sketchy junkie in the physical plane. The USG thinks (and truly believes) that the key to rejuvenating the US economy is trashing the dollar as a short cut to increasing exports (reducing the trade deficit). But what it can't see (nor anyone that focuses solely on the monetary plane for adjustment) is that the huge trade deficit the USG wants to quit is actually its own heroin fix. This is a deadly combo for the US dollar.

While the debt crisis weighs heavily on the borrowing costs in the Eurozone, the euro itself has held on remarkably well; we have our doubts that the U.S. dollar would has benign a ride should investors shun U.S. bonds.

Add Axel Merk to the list of 'getting it alright' ;)

AdvocatusDiaboli said...

A,
yes you're right we have total different views on "what is government".
How about that one: Every nation gets the government it deserves.
Hopefully at least everybody can sign that one.

Here's are funny ones from Dr.Angela Merkel:
"You can not expect that things said before election are still valid after the election."
http://www.youtube.com/watch?v=vJUlAEXm6O8

"The german nation can not expect that there is a fundamental right for democracy for ever."
http://www.youtube.com/watch?v=ANz6DXT6KE4

Or how about that one from Mr.Schäuble:
"The german nation had never any right of souverenity after 1945."
http://www.youtube.com/watch?v=iKd4lpNR3os

If somebody likes more the german parlament opposition, those even explicitly state their hatred against the german nation. Mr.Trittin: "Germany fates away each day more, and I consider that simply fantastic. (Allgemeinen Sonntagszeitung 02.01.2005)"

Guess what: Those clowns will be (re)elected. As I said above, every nation gets the government it deserves.
Greets, AD

costata said...

e_r,

Glad you appreciated the paper. I always read Axel Merk's public releases. He produces some very well reasoned analysis IMHO.

Cheers

MF and Aquilus,

I would draw your attention to the table on page 52 of the Erste report. (Thanks for the link BTW Motley Fool.)

The writer focuses on the demand from Asia but I think he is missing a far more important signal. The surge in buying from Europe is coming from a population with 10x the per capita purchasing power of India and China.

Anecdotal evidence from AD and others here who reside in Europe indicates that only a tiny percentage of the average citizens in their countries are buying physical gold. This suggests a lot of unused "firepower".

I continue to watch the Euro gold price as a belwether for a shift in Western attitudes to gold.

Anand Srivastava said...

These traders using algorithms to determine future price of gold don't realize the basic fact that the price of gold is actually the price of paper gold and thus there will have to be a discontinuity, at the point when the price of physical gold breaks from the price of paper gold.

Then there will be no physical gold in the market and the paper gold will suddenly lose all value. After some time Gold will get revalued by market forces at a much higher value. So no algorithm can predict the price after revaluation.

We can only guess the future price, and it will depend on the actual political setup of the world.

Some comments on Ronald Stoeferle's interview.

1) "One ounce of gold currently buys 15 barrels of oil. This is exactly the long-term median, and it means that gold is fairly valued in relation to oil."
This misses the basic concept that gold gains in value with technology, while oil loses value with technology. A long term median cannot be a fair value. Also when we know that the price of gold is manipulated.

2) "Every gramme of gold that is held for a variety of reasons is for sale at a certain price."
This is right for all commodities except gold, and to some extent silver. In this respect gold and silver are like antiques and works of art. They are held as a store of value not a tradeable commodity. It will not be sold even for millions of dollar per ounce. Actually a higher price will require less gold to be sold and actually reduce the flow in terms of weight.
The flow can only increase when interest rates increase and it becomes profitable to deploy that stored value. Even then the flow will not use a very big part of the worlds gold stock.

Gold's price will not rise to coax gold out of giants but so that the flow can remonetize the world. And the price will match the flow to do precisely that.

AdvocatusDiaboli said...

"Every gramme of gold that is held for a variety of reasons is for sale at a certain price."
I'm not so sure about that one, especially the word "every". Does the reference to "price" means "priced in legal tender fiat currency"?
Should it not rather read: "some more gramm will be available the more the price rises"?
I can only speak for myself, but I would not exchange my stash completely to fiat even for $10000000000000. Why should I, maybe just to diversify a very little bit more into other commodities or stocks, but not for holding fiat? I do have everything I want and need right now, so why exchange?
Greets, AD

Motley Fool said...

costata

Sure. I've only managed to make it to page 45 myself thus far, hope to have a chance to read the rest of it today.

Some interesting information, and some interesting similar ideas. Also some flawed ones..such as his belief that mine supply does not matter ( a central idea for the report).

While this may be true under FreeGold, under the current paradigm we know the importance of mine supply, given the fact that it must needs service the bulk of demand, since strong hands are not supplying at present prices.

Thus I strongly disagree with his hypothesis that gold being above production cost is not essential at present, and I see evidence all around to back up the idea that price of gold is managed with production cost in mind.

TF

Bron Suchecki said...

Where you get this idea that "strong hands are not supplying at present prices"?

There is no public data source I know of that gives us any indication how much of the investors stocks are turned over.

The Perth Mint Depository has a high proportion of buy and hold customers and I would classify them as strong hands but we still see some turnover.

Motley Fool said...

Bron

I should learn to be more precise in my wording, haha.

It must be true that some strong hands are suppliers at present, else the dynamics of the market does not add up. The available mine supply and scrap supply does not equal total demand ( as far as is known given how opaque that is ).

Perhaps you would be willing to concede that gold seems to be flowing into ever stronger hands over time, and supply from this source is not the bulk of supply.

My meaning was rather that mining supply is essential in satisfying the largest part of current observable demand, which is curious given the 60 year supply overhang, unless one assumes that current holders do not think the price sufficient to sell (or see no better alternative even with a higher price).

Apologies for my hyperbolic language. :)

TF

Motley Fool said...

Hi friend of noah ;)

The following may assist in your considerations.

Being that an appeal to integrity, or justice or your view of what is right will not convince these debtors to change their ways. And while the paradigm shift to Freegold will temper the numbers in that camp, a large part of the population will always cry for “someone to do something” when bad things happen that affect them. Moral judgment is irrelevant. This is the reality we have to work with.

TF

Jack Tarragon said...

Way off topic here, but the closer we get to Freegold, the more I contemplate storage issues related to it.


So, let's say I have twenty ounces of Freegold. That will be a considerable amount of savings. Now, where do I store them? The bank? At home in a safe? Hidden in my garden or elsewhere? Do we really want to trust banks and their safety deposit boxes?

And when it comes time to make a big purchase and liquidate the gold for fiat, do I just drive my life savings to the bank to make the transfer? What if I am robbed or carjacked on the way?

There are some logistical issues related to Freegold that are worth examining.

Will private vault companies go into business? Will I then pay to store and insure the Freegold? Would they then arrange to transfer the Freegold to the bank for me?

Anyone?

How exactly do I keep my Freegold safe?

Alien said...

Which "Freegold", Jack Taragon?

Aaron said...

Hi Jack-

Where to store your 20 ounces of gold is a very personal decision. If you're looking for the "best" answer, there really isn't one. For me it comes down to two things:

1) Am I able to readily access my gold in a short period of time with minimal complication?

Yes? ok check.

2) Do I feel less comfortable storing it in place X as opposed to place Y?

Yes? Ok, move it to somewhere that you are more comfortable with.

Do you live in the boonies? Backyard is probably safe enough.

Do you live in the Bronx? Ok, backyard might not be the best choice.

Is your Safe Deposit box located at CitiBank or is it at your local credit union?

Use your best judgement -- you will find your answer.

--Aaron

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