Thursday, August 9, 2012

Macrofreegold'nomics



"At times, when all the world's asleep, the questions run so deep, for such a simple man..."

We have had some discussion about international macroeconomics under a future Freegold system in the last two threads. And yesterday JR reposted an old comment of mine on the subject. As a companion piece to that comment, and also to add a new dimension to the discussion, I'd like to introduce a couple of new concepts. Let's call the first one "usable versus useless wealth" and the second concept we'll call "organic versus inorganic savings".

Usable versus Useless Wealth

For "usable" and "useless" wealth I'm calling everything in the physical plane except gold "usable wealth." "Useless wealth" would therefore be gold and paper/electronic savings. So obviously I am referring to the economic or living standard utility of something in the present. Gold would be the physical plane representation of "useless wealth" and paper/electronic savings would be monetary plane "useless wealth" because they both have little or no economic or standard of living utility to the saver. All they do is store purchasing power (more or less) with the promise of potential future purchasing power.

Let's look at an example. Costata wrote: "In other words I can't find an example of a country becoming rich via the monetary plane and then becoming wealthy in the physical plane."

In terms of "becoming wealthy" in the physical plane, I think we should distinguish between "usable" wealth (goods and services) and "useless" physical wealth (gold). One is usable right now for either production or consumption and the other is not.

It seems that the US became wealthy in "usable" wealth via the monetary plane exorbitant privilege granted by the ROW in 1922. It did have a period in the middle where it acquired a bunch of "useless" wealth (gold) while it provided the world with "usable" wealth in return, but lately that trend has reversed. And by lately, I mean the past half century.

So then the question would be how do you define "becoming wealthy"? Do you define it by having the most usable (in the present) wealth, or by foregoing usable wealth now in order to store useless (in the present) wealth for the future.

Here's one more example which JR sent me. It was published during the Great Depression on July 11, 1931 in the Magazine of Wall Street:

Gold Does Not Make Prosperity To men, as to nations, the possession of gold is a symbol of prosperity. Let's see. The United States has more gold than it ever had-and less prosperity. The banks are bursting with gold and barely meeting their dividends. Our great corporations have immense reserves of gold and their business is dwindling. All the nations are sending gold to us and our business with them is fading away. The truth is that large accumulations of gold are an inverse measure of prosperity.

Probably four-fifths of the gold in the Federal Reserve banks is idle - and nobody ever contended that idleness makes for prosperity. The fact is that except as it is used as the basis of bank credit, gold has no relation to prosperity. But when there is no business, there is no credit and gold is useless. In other words, business gives gold a utility value. Gold is dead until vitalized by commerce.

The piling up of gold in any country does not signify that it is prosperous; it merely shows that the country is giving other countries more goods than it receives; that it is parting with more usable wealth than it is getting back.

Today the United States is receiving gold and going without goods it would like to have. And because it is receiving gold it is selling less than it would like to. When we are prosperous, which means that credit is being freely extended, we need gold because it is the one commodity that mankind has agreed to accept on balance in place of the goods it would rather have. It is merely a balancing item in the offsetting of credits against debits. It might be epigrammatically said that prosperity "makes" gold and "unmakes" it instead of gold making or unmaking prosperity.

Okay, so that's the "usable versus useless" concept. You can disagree with my semantics if you want because I'm only trying to get the concept across.

Organic versus Inorganic Savings

What I'd like to call "organic savings" is when economic actors net-produce (produce more than they consume). "Inorganic savings" is when the monetary authority in a currency zone increases its reserves. And here reserves mean gold or foreign currency reserves. Assets denominated in a CB's own currency are not reserves. (I wrote more about the distinction of reserves in this post.)

For this concept I would like to draw your attention to a statement I've made many times that any gold inside a currency zone, public or private, is a viable reserve. That is, any gold inside a zone is "savings". But now I'd like to distinguish public and private gold and we'll call the private gold "organic savings" and the public gold (held by the CB or the government) "inorganic savings".

This concept works for paper savings as well as for gold savings, but we'll be looking at the future Freegold BOP machinations from a physical perspective which will exclude paper savings. So "organic physical savings" would be gold in private hands which is the product of an economic actor producing more than she consumes and purchasing "useless physical wealth" (gold) with the excess currency left over from "underconsuming".

"Inorganic physical savings" on the other hand would be gold purchased by the CB by printing currency. "Inorganic paper savings" would be like the PBoC purchasing US Treasuries by printing yuan. "But wait" you say, "the PBoC purchases Treasuries with US dollars it received through trade." This is true, but it also printed yuan in exchange for those dollars regardless of your perspective on the mechanism driving that transaction. You see, if the Chinese exporter had bought those Treasuries for his own savings, no yuan would have been printed. That would have been "organic paper saving". But by exchanging printed yuan for the dollars the PBoC is making those savings "inorganic" and at the same time it is managing the exchange rate of its currency. This equates to the PBoC printing yuan to buy gold as a currency management tool in Freegold.

The reason I am making this distinction is that I plan to show you that, in Freegold, the CB's inorganic "saving" and "dishoarding" actions will generally be the opposite of (or countercyclical to) the net-actions of organic savers in its currency zone when it manages its currency. Freegold will be much more smooth and balanced (than the $IMFS) even without CB interference, but we all know that in the real world CBs gotta do something to justify their existence, right? So I hope to show that their natural response will actually smooth cycles out even more than they would be without the CBs. And that's with everyone acting in their own self-interest.

Freegold BOP

The monetary plane is merely a reflection of the unsettled portion of the physical plane. It is simply remembered debt; it reflects uncompleted physical-plane trade. It, the "m-plane", reflects open transactions, those not yet extinguished. And the BOP, or Balance of Payments is the m-plane account for showing what has transpired and explaining what is presently happening from a macro perspective. It is often said that the Balance of Payments must balance. This is a tautology. It is like saying a sphere must be spherical. What it means is that if the BOP doesn't balance, you've made an error in your calculations, not that something needs to be done to bring it into balance.

The BOP never balances perfectly because they use aggregated, government-collected data which is inherently imperfect. It is only a tool that helps us understand what's happening out there in the real world by compiling macro data. It is a lens for seeing, not an active participant.

In a previous thread costata called current BOP accounting methods an anachronism. That may well be true, but I think he was trying to imply that it has some negative effect on reality. I don't think it does. And whether or not they change BOP accounting in Freegold, I think we can still use the current methodology to explain what will be happening in Freegold from a macro perspective. Again, that's all the BOP is—a lens that helps us understand what's going on.

I have done the "Freegold BOP" exercise a number of different ways and it seems to be hopelessly confusing trying to conceptually traverse a paradigm shift of this magnitude from a monetary plane perspective. What I have found is that the aggregated marginal actions of the various players in Freegold are counterintuitive given our immersion in the current paradigm. So I think we need to begin with the physical plane in order to understand how the macro m-plane will look in Freegold.

First of all, "useless" gold will flow in the opposite direction of usable goods and services at the margin. It's just like Another said, "gold and oil will never flow in the same direction." The same is true of the net-flow of "usable wealth" (goods and services) versus "useless wealth" (gold) in Freegold. "Usable wealth" and "useless wealth" will flow in opposite directions at the margin (deficit/surplus region). [1]

But physical gold exists in a (nearly) fixed amount (by weight), so we can imagine it "sloshing" back and forth (by weight) like the ocean moves back and forth expressed in the tides. What will prevent all gold from flowing uncontrollably into one country is the price of gold in that country.

And it is important to understand that savers alone determine the trade surplus. Non-savers trade goods for goods, but savers are the ones who "underconsume" thereby creating a trade surplus. We also need to distinguish between organic savers (you and I) and inorganic savers (CBs like the People's Bank of China). In Freegold these two types of savers will act in opposing ways which will have a damping effect which will smooth out the cycles, similar to the way opposing waves cancel each other out.

When you provide more usable wealth to the external world than you enjoy for yourself (consume), you will record the difference by buying gold. So when we see someone accumulating a lot of gold, we should think, good lord he's providing a lot of usable wealth in exchange for "useless" yellow metal. But on an aggregate (national or regional) scale, something like this could not go on forever or else all the gold would flow into that region. What stops this from happening is that gold's price will rise, rewarding the earlier savers while "punishing" the ongoing (newest) savers (underconsumers) with less gold by weight.

At some point the early savers will see enough reward (high priced gold) while the ongoing (new) savers will sense a "top" in gold and the flow will reverse. Savers in aggregate will start net-dishoarding. So how does this translate into the m-plane in Freegold? Let's view this as the organic hoard-dishoard cycle within a currency zone.

The upleg, when organic savers are accumulating gold and gold is flowing in, while the price of gold is rising and the country is exporting more "usable wealth" than it is importing, we'll call Leg A of the cycle. Then Leg B will be the dishoard leg of the cycle, when the zone is importing more usable wealth and exporting gold as the savers net-dishoard. (This is counterintuitive right now because we're thinking in terms of China and the US under the $IMFS. Seems like gold should be rising (dollar falling) in the US right now, but under Freegold it would be the opposite --> counterintuitive! --> because the trade deficit (more goods flowing in) would mean that savers are dishoarding (gold flowing out)!)

Freegold Currency Management

In Freegold, a currency manager will influence exchange rates by buying or selling gold. If a currency is trading higher than he wants, he'll purchase gold on the open market (doesn't matter where thanks to arbitrage) with freshly printed currency to weaken his currency. This will exert pressure for gold to flow into his zone and usable wealth to flow out. Normally he'll do this in a countercyclical way to what's happening with the "organic" savers. So our currency manager would most likely be inflating the currency (printing) and using that new currency to buy gold (weaken the currency while increasing reserves) during Leg B of the cycle described above (where the savers are strengthening the currency (to a point above where it "should" be given some measure of Purchasing Power Parity with its trading partners) by dishoarding gold).

If a currency is showing unwelcome weakness, he can sell his gold reserves on the open market. This will exert pressure for gold to flow out of his zone (or at least counteract the ongoing inflow driven by organic saving) and for usable wealth to flow in (or at least slow down the ongoing outflow (trade surplus)). He would do this during Leg A of the cycle described above, so as to be countercyclical to the organic savers. (Again, this is counterintuitive given our present immersion in the $IMFS. Who'd expect the PBOC to be selling official gold right now to reduce the trade surplus. Yet that's what they'd be doing in Freegold.)

So obviously a currency manager has nearly unlimited ability to weaken his currency (to counteract Leg B of the savers' hoard/dishoard cycle) but he is constrained by his accumulated reserves as to how much he can strengthen (defend) it (during Leg A). This actually makes sense because Leg B is when savers in the zone have stopped buying gold in aggregate (so that gold is no longer flowing in) and the printer can get them to start again by debasing their currency while simultaneously driving up the price of gold. In extremis the printer can stop the outflow of gold from dishoarding savers (and stop the net-inflow of goods and services) by buying every ounce sold by domestic (organic) savers with freshly printed currency.

I don't know if I would call that "pegging" a currency since gold is not the currency of a specific trading partner. But if you want to know how it would look on the FOREX, just imagine a steady gold price in the trading partner's currency and a rising gold price in your currency. The obvious arbitrage would lower your currency on the FOREX relative to the trading partner's currency with a stable gold price. Arbs would buy gold in the trading partner's zone and sell it in your zone delivering you an inflow of gold and the requisite outflow of "usable wealth".

I hope it is obvious to you that a zone which is experiencing an inflow of gold (in Freegold) is also experiencing an outflow of usable wealth. Gold is the symbolic token that implies you are providing more usable wealth to externals than you are using for yourself. Counterintuitively, the transactional currency of a zone experiencing this (in Freegold) is likely lower than it deserves to be on the FOREX. That's why its exports seem cheap to foreigners. So foreigners are buying more usable stuff from this country than they are selling to it. The currency manager would resist this by selling his own gold locally to stop the inflow of ("useless") gold which reflects the outflow of usable wealth. He is strengthening his currency by doing this and slowing exports of real goods (while also slowing imports of gold).

A currency manager can induce exports of real usable wealth and imports of ("useless") gold by inflating his currency to buy gold. This weakens the currency inducing the inflow of gold and the outflow of exports of real usable wealth. I realize this is counterintuitive (it seems obvious that a strong currency should buy more gold), but the easiest way to picture it is to imagine a currency manager doing this in isolation. He's printing and buying gold to weaken his overvalued currency. This is going to first cause gold to flow in but then the price of gold will rise. The currency manager could continue buying, say $10B in gold every day forever. And we could say that $10B in gold would flow into his reserves every day forever. But the reality is that the flow of gold by weight would slow and stop very quickly because the price of gold would rise so rapidly. At some point your $10B/day inflow of gold would be a fraction of an ounce.

So gold starts flowing out of a zone (and "usable wealth" starts flowing in) when the price of gold peaks and starts falling. The currency manager can counter this (for stability) by inflating the currency and buying some of that gold that the savers are dishoarding, slowing the export of gold and thereby slowing the import of "usable wealth".

So… When savers are hoarding gold, the CB is dishoarding. When savers are dishoarding, the CB is buying their gold with fresh currency. Over time this will minimize the flow of gold between currency zones and because the flow of gold is a reflection of an imbalance in the flow of "usable wealth" we can deduce that trade will be balanced and disruptive cycles and corrections will be minimized.

Will there be some paper debt involved across zones? Yes, because there is a time lag involved. But as long as savers and CBs aren't using that debt as their long term reserves/savings, it won't build up and it will reverse sides regularly. I think that this short term debt (call it the buffer) will still be reflected in the "Capital Account" of the Freegold BOP and the cross-border flow of gold will be reflected as a normal trade good. I don't think Freegold requires a revised BOP methodology.

As a parting thought, just remember that this BOP discussion is looking at Freegold from a macro (aggregated) perspective which is different from the personally subjective (micro) perspective in which it is usually discussed here. Things appear very different from the mountain top on the other side of a singularity. ;)

Sincerely,
FOFOA

[1] A relatively tiny amount of gold will flow as a "usable" good along with the rest of the "usable wealth". There are a few electronic uses for which gold is irreplaceable. At the current price there are about 300 tonnes consumed every year in electronics. But, even at today's price, substitutes are being created for the less important ones. My brother is a materials engineer working for a major medical equipment manufacturer. He personally administers the physical application of gold to these vital electronics.

They coat vital electronics with gold not because gold is a good conductor (silver and copper are much better) but because a very thin layer of gold prevents the lesser metals from corroding. Corrosion inhibits conductivity. In one product he makes there is 10-cents-worth of gold at today's price. That product costs $2,500 to manufacture and sells to medical professionals for $10,000… and it contains 10 cents of gold. Even with a 40X revaluation the gold component will only be $4.

On these high-end medical applications they use sophisticated techniques for applying the gold. Much more sophisticated than the gold plating used on cell phones and thumb drives. My brother uses evaporation and sputtering which deposits a layer only a few atoms thick. Gold electroplating from a liquid onto cheap electronics deposits a much thicker layer, and those lesser electronic uses will likely be substituted with something like this.

It's kind of funny that a $50 cell phone today contains 50-cents-worth of gold while the gold-plated piezoelectric capacitor in a $10,000 piece of medical equipment only contains 10 cents. That's right, an ounce of gold is required for every 16,000 of these devices. And that particular capacitor requires a lot of gold, about 10 sq cm of surface area to be coated. For comparison, an integrated circuit chip requires anywhere from 0.1 to 2 sq cm of surface area to be coated in gold. An ounce of gold covers about 160,000 sq cm using these high-end techniques at a thickness of 1000 angstroms (0.1 micron, 0.00001 cm).

My point is that I foresee the amount of gold being used in electronic applications dropping significantly to maybe 100 tonnes per year in Freegold. That's out of the 170,000 tonnes of gold in storage. A 1,700 year supply overhang perhaps? Somehow I don't think Freegold will interfere with any vital industrial uses for gold.


_______________

PS. I'd like to take the opportunity of a postscript in a fresh post to highlight Victor the Cleaner's explanation of what Mario Draghi meant when he said "whatever it takes". Reposted from Screwtape Files:

It seems that most people don't understand the ECB. If Draghi says "within their mandate", he is referring to their inflation target "below but close to 2% annually" in the medium term (i.e. 2-3 year average).

He said he would save the Euro "whatever it takes". He didn't say he would save government debt whatever it takes. Some people seem not to get it that these two are completely different goals.

If you take the 2% inflation target seriously (and every single step by the ECB is consistent with the assumption that they do), you conclude that:

1) The ECB will print money in order to create inflation as soon as the medium-term inflation rate gets substantially below 2%.

2) In order to create this inflation, the ECB will have to purchase consumer debt with new base money (this is how you create price inflation). So their standard choice will be to buy government debt - government expenditures are largely consumption, either directly or through salaries, pensions, benefits.

3) In the inflation rate drops substantially below 2% in some countries, but not in others ("policy transmission distorted"), the ECB will buy government debt of these countries, but not of others - most governments spend mainly in their own economy which allows the ECB to target where they want to create inflation

4) The ECB has no mandate to create more inflation than the mentioned 2% annually. So they will make sure this doesn't happen either.

5) How will they do it? Well, that's easy. A lot of debt is being written off (Spanish home owners defaulting on their mortgages etc.), and several governments had to sharply cut down on their deficit spending. Both are deflationary. So the ECB could simply leave the market alone, and the Euro zone would get some price deflation. So the ECB has enough tools to limit the inflation rate at 2% annually.

6) What is the main mechanism that might cause an inflation rate higher than 2% in the medium run? This would happen if the commercial banking system or the ECB monetize the running budget deficit of their governments or if they monetize other consumer debt beyond about 2-3% of GDP annually.

7) How can this be prevented? Well, some governments have gotten into serious difficulties raising funding, and Ireland, Portugal, Greece, Spain are forced to cut down on public spending. How precisely? The interest rates they would have to pay for additional debt are going up.

See? Some idiots claim "Draghi wants to print and buy all government debt in order to lower the interest rates" and then "ECB is too stupid to really lower interest rates"?

How about this: ECB has purchased some government debt in order to create inflation in those countries in which inflation was dropping too much below 2%, but ECB never intended to lower interest rates?

Much easier explanation, isn't it?

8) So what do we conclude if we assume that the ECB is doing nothing other than their job, i.e. to maintain their 2% inflation target?

8.1) They will buy government debt if the inflation rate drops too much below 2% annually. In particular, if this happens in some countries, the ECB will buy the government debt of these specific countries (SMP).

8.2) Although the ECB may buy government bonds for this reason, they will make sure they do not artificially suppress the interest rates (in contrast to the Fed or the BoE).

8.3) As long as the inflation rate stays around 2%, the ECB will not monetize government debt, simply because this would create more inflation. In particular, this indicates a limit of the annual budget deficits that will end up on the balance sheet of the combined banking sector (commercial banks and ECB): no more than around 2-3% of GDP which would cause about 1.4-2.1% consumer price inflation in the steady state (assuming roughly 70% of government expenditures is consumption - you can adjust these figures if you have better data, the ECB certainly do have better data).

8.4) So while some debt will be bought by the ECB in order to maintain 2% inflation, some other debt will most likely be defaulted on. How much? I guess this will still be a lot.

8.5) If some politicians try to give the ESFS or ESM a banking license or to use government run banks in order to monetize their own debt, the ECB will have to obstruct these attempts, for example, by changing the requirements on the collateral they accept from these banks. Also, the northern countries will not like this and presumably already be influential enough to stop it.

Victor

_______________




When I was young, it seemed that life was so wonderful,
a miracle, oh it was beautiful, magical.
And all the birds in the trees, well they'd be singing so happily,
joyfully, playfully watching me.
But then they send me away to teach me how to be sensible,
logical, responsible, practical.
And they showed me a world where I could be so dependable,
clinical, intellectual, cynical.

There are times when all the world's asleep,
the questions run too deep
for such a simple man.
Won't you please, please tell me what we've learned
I know it sounds absurd
but please tell me who I am.

Now watch what you say or they'll be calling you a radical,
liberal, fanatical, criminal.
Won't you sign up your name, we'd like to feel you're
acceptable, respecable, presentable, a vegtable!

At night, when all the world's asleep,
the questions run so deep
for such a simple man.
Won't you please, please tell me what we've learned
I know it sounds absurd
but please tell me who I am.

433 comments:

1 – 200 of 433   Newer›   Newest»
DP said...

1st! XD

Motley Fool said...

2nd! I guess that means I get silver. Bugger!. :D

Jeff said...

Qiu Shi: Establish and Implement the Chinese Gold Strategy

http://chinascope.org/main/content/view/4752/107/

English translation:

http://tinyurl.com/97n5mta

USAGold commentary:

http://www.usagold.com/cpmforum/2012/08/08/chinas-golden-people/

Aaron said...

Damn I didn't even get copper. ;-(

Aaron said...

I mean Bronze -- damn preview button.

e_r said...

JR,

I can let you know people don't like having words put in the mouth. Maybe a more open minded approach to matters you claim to not know about is warranted, or if its ruse, just be more direct. Its clear you are advocating for a hidden aganda, so just be honest about it. Don't try to suggest others support this agenda by twisting their words and trying to play games with leading questions built on absurd predicates.

I can tell you that I don't have any hidden agenda that you perceive, I am simply exploring by asking questions.

What I meant when I asked: "general equities market will die", was that based on what you wrote about Siegel: you seem to think that the future investing returns (post-FG transition) would be completely different than the past 200 years. I was simply wondering why that would be the case?

After all we went through a fixed gold standard, gold exchange standard and then a USD reserve standard. Over 200 years and with these many monetary changes, the return on equities have remained about 6%.

DP said...

Just one more gold for #TeamGB. So many by now they don't even mean much any more. #Yawn

e_r said...

2nd! I guess that means I get silver. Bugger!. :D

MF,

Even DP would get only 1.34% gold for his gold medal. ;)

Edwardo said...

costata wrote:

"I'm wondering if a company/enterprise is even viable if it operates with 100 per cent debt and no capital at all or perhaps merely too little capital versus debt. Is a capital-free enterprise just an accident waiting to happen?

I don't have one shred of data to provide in support of what I'm about to assert, but the answer to your question is a resounding, YES!

e_r said...

I agree with Edwardo on the capital-free enterprise part. There is marginal productivity of debt (up to a certain level depending on the enterprise's function) and beyond which additional debt does not have any positive impact on the marginal productivity.

Costata, you also wrote:
Looked at from a conventional bookkeeping perspective USA Inc runs at a loss. If those national accounts were constructed from a savers perspective then USA Inc would be a fantastically profitable enterprise thus far.

can you may be walk us through a simple example and expand on that statement?

JR said...

Hi e_r,

Were moving backwards. What about JoJo's links last thread? We had resolved the 200 years issue back then, why are we now all the sudden reviving it?

Aquilus said...

Excellent post FOFOA.

The scary part (joking) was that when reading the post the concept of CBs buying gold to weaken their currency made total sense instead of being counter-intuitive (as currency qty increases and gold available decreases, therefore making the currency-price of gold increase, and as such debasing the currency).

Maybe I spent way too much time reading your blog. Smile.

burningfiat said...

FOFOA,

Thank you very much for this post. I already sense it will become a Classic that will be referred a lot from JR (and others) when we discuss the big picture in a post-transition world. :-)

Vtc,

Thanks for that explanation on the ECB mandate. So logical. If we think about Greece, isn't this exactly what we have seen? ECB taking care of the Greeks not experiencing price deflation, while the excess previous debt held have partially defaulted?
I would love to be enlightened if the facts on the Greek ground differs from VtC's ECB action recipe. Anyone?

Some inspiration: http://www.global-rates.com/economic-indicators/inflation/consumer-prices/cpi/greece.aspx
Look at that CPI graph after 1999. Hey, wow, huh? Even the fluctuations since 2008 seems pretty suppressed...

Woland,

Thanks a lot for your contribution to this place. We never did get an account of that trip you went on last month, but maybe you yourself was visited by that buffalo? :-)
Take care out there on the Trail, it was nice hiking with you for a while. Au revoir.

/Burning

e_r said...

FOFOA,

Nice Addendum to the 4-part repost by JR.

I'm not sure why you would call gold as "useless wealth" because it could be deployed as capital for production or could be exchanged for some consumable good on the open market. In a way, it is the most used wealth reserve because it would be the most acceptable no?

The second part about organic vs. inorganic savings and the role played by CB (countercyclical to the economy) makes sense.

What would be the role of the Government?

Issuing more debt when the currency is strong and repaying more debt when the currency is weak makes sense from the Government's perspective.

But if the CB is acting counter-cyclical to the savers, then it sort of balances the currency's strength in either up/down cycle, right?

Does the CB's act essentially gives no incentive for the Government to issue more debtthan it can handle and therefore keeps Government's repaying ability at check?

burningfiat said...

e_r,

I like the term "useless wealth":
1) It is wealth
2) It is useless! Understanding: it has no use (/utility as FOFOA says).

As AD once said: Funny yellow stones.

Aquilus said...

e_r,

on government debt issue in that scenario:

Govt debt would have to show that it's better than gold for the issuing period (in order to be bought).

To accomplish that, its interest rate should be greater than the currency depreciation rate (vs gold), otherwise you'd be better off holding gold.

If games are played all the time where after the issuance of debt, depreciation rate increases, market will front-run them and pre-discount the debt (not to mention that no govt can play that game for too long without destroying the value of their currency for all to see in that environment).

So to summarize, debt interest rate must be higher than gold appreciation rate + the more debt, the faster/higher the gold appreciation (currency depreciation) rate is => not so tenable, right?

Aquilus

P.S. Useless wealth concept is neat if you think of gold as having no use in anything but a monetary sense. Useless as a commodity, very useful in the monetary role (as Burning also said above using different words)

JR said...

To pile on:

Gold is "useless wealth" as outlined above because it has little real world application (aka industrial demand).

In terms of "becoming wealthy" in the physical plane, I think we should distinguish between "usable" wealth (goods and services) and "useless" physical wealth (gold). One is usable right now for either production or consumption and the other is not.

Net-producers don't use gold to make more stuff and consumers don't use gold for consumption. They sell gold to buy that stuff.

Gold is wealth, but not wealth that you use to make more wealth or to consume. Contrast owning gold (wealth) to owning a factory (also a form of wealth producers own) or owning a Lamborghini (a form of wealth consumers own)

FOFOA wrote "Usable wealth" and "useless wealth" will flow in opposite directions at the margin (deficit/surplus region). [1] The footnote [1] says A relatively tiny amount of gold will flow as a "usable" good along with the rest of the "usable wealth".

Gold's not used by producers in production, its not wealth you use to make more wealth (a factory, a computer, etc.). Gold is what you use to store wealth. See why its not usable (although it can be traded for usable stuff):

The piling up of gold in any country does not signify that it is prosperous; it merely shows that the country is giving other countries more goods than it receives; that it is parting with more usable wealth than it is getting back.

e_r said...

JR/Burning,

Thanks, Quite clear now.

Aquilus,

Makes sense. The CB of a nation cannot buy the debt of its own nation, right (monetization of debt)? I would imagine there would be explicit firewalls for this purpose?

When we say CB's foreign currency assets as its reserves, do we mean just foreign currencies held for trade settlement or both currencies + bonds denominated in that currency?

In the latter case, it gets a bit more interesting because foreigners may also be interested in a nation's bonds if the interest rate is attractive compared to the currency depreciation rate.

JR said...

I would imagine there would be explicit firewalls for this purpose?

Why would you imagine this?

CBs can do whatever they want. But there may be market consequences of which those CBs might want to be mindful.

JR said...

When we say CB's foreign currency assets as its reserves, do we mean just foreign currencies held for trade settlement or both currencies + bonds denominated in that currency?

We mean you can't use assets denominated in your own currency to defend the currency, so anything else the CBs hold is a reserve.

JR said...

On a CB balance sheet there is a distinction we can make between assets in general and those assets that qualify as reserve assets. At the central banking level such as the ECB, its institutional liabilities largely take the form of issuance of currency banknotes and deposits held on behalf of commercial banking institutions (such as those being held to meet a commercial bank's reserve requirements, and to facilitate check-clearing between institutions) which are denominated in its own domestic monetary unit (i.e., the euro.)

The requisite assets to balance against these liabilities are largely in form of euro-denominated claims on commercial credit/banking institutions. As these claims are often collateralized by government bonds, at the very end of the rope it is fair to say a large portion of assets held by the central bank take the form of government bonds even though they were (largely) acquired indirectly through typical financing operations to extend credit to the commercial institutions.

These euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do nothing in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a position in foreign currency claims against non-resident (foreign) institutions. It is this combination of gold assets and foreign currency assets that constitute the official "reserves" of a central bank.


RPG Update #4

costata said...

FOFOA,

As always some unique perspectives on a big picture issue. Thanks for grasping this bull by the horns. Much to discuss methinks.

BTW I think anyone who mentions the Olympics or medal tallies should be banned from this blog. This thread has its share of trolls already. For example:

Just one more gold for #TeamGB. So many by now they don't even mean much any more. #Yawn

Totally off topic.

e_r said...

JR,

Why would you imagine this?

CBs can do whatever they want. But there may be market consequences of which those CBs might want to be mindful.


Isn't interest rate essentially the price of a fiat currency?

There is no true price discovery for interest rates today.

How would we know that the Government's interest rate is actually a true market price discovery and not something manipulated, post-FG?

JR said...

I have no idea what you are talking about e_r.

In lieu of engaging other people in dialogue you chose to repeatedly ignore there comments and insert your own ideas. Its is as if you want to prove Freegold wrong without bothering to understand it. I hope that works out for you.

===========

Isn't interest rate essentially the price of a fiat currency?

There is no true price discovery for interest rates today.

How would we know that the Government's interest rate is actually a true market price discovery and not something manipulated, post-FG?


Why do we care about a government's interest rate?

Why do you imply a government that issues its own currency is somehow beholden to a need to go to the market to obtain that currency?

How can there be a price discovery market material to the person who can create more supply at de minimis cost?

Why aren't you talking about gold?

J.R.

JR said...

Are you aware how arrogantly dismissive it comes across to blow off repeated responses and keep advancing your own dialogue?

Do you think we are morons? Do you think that you understand Freegold and we don't? Do you enjoy pretending that you have some great power to see some huge hole in Freegold we are all blind to?

How about you suspend your personal beliefs for just one second and try to understand Freegold. Don't try to prove it wrong, just ask people what they mean. Can you not put words in peoples mouths and instead as open-ended questions?

Like, when somebody talks about x, maybe you could ask what does "x" mean instead of your usual you said x, so therefore b must apply and q is thus the result? Why not show some respect and give someone a chance to explain themselves instead of putting your own words in their mouth.

“It is the mark of an educated mind to be able to entertain a thought without accepting it.”
― Aristotle, Metaphysics

e_r said...

In lieu of engaging other people in dialogue you chose to repeatedly ignore there comments and insert your own ideas. Its is as if you want to prove Freegold wrong without bothering to understand it. I hope that works out for you.

I have no idea what you are talking about. Aquilus said the Government interest rate should be higher than the currency depreciation rate in gold.

I agree with that but I am questioning how that can be true, if we are not sure that the interes rate is true market discovery.

Why do we care about a government's interest rate?

Because it is competing in the same market just like everybody else.

Why do you imply a government that issues its own currency is somehow beholden to a need to go to the market to obtain that currency?

Unless and otherwise the Government decides to hyperinflate the currency, I would assume that it would do so in an orderly fashion.

How can there be a price discovery market material to the person who can create more supply at de minimis cost?

The Government is a third player in this scenario and I was simply wondering how it would fit in (in addition to CB and the savers).

Why aren't you talking about gold?

I will talk about what I consider as relevant. Do you get to decide what I should or shouldn't talk about?

e_r said...

Are you aware how arrogantly dismissive it comes across to blow off repeated responses and keep advancing your own dialogue?

No. because that is your own perception. If FOFOA feels so, let him state it and I'll stop posting.

Do you think we are morons?

No, obviously.

Do you think that you understand Freegold and we don't?

No, again.

Do you enjoy pretending that you have some great power to see some huge hole in Freegold we are all blind to?

I come with an open mind. I don't enjoy pretending anything.

How about you suspend your personal beliefs for just one second and try to understand Freegold. Don't try to prove it wrong, just ask people what they mean. Can you not put words in peoples mouths and instead as open-ended questions?

Are you the thought police of this blog? Do you get to decide how people should or shouldn't ask questions?

Like, when somebody talks about x, maybe you could ask what does "x" mean instead of your usual you said x, so therefore b must apply and q is thus the result? Why not show some respect and give someone a chance to explain themselves instead of putting your own words in their mouth.

I really don't know what you are smoking here, but I am going to ignore you henceforth.

Clearly you are imagining or perceiving things that have nothing to do with what I write.

JR said...

Aquilus said the Government interest rate should be higher than the currency depreciation rate in gold.

He is talking about debt being a more attractive option that gold for investors.

Govt debt would have to show that it's better than gold for the issuing period (in order to be bought).

Governments can tax. They don't have to issue endless debt to fund themselves.

JR said...

I will talk about what I consider as relevant. Do you get to decide what I should or shouldn't talk about?

Do you think I have such power?

You will do what you want, and those actions may lead to consequences, just like for a CB in Freegold.

Here, one of the consequences is me pointing what you think is relevant is not relevant, that you don't care what is relevant, that you ignore people who understand what is relevant,...

/SleepingVillage/ said...

Excellent, this one helped me put a few things together that e_r got me thinking about in the last thread. Gotta give it a re-read tomorrow for the full effect.

I'm off down the hill to Peach Fest and the casino for shits and giggles. Hope you all have a great weekend.

costata said...

VtC,

That was an excellent walk through on the ECB's approach to controlling inflation. Thank you. And it also reminded me that there is always something to learn in these discussions.

I was never able to figure out why the treaties governing deficits in the EU were set at a maximum of 3 per cent. My gut reaction was Why not a balanced budget requirement? It makes sense to me now that there needs to be some flexibility in this area as part of a range of policy instruments that can be employed to engender inflation.

Cheers

Aaron said...

I think anyone who mentions the Olympics or medal tallies should be banned from this blog. This thread has its share of trolls already.

I couldn't agree more Costata. I'm right there with you. Absolutely disgusting! Almost immediately after posting that comment DP sent me a simple regression analysis plotting clinically effective bong hits against friction coefficients in aquatic environments.

Michael dV said...

shoot
I spend my time trying to front run the $IMF and now with this info I have to prepare to front run the CBs in Freegold,....no rest no rest

costata said...

Silver

I think folks who are awaiting an opportunity to roll their silver for gold should take notice of this piece by Ben Davies of Hynde Capital:

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/9_Ben_Davies_-_There_Is_A_Massive_Buyer_In_The_Gold_Market.html

There's some interesting analysis of gold as well. But this is the part I want to draw your attention to (my emphasis):

However, the evidence points to an upside break for both gold and silver, which is not dissimilar to our Silver – The Coming Bullet - August 2010 ‘Trend Ready’ state.

Although we will edge towards holding perhaps more silver as the old silver ratio looks divergent from ISM data (Purchasing Managers Business Survey), and emerging equity indices, which we believe have begun to perform well, as they respond to worldwide efforts to re-stimulate.....

.... Additionally, the VP Business Cycle Financing Index (chart above), points to a higher ISM in the next 6 to 9 months, which as the graph below highlights will lead to a narrowing of the gold/silver ratio, with silver outperforming (the ratio is inverted to provide clarity on changes).

As the ISM rises, the gold/silver ratio will fall from near 60, where it is now, to 45 and more.


Long time readers will be aware that Uncle costata sees the industrial silver users as the ultimate bag holder for pumps and dumps in silver. To reiterate, these industrial users are the largely inelastic component of demand for silver.

The silver spruikers will, of course, do their level best to get the retail silver bugs onto the bandwagon when silver starts to lift off. So that will help the manipulators out as well. Stay sharp rollers and good luck with your timing.

Cheers

costata said...

Some interesting stats on import prices for the USA:

http://www.calculatedriskblog.com/2012/08/import-price-declined-06-percent-in-july.html

...Prices of U.S. imports fell 0.6 percent in July, the fourth consecutive monthly decline for the index following a 1.4 percent increase in March....

....Nonfuel prices also fell in July, declining 0.4 percent following a 0.3 percent decrease in June and a 0.1 percent drop in May. The July decline was the largest monthly drop since a 0.4 percent decrease in June 2010, and was driven by lower prices for nonfuel industrial supplies and materials and foods, feeds, and beverages.

Despite the decline over the past three months, nonfuel import prices were unchanged for the year ended in July ...

Nickelsaver said...

FOFOA,

This a nice continuation of "Glimpsing the Hereafter". And I found the terminology a bit easier to digest, but perhaps that is merely my becoming accustom to FOFOA-speak.

"useless wealth" - you can't eat your gold, but many would skip a meal or two to have it. Just don't store it in the microwave ;-)

costata said...

FOFOA,

As this conversation unfolds I'm going to toss in a few examples of aspects of national accounting that I look upon as distortions of reality. The discussants can offer their opinions if they so choose.

The first one is the treatment of monetary gold versus non-monetary gold under IMF rules with India as the case in point. They have a trade deficit that is partly the result of imports of non-monetary gold.

In theory if they were to receive an import of monetary gold it would reduce the deficit in a similar way to an inflow of investment capital. So gold could be treated as both a commodity and as capital in their national accounts - an artificial construct IMO.

I have mentioned this before in these pages (if memory serves me) but I think it is on topic for this post and bears repeating.

Beer Holiday said...
This comment has been removed by the author.
d2thdr said...

Aquilus said-
So to summarize, debt interest rate must be higher than gold appreciation rate + the more debt, the faster/higher the gold appreciation (currency depreciation) rate is => not so tenable, right?

And then JR added-
Govt debt would have to show that it's better than gold for the issuing period (in order to be bought).

I still strongly believe there will be no government debt to buy or sell. This is $IMFesque in its character.

Tell me why should there be government debt? To provide welfare? To support defence industries?

I am really interested in exploring this.

My view is the government in freegold era will be 1 millionth of its current size. It simply wont be affordable to have a government bigger than that. The natural tendency to enlarge the government will only lead to the monetary base expanding to support the expanding waistlines of the useless government. The democratization that the west has started will find its natural death in the era of freegold. Thats how I see it.

Phat Expat said...

@costata
Thanks for pointing that story out regarding silver (I have been waiting for something like that since you first mentioned it long ago). Here's hoping as I am 50:50 gold:silver and want to get that to 90:10 gold:silver.

burningfiat said...

d2thdr,

I believe there will be governments in Freegold! LOL

It will be up to the people to determine the size of their government. Some like it small while others think that size does matter...
I, for one, like 'em small but I am only one voter :)

What I see an end to is Gov. debt so huge it is basically unpayable. This will end, because markets wont accept it anymore. Gov. must stop the shenanigans and tax their population directly and in the short/medium term if they want to expand. This will hopefully make voters prefer smaller Govs.

Tell me why should there be government debt? To provide welfare? To support defence industries?

Well, it will always be a challenge to match shorter term outlays with receipts, so until taxes or expenses are adjusted to balance, some short term debt is needed I guess. So this explain the _demand_ for gov. debt.

As for the _supply_ of Gov. debt., this will be up to market. So at the right price there will be money available for the Gov. to borrow. But this debt likely wont be cheap for the G-men. As a minimum, the debt will need to pay more interest than the issuer can likely expect to get from general investment in productive businesses and/or gold (denominated in local currency)...

So how is this different from today? It differs because savers and super-producers wont enable excessive sovereign debt anymore. If the debt is judged to get out of hand, we'll just go to the fool-proof SoV par excellence.

Motley Fool said...

I would like some opinions on something.

Hyperinflation is caused by collapse of confidence in a currency. The implicit statement here as regards to the actors is that they have some purchasing power in fiat which they are not currently exchanging for goods.

So I was wondering who is it that will drive US confidence collapse. Obviously not the bottom 30% or so of the population that live on welfare stamps; nor the large segment of the population that is living from paycheck to paycheck; nor the segment who are living from minimum credit card repayment to minimum credit card repayment; nor it seems to me retirees who are suckling at the koolaid the hardest, and have the most experience with this current system and the greatest vested interest in it continuing; nor companies who only care about nominal accounting.

Who is left? Is their collective savings enough to make their collapse of confidence a significant factor?

Thank you.

TF

burningfiat said...

...more interest than the issuer can likely expect...

I meant holder instead of issuer of course!

Aquilus said...

@d2thdr

Tell me why should there be government debt? To provide welfare? To support defence industries?

In my last post I started with the premise that government debt existed, and pointed out some parameters under which it makes sense for it to exist.

As to the question of "why should it exist":simply because debt smooths out the gap between government income (through taxation, etc) and real need for expenses.

But let me quickly add that in a freegold environment debts will have to be small relative to government budgets so they can be credibly repaid.

Smooth out the gap I say? What is that? Let's take an example.

As we have explored, generally a government must have a more or less balanced budget under freegold. That's the starting point.

But unexpected things happen. Hurricanes, earthquakes, wars, political/banking crisis, etc.

The freegold environment is one in which liquidity can and is provided when needed. The CB can always decide to sell gold (if under the control of the gov), and issue currency to address the needs, but would it not make sense that instead of selling the real reserve, some "catastrophy bonds" be issued? Why not? That's what currency is there for - to provide liquidity and that debt has to be accounted for in the next tax cycles.

Even more so for an ECB member state that has no control over the ECB. If there's a huge earthquake that destroys part of say, Italy, should Italy increase taxes, or sell it's gold? If I were them I would issue some debt now, and account for how to pay it in the next tax cycles. After all, it is an Italian problem, and has to be ultimately solved under the Italian budget.

So what's stopping a country from loading up on debt under freegold? Let's play it out.

The more debt a country takes on, the more it has to either increase tax revenue or have a bigger structural deficit.

Taxes can only go so far in one jusrisdiction before it becomes uncompetitive, so that has a limited runway

A structural deficit, will require that the debt be appealing to investors/speculators (savers won't really care). That means a vicious circle of increasing interest on the debt with each issue/rollover and/or currency debasement (not so much in Euro case if only one state takes on debt).

This vicious circle of making debt more appealing is stopped in its tracks early in freegold. If the issuing state controls its currency, and keeps issuing debt, that currency will (eventually) de debased into oblivion. If the issuing state does not control currency issuance, then interest rates will quickly become prohibitive.

Remember, under freegold, all debt buyers are NOT the savers, they are mostly professional speculator/investor types, and it is them you have to convince of your debt sustainability.

So to conclude my rant, debt yes, but in sustainable amounts.

Aquilus

Edwardo said...

I know this is OT, but I am posting this link as part of what I perceive to be a tradition on this blog of noting developments that could conceivably act as catalysts to the emerging paradigm (in The West) of holding one's wealth outside what is an increasingly perilous system.

http://www.reuters.com/article/2012/08/10/us-sentinel-appeals-decision-idUSBRE87900T20120810

Jeff said...

MF,

The world is awash in savings, because we save in debt.

FOFOA: If we think about "global debt" as "global liabilities," then there must be the equal and opposite "global assets." Simple balance sheet math. The liabilities are failing because collateral values are falling and debtors are defaulting. As FOA said, "As debt defaults, fiat is destroyed." Or another way to say is, "As debt defaults, fiat savings are destroyed."

But what is actually happening is the assets are being papered over with fresh base money. FOA: "hyperinflation is the process of saving debt at all costs, even buying it outright for cash." Or said another way, "hyperinflation is the process of saving debt-backed assets (MBS's etc..) at all costs, even buying them outright for cash."...

Credibility inflation is the confidence the savers have in saving the debtor's debt. And this is what enabled the debt bubble to grow so large in the first place. And in a circular fashion, the debt also allowed the savings bubble to grow so big, bigger even than the underlying world of real things...

Anyway, the future hyperinflation fuel is stored in the savings balloon during this period of credibility inflation...

And when the debt starts to fail, so does the credibility of paper debt to the savers...

So as the credibility of debt paper as a savings instrument fails in the mind of the savers, that hyperinflation fuel stored in the savers' balloon turns into real price inflation as it scrambles to be spent..

The Fed has the power to keep the savers' balloon 100% full if it wants to, and the political will to fully back that action. It simply buys those deflating MBS's (etc..) at full price ("dumping them on your front lawn! (smile)") and suddenly the air in the savings balloon has been replaced with non-elastic fresh cash. This process is already well underway… and IT IS the trigger for hyperinflation.

Motley Fool said...

Jeff

Thanks for your comment.

Perhaps I can simplify my query.

Who are these savers that holds these debts?

And the corollary : Are those savers that are identified likely to lose confidence? / What's at stake for them if they lose confidence? / How high is the cognitive dissonance bar for those savers?

TF

Jeff said...

We already hyperinflated our credit system and derivatives as far as we can. Now that gets passed through to the currency.

FOA: Mr. Traveler: conversely: the "real" inflation I point to is largely a cash phenomenon, where all the past massively over-created credit instruments are bought up by the money making authorities and paid for with printed cash or allocations to the owners digital cash accounts.

As your own examples pointed out above, rising prices in your examples above indicate how we are already receiving the effects of a hyper inflated credit system. Again, these are only an advance example of price inflation that's beginning to reflect the "real" amount of "credit money" we have created over 20, 30, 40 years.

in the real hyperinflation that's coming as it follows our current credit inflation phenomenon it's not the borrowing class that's liquefied, it's the lending class! Remember, out there in our vast dollar world, for every dollar a consumer has borrowed, some entity holds the other side of the credit instrument. Our classic deflation begins when these holders are no longer being paid, resulting in the write-down of their assets. Across the land, banks, credit unions, citizens with lend able funds and every other form of lender no longer own a credit instrument that's sellable at par. That's 100 cents on the dollar.

Hyperinflation begins when pushing on the string no longer is an option. As you pointed out; "the consumer is binged out"! But there is more (smile).

No country ever hyper inflates for the pleasure of the ruling class, as many want to believe. They / We inflate to keep the domestic system in use and do so because it's the last resort. In other words you are forced into it! ...

Just as in many other historic examples and present examples around the world, nation states always choose hyperinflation when no other way out is offered. No nation on earth has ever cascaded themselves into deflation once they are off the gold money system...

I doubt the creditor class as a group is seeking to remove the financial inequalities that separate people through this coming process of hyperinflation. Far from it. As I stated above, the credit hyperinflation has already occurred. It's there, in place as we speak.

What is now faced by this non egalitarian lending crown is the choice of: having their debt instruments defaulted on and losing everything,,,,, or playing 'let the fastest runner win the game!'

My friend this is the choice you get when the currency your assets are denominated in hits the end of its "timeline".

Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets.

Motley Fool said...

Jeff

Or said another way, "hyperinflation is the process of saving debt-backed assets (MBS's etc..) at all costs, even buying them outright for cash."...

This provides part of the answer. However, do you think this group likely to lose confidence in the system?

Where are the savings that will panic in a hyperinflationary manner?

TF

Jeff said...

Hi MF,

It will be the big money investments that get liquid first, in large amounts.

"Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets."

Motley Fool said...

" They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I."

"... spend the fiat..."

This is what I am questioning, if you are implying that banks will be the drivers of hyperinflation.

TF

Aquilus said...

Motley Fool:
Who are these savers that holds these debts?


Just one example: my wife though her retirement investment plan. she works for the State of CT, and they have to choose from a few investments offered. Those investments are debt and equity (stocks) only.

So she won't loose confidence herself, but that pension plan better not loose money too many quarters or else people would stop contributing (many co-workers reduced contributions in 2008-2009). We just stopped ours in 2010 (but that's because of me). As long as the quarterly statements deliver nominally, co-workers are happily contributing to those plans.

Motley Fool said...

Aquilus

Right, captive savings...not gonna panic.

Marginal savings might. Not much in the bigger scheme of things. Especially if you like us and legislative requirements in terms of pension fund contributions.

TF

Aquilus said...

MF,

Hyperinflation already happened in $. The only question now is when the realization triggers the issuance of currency to fulfill the promises and where that currency will be spent.

Since the first spenders will be financial institutions and professional speculator/investors, I doubt they will buy more debt at that time, but rather run for "real things" as in all late-stage hyper-inflation (when money is actually printed).

Motley Fool said...

Aquilus

Perhaps. I am questioning this implicit assumption. That banks, the receivers of freshly printed cash, will drive hyperinflation.

In the paradigm of those that are at the helm of those investments, everything is just peachy.

Besides...isn't everyone doing badly? It's not their fault is it? They just need to beat their competitors to be a better bet don't they? ;)

TF

Aquilus said...

No, these captive savings will not panic, but they still need those assets functioning so they don't. So the money has to come from somewhere. And if we don't have foreign CB support any longer, it's on the FED to introduce base money. And as that base money grows, what happens?

Aquilus said...

No, no, banks won't drive hyperinflation. Their behavior with the fresh cash will be an effect of the realized hyperinflation. See the difference?

Motley Fool said...

Aquilus

So you are saying that if the banks do not panic we will simply have high inflation for a long time as the real value of US debts is devalued? :P

TF

Motley Fool said...

Aquilus

I do get the difference. I'm just pointing out that you/we are assuming they will do a specific thing with that cash.

TF

Aquilus said...

No, I'm not saying high inflation for a long time.

I don't like to equate the quantity of currency issued with inflation. The quantity can grow without noticeable inflation. Look around the US all these years - inflation has been negligible compared to the quantity of credit and guarantees.

Again, hyperinflation in the $ ALREADY HAPPENED. What has not happened yet is the realization of that fact because confidence has not eroded enough.

But as debt has to be saved nominally to prop confidence, there is a point in all hyperinflations where that confidence switches (on a dime, extremely fast usually) to complete distrust. That's the visible face of hyperinflation.

Aquilus said...

I'm just pointing out that you/we are assuming they will do a specific thing with that cash.

Put yourself in their shoes. You need to deliver nominal yield. You just got bailed out of your bad debt holdings. More debt is bailed the same way all around you. Interest on that debt is extremely low, because the FED buys it, there's no market force to drive up interest rates.

On that background, the economy is probably not doing too hot since credit is dying everywhere.

Where do you go (as a bank/investment company) to nominally deliver?

Motley Fool said...

Aquilus

I agree that quantity of money added does not translate directly into inflation as we have to take into account the velocity of money.

Hyperinflation in one sense is hyper-velocity of money.

I agree that more liabilities than can be repaid have already been created. This however is the seed for hyperinflation(or a long period of high inflation) not the thing itself.

Confidence only matters where the holders of money is concerned. Our indebted or welfare comrade, not so much. Nor our retirees as I pointed out in my initial comment.

Which leaves banks. I'm just not convinced at the moment that they will panic, and lose belief in the system. All they care about is nominal terms remember. :)

TF

Motley Fool said...

Aquilus

Stocks perhaps?

Do not forget the paradigm under which those monetary managers operate.

Commodities won't do great if the economy is languishing, and if bonds aren't that great either, then blue chip stocks here we come. :P

TF

Aquilus said...

TF

Sure, a natural reaction, right?

But let's think it through:

Stock performance ultimately depends on a few things:
1 Earnings
2 Ability to fund the needs of the business
3 Number of investors bidding up the shares.

1. Earnings
In the period we're talking about, with credit being bailed out for base FED money, the investors are bailed out, but the credit-takers are still failing, right? So they're not that eager to expand I'm guessing? Just one example of why the macro-economy will not support earnings

2. Ability to fund

Issuing new corporate bonds in the world described above is a little iffy, wouldn't you say. And will companies even go for huge new debts when future is uncertain? Better hunker down.


3. Investors bidding the stock up.

Ok, not shortage of that initially. But as stock valuation to earnings goes limit to 0, what happens?


So, sure, an initial, short-lived stock market bubble is not out of the question (have you seen S&P lately), jut to be overtaken when debt-bailouts introduce so much cash in the system that the visible HI phase begins.

Aquilus said...

Will check back much later -Saturday morning family activities call :-P

Motley Fool said...

Aquilus

The eventual outcome seems inevitable. In the interim however there is time.

I for one have been surprised at how long this has taken.

If we are waiting for banks to panic, we might have a long wait ahead of us still. What you are talking about is the final stages of a panic like that. It might also explain why it has taken this long, if they are to be the eventual actors in this play.

TF

JR said...

Hi Costata,

The first one is the treatment of monetary gold versus non-monetary gold under IMF rules with India as the case in point. They have a trade deficit that is partly the result of imports of non-monetary gold.

In theory if they were to receive an import of monetary gold it would reduce the deficit in a similar way to an inflow of investment capital. So gold could be treated as both a commodity and as capital in their national accounts - an artificial construct IMO.


what? The BOP is an accounting mechanism, a way of describing the real world. Changing the accounting doesn't change the real world.

How do they pay for non-monetary gold? Does this change is they call it monetary? They still pay x and get y gold back, but you think if they change how they account for it, the trade deficit goes away?

The price of gold, not how its is accounted for in the BOP, is the issue.

India's gold:

It seems that all the gold buying in India is contributing to a balance of payments problem, a current account deficit, and a currency overvaluation problem. No wonder they raised the import duty on gold! What's interesting about this situation is that India had a balance of payments problem back in 1991 with similar symptoms.

[...]

A Few Thoughts

It occurs to me that Indian savers are saving at full capacity and then some; call it the savings rate ceiling. The problem is that Indians like physical gold. You don't see much paper gold at those weddings, do you?

Gold demand is generally inelastic in currency terms because its primary use is as a wealth reserve. This is in contrast to industrial metals where demand is relatively inelastic in weight terms. In other words, gold flow by volume should be observed to decline as the price rises while gold flow by value might remain steady. Yet India's gold intake has risen from $4.1B in 2002 to $33.8B in 2011. That's an 824% rise in demand in currency terms at the same time as the price of gold in dollars rose only around 600%. And this while running a trade deficit:

This has to be putting tremendous pressure on anyone working to delay Freegold, assuming such an effort even exists. I guess it's a good thing there are only 1.2 billion Indians.

JR said...

Where are the savings that will panic in a hyperinflationary manner?

The foreign dollar support:

The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands. Which kind of renders the premise invalid, doesn't it?

Inflation or Hyperinflation?


Or maybe a big enough paper gold hold:

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.

So buyers large and small, get in line to get your gold. Because we have no way of knowing who will be the last in line to get cashed out. What we have here is an explosion in the bullion banks' physical leverage factor, not through an increase in lending this time (the lending is actually declining), but through customer withdrawal of reserves, with no physical backstop. Even a bank with a conservative leverage factor can experience a bank-busting, system-crashing run. Public confidence is the only thing that stands in the way. This is how a classic bank run runs.


The View: A Classic Bank Run

JR said...

Think about this:

So the paper gold of the bullion banks is now TBTF. Of course that doesn’t mean it can’t fail. It either fails, or the USG hyperinflates the dollar as prices rise. They are related, and each will likely cause the other almost immediately, but either one could end up being the initial cause IMO. If price inflation forces the USG to hyperinflate then the paper gold insurance stickers will have to fail to perform. And if these price rises in the gold market fail to manage the flow (demand) of physical as they have so far, we’ll likely see a 10% or larger GLD puke at some point. That would signify more than a 120 tonne allocation demand, a system-busting size. They might think they can rocket the price at that point and get it back, but more likely we’ll see more allocation requests coincident with a falling (paper) "gold" price as the longs dump their worthless “insurance” while wishing they had the real thing.

GLD Talk Continued

PS - credit dies in a hyperinflation, so don't look to the banks to drive it. There may be a bank holiday while pallets of cash are shipper to banks, but the G is driving that show.

JR said...

d2thdr,

Tell me why should there be government debt? To provide welfare? To support defence industries?

Should's quite a word.

To start, here's one reason for some: international trade clearing. Consider this idea:

A related idea that gets to gold as savings final settlement is the scrip at the Medieval fair analogy from Euro Gold. There is always a lag between initial settlement in scrip/currency aka indirect trading (not direct barter) and later final settlement in gold. During that lag people hold paper, be it in currency or direct debt.

This short term paper will show up on the BOP as an imbalance one way or another. There will always be some paper held due to the lag, but it won't grow to systemically destructively levels because trade partners won't hold the currency of another nation, they will settle in gold.


What other reasons do people see?

J.R.

Jeff said...

MF,

Remember the trillions of dollars that tried to run out of money markets after Lehman? It was only stopped by the fed halting the transfers/redemptions. The collapse would have been over in hours if it wasn't stopped.

burningfiat said...

JR,

This trade clearing function, couldn't that be handled by bank debt (AKA credit money), central bank clearing and finally gold clearing?
Gov. debt doesn't necessarily need to be involved here, or does it?

I still see outlays/receipt matching and borrowing needs for extraordinary events (see Aquilus' comment) as the most likely drivers for public debt (in short/medium term).
Also eligible for long term public debt: Bridges and other vital infrastructure that actually lifts productivity in society.

JR said...

I'm not saying it has to be, but that it likely will. Read the section above called Freegold Currency Management. Do you think this is all done with physical cash/base money. Do you think CBs will stop open market operations ? CBs manage there currency by buying and selling their debt, its how they manage their currency. Why would this stop?


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

Just as it is with municipal/state governments across the US today, there will be lots of special purpose bond offerings sold to the public to finance stuff and backed by the power to tax. But they'll be competing in a market where savers have a solid place to save and aren't forced to "save" in "safe AAA tax free muni debt and government bonds" so the market will be much different than today.

JR said...

When you think about government debt in freegold, think more bills/shorter term notes and not bonds.

burningfiat said...

JR,

I believe I said bank money, not base money above, so I don't know where you get that idea from?

The banking system would facilitate any kind of international trade by moving credit around in the system opposite the goods involved in that trade. Credit could even be created against the goods being traded. No direct need for base money.

Of course the open market operations would still consist mainly of gov. debt buying, but that's another story right? That is the story of how CB's control the money supply up or down. IMHO that's another subject than the one d2thdr asked about.

So yes in a very indirect way, gov. debt is needed to facilitate international trade, by making sure the CB can operate in the first place. Still I stick to my original point: Gov. debt will not be directly involved in international trade.

burningfiat said...

JR,
And if gov. debt goes more out of fashion in Freegold, like we all seem to agree on (more or less), CB's will just conduct their open market operations against gold instead right?

FOFOA: In Freegold, a currency manager will influence exchange rates by buying or selling gold. If a currency is trading higher than he wants, he'll purchase gold on the open market (doesn't matter where thanks to arbitrage) with freshly printed currency to weaken his currency.

john smith said...

Disclaimer: I am not a native English speaker, so I might not be choosing the right words. If there is anything that you do not understand, please ask and I’ll try to reformulate.

Once more I bring back the "Fallacies – 1. Paper Gold is just like Paper Anything" essay.

After the kind answer of JR, I still do not see the mechanism by which the following three unique characteristics of current [i.e. futures and options] gold markets depress systemically gold:

1) Gold is not consumed.
2) Gold is bought in currency terms, not weight terms.
3) Gold has a 60 year "supply overhang".

The problem I find with this FOFOA's essay and JR's quotes is that the mechanism described there seem to be merely one of paper supplying "gold" demand, i.e. buyers are not calling sellers bluff by preferring dollars as settlement for contracts, because it is so much more convenient and, after all, the buyers where there just for the quick dollar [gold exchanges are different, because they the only ones that allow dollars settlements, if buyers prefer so].

Perhaps the problem is all in my mind and I have misread this essay. I.e. FOFOA is not saying tat the three aforementioned characteristics have an independent role in gold price suppression. In that case the following story does not apply:

Laplace, Pierre Simon de (1749-1827) The French mathematician is remembered in philosophy partly for his contributions to probability theory, and also for his strict determinism. He himself proved the mechanical stability of the solar system within Newtonian mechanics, thereby removing the need for any regulation by divine intervention. It is this that occasioned his celebrated remark to Napoleon about God: ‘Je n'ai pas besoin de cette hypothèse’: I have no need of that hypothesis.

Source: http://www.answers.com/topic/pierre-simon-laplace

JR said...

Hi Burningfiat,

You said:

Gov. debt doesn't necessarily need to be involved here, or does it?

I said.

I'm not saying it has to be, but that it likely will.

Of course bank credit will be involved in international clearing as well.

======

d2drth asked:

Tell me why should there be government debt? To provide welfare? To support defence industries?

That's why I was talking about debt being involved in money supply management, ala:

That is the story of how CB's control the money supply up or down.

Right, I think CBs debt issuance will be a part of their open market operations in managing their fiat currency. Nothing like today but there will be some. I can imagine trading partners holding some of that debt (like short term notes).

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

Yes CBs will manage the currency against gold.

But they also have to manage there currency wrt their domestic banking system. That's what open market operations come into play - banking clearing, reserves, etc. I'm not saying there will be a lot of it, but debt issuance, monetization, currency management is not the bogeyman - its only when we save in the currency does it turn into My. Hyde.

We need and want credit fiat currency - its great for lubricating trade. Not good for saving.

I think a lot of the fiat activities that go on today will continue, but they will be much smaller in scale because they aren't being enable by the savers.

JR said...

Hi John Smith,

In brief, other commodities can have a supply shortage, but not gold. Gold isn't consumed. With gold, the issues is always price. not so with other commodities, where the paper market can levitate the price as well as suppress it.

Fallacies – 1. Paper Gold is just like Paper Anything

The paper market for commodities is just as likely to have a levitating effect as a suppressing one because it allows for financial participation by those who have no need or ability to hold the actual commodity. Gold is the only one that is unequivocally suppressed by the existence of a paper market.

[...]

The paper market for commodities is just as likely to have a levitating effect as a suppressing one because it allows for financial participation by those who have no need or ability to hold the actual commodity. Gold is the only one that is unequivocally suppressed by the existence of a paper market.

The second difference is that the vast majority of demand for gold is in currency terms, not weight terms. This is not true for commodities. If you need a ton of copper for a construction site, you need a ton of copper. That's weight-denominated demand. But gold demand is overwhelmingly in currency terms. If you need a tonne of gold, what you really need is $50,000,000 worth of gold. It doesn't matter how much it weighs because you're just going to stick it in a vault.

Having a paper market as a shock absorber for the gold market only has the effect of keeping the price too low.

[...]

Since gold is not consumed by consumers or industry the way corn, oil, copper and grains are, and because it simply accumulates, supply shocks are not economically critical. On the demand side, gold is apparently used as a "safe haven currency". And we apparently had a demand shock of around 7,575 tonnes in Q1 2011. The normal supply for that period would have been around 700-1000 tonnes, so the paper gold market acted as a shock absorber and absorbed that demand shock by expanding. That way the price of gold only rose $30 in a quarter with a demand shock of 10 times the normal physical supply flow.

But that wasn't really demand for 7,575 tonnes of gold. It was demand for $337B worth of gold. Hypothetically, if the price of gold had been $55,000/oz. in Q1 2011, that demand would still have been for $337B worth of gold, the only difference being that the $337B demand could have been supplied by only 190 tonnes (a mild 20% increase in flow rather than an extreme 1,000% increase) and the price of gold would therefore have barely felt a bump in the road, even without a paper market shock absorber.

Therefore, having an elastic paper market shock absorber for gold is only necessary if the price is too low, because there will always be plenty of supply if the price is high enough (60 year supply overhang, remember?). At today's price, having a paper market shock absorber is apparently necessary to keep the gold market from blowing up.

It logically follows that it is the very existence of the paper gold market which is keeping the price too low, because if you took it away, price alone would have to regulate the flow. Take the paper market away from other commodities and you simply remove the investor/speculator money in the middle thereby exposing producers (and consumers) to unpleasant shocks.

d2thdr said...

Hi JR,

In response to your comment- [i]A related idea that gets to gold as savings final settlement is the scrip at the Medieval fair analogy from Euro Gold. There is always a lag between initial settlement in scrip/currency aka indirect trading (not direct barter) and later final settlement in gold. During that lag people hold paper, be it in currency or direct debt.

This short term paper will show up on the BOP as an imbalance one way or another. There will always be some paper held due to the lag, but it won't grow to systemically destructively levels because trade partners won't hold the currency of another nation, they will settle in gold.

What other reasons do people see? [/i]-

The smaller nations with limited resources, for example say Switzerland, cannot aspire to support a solipsistic lifestyle which its used to by having inadequate tax receipts from a small population with limited industry. The world surely is wise enough to see through the very obvious short comings of the Swiss. Join the Euro or see the very perceptible painful fall in the standards of living. I digress.

The Swiss government, for example, clearly cannot afford for the long term rely on the debt until the reality catches up. Why can they not print their own currency thus debasing vis-a-vis physical gold and then gradually accept the dwindling standards of living or start becoming more like their neighbours, Germany.

john smith said...
This comment has been removed by the author.
d2thdr said...

JR,

In another comment, you stated - Just as it is with municipal/state governments across the US today, there will be lots of special purpose bond offerings sold to the public to finance stuff and backed by the power to tax. But they'll be competing in a market where savers have a solid place to save and aren't forced to "save" in "safe AAA tax free muni debt and government bonds" so the market will be much different than today.

Now pray tell me how long will these bonds survive until they are quietly discontinued?

john smith said...

(some errors corrected)

Thanks JR, I have read and reread this very same FOFOA's article more than once and also your quotes from the very same thing more than once.

Unfortunately, I still do not get it as an independent mechanism to supress systemically gold.:(

Paraphrasing Einstein, I feel the following: insanity is keep reading the same thing over and over and over again and expecting different results.

Nickelsaver said...

John Smith,

What is the purpose of a commodities market?

Is it not to hedge risk for the producers and users of the commodity? And if we are talking about corn, or wheat, and other things that are consumed, is it not to control price to the extent that the producers and users can keep the flow going with out suffering supply and demand shock?

But if you look at gold. It is a commodity that is consumed very little in proportion to its use as a reserve asset? Because it is fully treated as a commodity, its price is controlled and suppressed. In other words, its price discovery is based on artificial supply and demand signals BECAUSE it is treated as a 100% commodity.

So, in looking for a independent mechanism for gold, you need to look at it from the stand point of what would its price be if it were NOT treated as a commodity.

If we were to look at corn or wheat or oil, its price outside of a commodities market would not differ (except for stability) in price due to the end user demand.

But what would gold do outside of a paper exchange? That is the question you should be asking.

Hanzo Itami said...

@ John Smith

Honorable Mr. Smith!

Hanzo directs your attention to the honorable Jason Fane of Ithaca who thought he "owned" gold through paper contracts, but now has a different understanding!

http://www.zerohedge.com/news/gold-rehypotecation-unwind-begins-hsbc-sues-mf-global-over-disputed-ownership-physical-gold

The honorable FOFOA referenced this particular incident in a typically excellent previous posting!

http://fofoa.blogspot.com/2011/12/unambiguous-wealth-2-mf-global.html

Much like the Japanese treasury did in my time (chronicled in "Who's Got the Gold"), there is great evidence that the people's money (gold) has been diluted, only in this century they dilute with paper, not with base metals!

Sayonara!

-Hanzo

JR said...

Hi burningfiat,

Governments can borrow money, just like investors and consumers. I can imagine a nation with lots of venture capital projects where lots of people will lend money to the G to build necessary infrastructure to support the vc investment, looking to the tax base of the vc investment in the future.

Make sense?

JR said...

John smith,

Paper is paper. Nothing different is found in the paper gold market than other paper markets.

The difference is on the other side. Gold is different. Gold is not a commodity. Because gold is different (mucho supply) the same paper markets impacts gold differently than commodities.

Gold is different.

JR said...

HI d2thdr ,

I wasn't aware such long term borrowing would be available, which I why wrote:

When you think about government debt in freegold, think more bills/shorter term notes and not bonds.

I would categorically exclude bonds, but I certainly wouldn't expect many of them.

J.R.

jojo said...

would there maybe be an 'nt missing from the last sentence above?

jojo said...

err... n't

john smith said...

Thanks Nickelsaver,

That is a brilliant point:

When a thing [anything] is traded on commodity exchange [even when the settlement must be made only with that very thing, i.e. fiat is not allowed], it will attract its producers and commercial users to that exchange to hedge their risks.

It goes without saying that their focal point is the production cost and naturally that is what they arbitrate. But this has an interesting dynamic --that price being communicated urbi et orbi it is what is perceived as the value by the outsiders and that perception feeds back on producers and commercial users.

So you have shown a second suppressing mechanism for [monetary] gold, as its value is abouve production cost.

But we have a situation here: where are used the following conditions?

1) Gold is not consumed.
2) Gold is bought in currency terms, not weight terms.
3) Gold has a 60 year "supply overhang".

Answer: they are not needed.

So was really this what FOFOA was talking about or does he have a third depressing mechanism, where the three aforementioned conditions play a vital role?

Hanzo Itami said...

Honorable Mr. John Smith!

It is dishonorable to ask a question and then ignore the answer!

Hanzo directs your attention to his previous comment!

http://fofoa.blogspot.com/2012/08/macrofreegoldnomics.html?showComment=1344721254247#c7597594385269476889

Sayonara!

-Hanzo

Nickelsaver said...

John Smith,

I'll let FOFOA answer that last part for himself. But I will pose another question to you. If the following is true:

1) Gold is not consumed.
2) Gold is bought in currency terms, not weight terms.
3) Gold has a 60 year "supply overhang".

Why is the commodity price so high?

I mean, if there is a supply overhang, it stands to reason the price would go lower and lower until the supply overhang is at equilibrium, right?

Again the answer lies in asking the question, what would its price be outside of the paper market. And moreover, what would happen to that supply overhang?

Think about how a paper market meets demand -vs- a physical only market.

john smith said...

Hi Nickelsaver,

> Why is the commodity price so high?

It is a question of supply and demand. Now, not all giants nor not all ants buy the idea that gold is just a commodity.

Michael dV said...

john smith
I too had some difficulty in seeing the paper market’s ‘price supression only’ effect. I intuitively believe it however. This is how I explained it to myself with out using fofoa’s words:
If the corn crop is poor this year the price for corn will rise. If it is abundant the price will fall, sometimes to the point where corn will be plowed back into the ground. The futures market removes risk for both buyers and sellers and speculators even out the bumps.
With gold the ‘crop’ is always great. Scarcity is never an issue. All that is needed to improve the ‘crop’ is a higher price.
If the market was purely physical then the price would have to rise when demand goes up. With a paper market the promise of gold acts as a substitute for physical gold. This could not occur with corn. The price would rise for corn until some substitute was found for corn need.
With gold, since there is no real need, it is (almost entirely) desired foto fulfill a financial purpose rather than a physical need for a cetain quantity, the promise of a financial equivalent suffices. This is not true for other commodities.
The futures market ensures that the exact same thing that real gold does, can be accomplished by a paper substitute. If there were no paper substitute the price would rise.
Because the price is determined by supply and demand the price would fall only if the demand dropped since the supply is always adequate (at the right price). A paper market would have no effect on this (falling demand).
So the existance of the paper market ensures that the supply of gold is always high enough and thus supresses the price. It does not elevate the price since that is controlled soley by demand. If demand falls the price of gold drops paper market or no.
Thid is how I convinced myself. Please let me know if it helps you or if I have just fooled myself in explaining something I already believed.

Edwardo said...

My view is that the inputs listed below acting as the cornerstones of a buoyant stock market are vastly overrated these days. Liquidity, in sufficient quantity, will over ride such quaint niceties as earnings and investors bidding up shares. We have had low volume, i.e. low participation, melt ups in the stock market for years now. Quite frankly, it's not really a market by my definition, since, in this time of said market dominated by HFT algo bots, anything like credible price discovery is a pure fiction. Equally the amount of fraud embedded in the system coupled with a paucity of law enforcement has more to say about where stock prices will be prospectively than most would like to imagine.


1 Earnings
2 Ability to fund the needs of the business
3 Number of investors bidding up the shares.

Aaron said...

Michael dV-

Bravo!

costata said...

JR,

Your comments from above in italics.

what? The BOP is an accounting mechanism, a way of describing the real world. Changing the accounting doesn't change the real world.

Agreed it is a type/form of description. That description may be accurate or not. Changing the description does not change the thing it is describing. Are we clear on this issue now?

I am arguing (in your terminology) that national accounting is not an accurate "description" of the real world. In the example I offered above the IMF has created an artificial distinction. In a sense two "species" of gold when, in reality, it is the same "animal".

How do they pay for non-monetary gold? Does this change is they call it monetary? They still pay x and get y gold back, but you think if they change how they account for it, the trade deficit goes away?

No I don't think that if they change the way they account for it the trade deficit goes away. The argument that gold should not be treated as a commodity import was advanced by an Indian economist. I brought that argument to FOFOA's attention.

If they exported gold, at a high enough price, the trade deficit goes away under the current national accounting system.

I also brought to FOFOA's attention a counter-argument from another Indian economist against the idea that gold should be treated differently in India's national accounts.

He argued that reclassifying gold in the way his opponent wanted to would be a distortion of reality. A distortion in the way those accounts depicted what India owes the world and what the world owes India.

I do think that if two prominent Indian economists can have such diverging views about national accounting it does highlight that there is an ongoing debate about how national accounts should be constructed in India. And there is ongoing debate in other countries as well about national accounting. The "science" of national accounting is not settled in my opinion.

The price of gold, not how its is accounted for in the BOP, is the issue.

Post-transition the price of gold will be of great importance in national accounting but the direction of the flow will be of equal importance to the picture it presents of an economy. (And much, if not all, of that flow may be notional.)

Aquilus said...

John Smith,

Let me put it this way:


On the physical side:

Just look at the 60 year overhang. At the current combined paper/physical prices, only 2800T are moving a year, yet the stock is approx 175,000T . That means that the other (175000-2800) tons did not deem this price high enough to make them sell. The price is too low to make these people dis-hoard their gold. Not because I tell you, but because of their (non) action.

On the exchange/bullion bank side:

Just in the example from FOFOA, we see the huge demand (over 7500T/quarter) that could not possibly be met by the approx 750T/quarter of flowing physical. What does that mean. That means that paper contracts were sold for the rest of the (7500-750) Tons. Is that legal? Naked shorts, yells KingWorldNews!!! Well, guess what, as a BB, having a 10-1 fractional reserve gold business is perfectly legal, especially because from experience they know:
a) most of these people buy gold contracts not for physical delivery but to convert x amount of currency exposure to y amount of gold price exposure
b) if they had to somehow produce the gold, they most that any court would enforce would be payment in legal tender for the contract (and banks did nothing legally wrong in selling fractionally reserved gold in un-allocated accounts)

So for good business reasons, it makes sense to meet any increased demand and (legally) sell much, much more (paper) "gold" than physical gold available. That would dampen the price by quite a bit, right?

Also, let's not forget how the paper price allows many western investors, funds,etc to get exposure to the price of gold, and yet not take delivery. In the mean time, Saudis make gold loans outside of the markets by financing mines in deals that offer money to miners now for gold re-payment in the future. That eliminates some of the demand from these major physical buyers from the paper markets, keeping the price low.

Do you see it now? Gold has been "cornered" already by the fact that :
1. Holders of physical stock are not selling at these prices
2. Future mine output is directly bought through financing deals, reducing the flow of physical that comes to market
Without the paper "buffer", the demand for exchanging hundreds of billions of dollars into "gold" exposure would overtake the available flow of physical gold by at least 10 to 1, likely more, and blowing up the entire paper market, if not enough "paper" gold was created to satisfy that need. And since that need is currently still mostly for the exposure to price of gold not to OWNING physical gold, the paper market absorbs the demand and in the process prevents the price from skyrocketing. The price still has to go up just so more dollars can be absorbed (as more are created), but as long as it's an orderly process, and no huge spikes in price occur, all is well.

And when the end comes, all paper gold will be settled in legal tender (currency), because no court can ask bullion banks to conjure up gold from thin air. And it will be absolutely legal, since fractional reserve bullion banking is totally legal.

Got it now?

Aquilus said...

Edwardo,

Let me clarify (since there seems to be some confusion): "3. Number of investors bidding up the shares." is the liquidity you're talking about. Whether that be HFT algos or people with a pulse.

Yes, look around you right now, you're seeing that. Today. It's to be expected.

And the crash, when it comes, will not be down in term of dollars (other than short term). It will be up, but at a lesser speed than the dollar loses purchasing power.

M said...

@MF

"Perhaps. I am questioning this implicit assumption. That banks, the receivers of freshly printed cash, will drive hyperinflation."

Good questions.

That is why I always bring up the Asian financial crisis and the treasury bubble. Because the loss of confidence will be outside the US. The initial spark will be just like the AFC. Capital flight out of US paper.

As this takes hold, Bernanke claims that he can stop this in 15 minutes.

2:43 in, "we can raise interest rates in 15 minutes if we have to"- Bernanke

http://www.youtube.com/watch?v=EwE4_n56kIc

This is eerily similar to the efforts of the Asian CBs in 1997.

"To prevent currency values collapsing, these Asian tiger countries' governments raised domestic interest rates to exceedingly high levels (to help diminish flight of capital by making lending more attractive to investors)"

^That is exactly what Bernanke said he plans on doing in the above interview.

M said...

@ MF

"If we are waiting for banks to panic, we might have a long wait ahead of us still. What you are talking about is the final stages of a panic like that. It might also explain why it has taken this long, if they are to be the eventual actors in this play."

The big US and global banks are part of the easy money camp. They will go down just like all the big banks in S Korea and Thailand.

Its the raw creditors that obtained this status through the physical plane (Japan, Germany, China, Oil states) that will panic out of US paper which will take down all of these banks. This will cause the obvious drop in the currencies and that is when even the 1% in the US will have to live within its means. Just like the 1% in Asia had to after the AFC. (the ones that didn't have any gold)

costata said...

M,

I would also factor in the inter-bank market and constant need of the banks to rollover short term borrowing. If the wholesale lending market goes "no bid" then a liquidity crisis in the inter-bank market is a near certainty.

The problem with this IMFS is containment i.e. some types of crisis anywhere are automatically a crisis everywhere. The kind of panic you guys are discussing can become contagious with incredible speed.

JR said...

Costata,

I do think that if two prominent Indian economists can have such diverging views about national accounting it does highlight that there is an ongoing debate about how national accounts should be constructed in India.

So what?

Why should we care, lots of economists disagree about lots of stuff. Labeling someone an economist is a pretty telling indictment in and of itself.

JR said...

Thanks jojo,

The software was never meant for people posting between Pimm's royal cups on mobile devices while stuck in longer lines than they should have to deal with. Operator error probably deserves a prominent place somewhere too :)

Go Go missing "n't"

JR said...

Hi John Smith.

The LTV is awful. People bitch about the Nazis but lets be honest, more harm has been done by this LTV nonsense than the sick Nazis could only dream of.

So you have shown a second suppressing mechanism for [monetary] gold, as its value is abouve production cost.

Of course it is, LTV analysis = double digit IQ folks flock. You are too smart to advance nonsensical LTV crap, get *MARGINAL* and learn you about the The Value of Gold.

costata said...

JR,

I'd like to make a few more observations about that debate between those economists in India over gold to see if we can provide some "what" for that "So what?" of yours.

The economist who was arguing that India should simply reclassify the gold imports and record them elsewhere in their national accounts was correct in that it would reduce the deficit they are recording in their trade accounts.

As I said earlier I don't see this as a solution to their trade deficit. But if all they are seeking is a better looking set of books from a CAD perspective then it would achieve that.

Let's take a look at the argument from his opponent. From my comment to you above:

He argued that reclassifying gold in the way his opponent wanted to would be a distortion of reality. A distortion in the way those accounts depicted what India owes the world and what the world owes India.

One of the counter arguments to this assertion is that Indians use gold as a form of saving. As gold is the most barterable good these gold savings represent a claim on the production of the ROW that can be redeemed in virtually any type of goods.

Since these gold imports are not consumed they have similar properties to having a privately held FX reserve within India. From a trade perspective they can be spent on imported goods. They are a store of international purchasing power.

A current account deficit generally indicates over-consumption, over-indebtedness, excessive reliance on foreign capital or some combination of all three. The gold component of India's imports isn't consistent with the picture their CAD presents.

As I said in that earlier comment at August 11, 2012 7:13 PM:

I am arguing (in your terminology) that national accounting is not an accurate "description" of the real world.

costata said...

What does this acronym LTV stand for?

costata said...

Doug Noland's latest (my emphasis):

Draghi’s Plan may have done little to bolster the euro, but it did incite another powerful “rip your face off” short squeeze in many risk markets. Policymakers may very well take satisfaction in wielding such extraordinary market power, although there will be a heavy price to be paid for interventions that feed increasingly unwieldy markets.

http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10693

Rough times ahead for the kiddies (speculators) splashing around in the new debt pool.

Blondie said...

Labour Theory of Value.

Edwardo said...

Acquilus wrote:

"Let me clarify (since there seems to be some confusion): "3. Number of investors bidding up the shares." is the liquidity you're talking about. Whether that be HFT algos or people with a pulse."

There is no liquidity in the market, that's the point. There is volume, but no liquidity. I realized after I wrote my post that I should have specified that crucial aspect. Thanks for giving me an opportunity to do so. That is what the Flash Crash of May 2010, among other items, exemplified, ditto, the less dramatic action that occurred earlier this month as a result of the so called Knightmare on Wall Street.

The point here is that while the "down in real terms, up nominally," schema is something that I, too, am on board with (from a theoretical standpoint) the market has demonstrated that it can go NO BID at any time with deeply unpleasant consequences. It is, unfortunately, neither hyperbole nor hysteria to suggest, as per the work of Taleb and his mentor Mandelbrot, that the so far near death experiences of Ms. Market will one day not be limited to just the critical care ward.

costata said...

Blondie,

DOH! Thanks. I agree with JR's assessment by the way. More body bags as a result of that piece of ideology than any army has created.

burningfiat said...

JR,
After your latest comments, I think we are more or less in agreement on gov. debt usage in Freegold. A litte bit will be used for money supply management (alongsde gold), and some will also be used for short term gov. imbalances.

You seem to think trading partners will hold short term gov. debt. Me not so much, but it seems like a minor disagreement.

BTW: Was thinking about the usage of gov. debt in the Eurozone right after Freegold transition (keeping VtC's above list in mind). Until gold spur and break forces is properly in place and recognized in the economy, Gov. bond buying would still be a big tool for the ECB to hit close to the 2% inflation rate in all countries. After the full function of gold kicks in, I imagine Gov. debt usage in the open market operations would dwindle to only be used for fine-tuning the money supply in the individual countries. The gold-signal would do over 90% of the job with distributing the Euro's to the proper places within the Euro-zone (thus flattening out inflation-rates between the countries).

/Burning

Motley Fool said...

john smith

I had a little chat with our recently departed troll AD on just this topic not too long ago.

I don't know how to link a comment on the third page. So...

Find this time stamp : July 20, 2012 7:13 AM on this post : http://fofoa.blogspot.com/2012/07/fallacies-1-paper-gold-is-just-like.html?commentPage=3

and have a look see. :)

TF

Motley Fool said...

Hmm

Many comments in between, perhaps this timestamp is a better starting point : July 21, 2012 8:39 AM

Motley Fool said...

JR

"The foreign dollar support"

If it comes down to that, I expect capital controls. So no-go on that idea.

"Or maybe a big enough paper gold hold"

Maybe, as incentive. The problem I see is that these entities are severely limited legislatively in terms of what they may buy. Physical gold? Not so much.

"PS - credit dies in a hyperinflation, so don't look to the banks to drive it."

Sure, sure. I was asking who has the cash. Who has the monies...that will spike in velocity.

@Jeff

" It was only stopped by the fed halting the transfers/redemptions."

And you don't think they would do the same again? :P

TF

john smith said...
This comment has been removed by the author.
john smith said...
This comment has been removed by the author.
john smith said...

(removed spurious brake lines)

Hi Michael dV,

> With gold the ‘crop’ is always great. Scarcity is never an issue.

I wouldn't say that the crop is that great [just that it is quite stable] and allegedly the house of Saud neither, as the flow is not that great, at least near production costs.

> If the market was purely physical then the price would have to
> rise when demand goes up.

Yes, we detect the presence of a black hole by indirect means, but it existence is also deduced by first principles, as it is a mere consequence of the laws of Physics.

I already have two reasons to believe that paper markets supress(ed) gold:

* If an exchange allow paper settlements, sellers would sell paper as "gold" to the extent that buyers do not call the bluff on settlement by demanding the physical.

* By trading gold on a commodity exchange, it will attract its buyers and sellers as commodity and accordingly they will set the price near production cost, provided that those who know better [if they exist] only and carefully buy long dated futures and call options to take physical delivery.

Naturally I'm eager to understand what third suppressing mechanism FOFOA saw.

> If the market was purely physical then the price would have to
> rise when demand goes up.

Not immediately with the second aforementioned mechanism, as it is a Faustian bargain [it works incredibly well until id doesn't]. If those who know better only and carefully buy long dated futures and call options, their absence from the spot market depress the price due to reduced immediate demand.

Not only this reduced spot price is communicated urbi et orbi and change the value perceptions of the outsiders, but also it makes more appealing for producer to sell forward to secure a profit. That was just the better of all worlds for those who know better [if they exist]. The problem is that price fall too low and that removed the incentives to sell forward and now Mephistopheles is demanding his part of the bargain...

> With gold, since there is no real need, it is (almost entirely)
> desired foto fulfill a financial purpose rather than a physical
> need for a cetain quantity, the promise of a financial
> equivalent suffices.

That's the first aforementioned suppressing mechanism.

> So the existance of the paper market ensures that the supply
> of gold is always high enough and thus supresses the price.

Not always, just while buyers do not call the "gold" bluff.

Jeff said...

Hi MF,

It wasn't just the halting of transfers that stopped the run. The Fed guaranteed absolutely everything. Confidence returned, at least this time.

http://www.cnbc.com/id/48578949

I foresee things going differently next time.

1. Those investors who didn't like finding their funds trapped have already found a way to avoid that happening again.

2. If their funds are trapped they apply political pressure to get them untrapped, and fast.

Jeff said...

You cannot hold the worlds money hostage when you need their support.

Randy: The reason this full transition has not already occurred is that institutional interest still exists to foster the smoothest practicable transition until that unknowable moment where the final remaining *SNAP* in the adjustment occurs.


FOA: My friends, a national fiat in our modern world only functions if the whole world uses and supports its flow and most importantly likes its management (political styling is the catch word). This support and use of our dollar can and will change faster than many think possible once the Euro is finished. Our dollar is not going to become a "banana" or "nada" in the future, as auspec notes. It already is and has carried this trait for some time now as does every fiat today. The only thing that keeps them from cascading away is world support and use...

Today, most asset holders are true to nature players of the trading mentality. If inflation becomes the risk, they will exit the door in an attempt to out-trade you and me (and that man behind the tree (smile))! Most of them will simply run up the inflation ladder seeking the next higher return. In the process marking the market down in existing holdings until the government must also buy those items at par.

john smith said...

Part 1 of 2

Hi Aquilus,

Just look at the 60 year overhang. At the current combined paper/physical prices, only 2800T are moving a year, yet the stock is approx 175,000T . That means that the other (175000-2800) tons did not deem this price high enough to make them sell. The price is too low to make these people dis-hoard their gold. Not because I tell you, but because of their (non) action.

These are undeniable facts. But the suppressing mechanism of 60 year overhang is conspicuous by its absence.

Just in the example from FOFOA, we see the huge demand (over 7500T/quarter) that could not possibly be met by the approx 750T/quarter of flowing physical. What does that mean. That means that paper contracts were sold for the rest of the (7500-750) Tons. Is that legal? Naked shorts, yells KingWorldNews!!! Well, guess what, as a BB, having a 10-1 fractional reserve gold business is perfectly legal, especially because from experience they know:
a) most of these people buy gold contracts not for physical delivery but to convert x amount of currency exposure to y amount of gold price exposure
b) if they had to somehow produce the gold, they most that any court would enforce would be payment in legal tender for the contract (and banks did nothing legally wrong in selling fractionally reserved gold in un-allocated accounts)


I'll reformulate the question: is there anything more than just paper supply filling "gold" demand [fractional gold, if you prefer] and that bluff not being called by buyers?

So for good business reasons, it makes sense to meet any increased demand and (legally) sell much, much more (paper) "gold" than physical gold available. That would dampen the price by quite a bit, right?

Absolutely! But, once more, I can't find there any mechanism how the following three differences suppress the spot price:

1) Gold is not consumed.
2) Gold is bought in currency terms, not weight terms.
3) Gold has a 60 year "supply overhang".

john smith said...

Part 2 of 2

Also, let's not forget how the paper price allows many western investors, funds,etc to get exposure to the price of gold, and yet not take delivery. In the mean time, Saudis make gold loans outside of the markets by financing mines in deals that offer money to miners now for gold re-payment in the future. That eliminates some of the demand from these major physical buyers from the paper markets, keeping the price low.

Plausible, I'm not sure if I should take that baggage. Once more I do not see the three aforementioned characteristics playing any suppressing role here.

Do you see it now? Gold has been "cornered" already by the fact that :
1. Holders of physical stock are not selling at these prices
2. Future mine output is directly bought through financing deals, reducing the flow of physical that comes to market
Without the paper "buffer", the demand for exchanging hundreds of billions of dollars into "gold" exposure would overtake the available flow of physical gold by at least 10 to 1, likely more, and blowing up the entire paper market, if not enough "paper" gold was created to satisfy that need. And since that need is currently still mostly for the exposure to price of gold not to OWNING physical gold, the paper market absorbs the demand and in the process prevents the price from skyrocketing. The price still has to go up just so more dollars can be absorbed (as more are created), but as long as it's an orderly process, and no huge spikes in price occur, all is well.


Yes, I see that the "gold" bluff is not being called. The only thing I do not see is what I asked for: how this three characteristics suppress the gold price?

1) Gold is not consumed.
2) Gold is bought in currency terms, not weight terms.
3) Gold has a 60 year "supply overhang".

And when the end comes, all paper gold will be settled in legal tender (currency), because no court can ask bullion banks to conjure up gold from thin air. And it will be absolutely legal, since fractional reserve bullion banking is totally legal.

Caveat emptor.

Got it now?

I am as clueless as before, as I still do not see how the three aforementioned characteristics suppress gold price.

john smith said...

Hi JR,

I guess that I’m a hopeless case, as I haven’t the slightest clue of what are you talking about.

Jeff said...

John Smith,

Your english has experienced a remarkable improvement; unfortunately your understanding has not. Perhaps you are not clueless, but willfully ignorant. You aren't posting from Germany are you?

"Maybe the atheist cannot find God for the same reason a thief cannot find a policeman."

burningfiat said...

Jeff and John Smith,

Mephistopheles = Satan's helper = Devils advocate = Advocatus Diabolus?

Apologies in advance if that chain of associations is unwarranted!

Aquilus said...

John Smith

Re:

how this three characteristics suppress the gold price?

1) Gold is not consumed.
2) Gold is bought in currency terms, not weight terms.
3) Gold has a 60 year "supply overhang".



Just because you pick three things about gold does not mean you stumbled upon the things that CAUSE price suppression.

The suppression is described in my and others' comments above.

Your point 1 describes the non-industrial nature of gold. That makes it a good SoV. In itself, it has nothing to do with suppression.

Point 2 describes the actions of mostly Western players that want exposure to gold price not bullion per se. This enables the setup and functioning of the paper gold market

3. This is the RESULT gold price being suppressed, not the cause.

So, if you insist on making these 3 points the CAUSE, good luck, I cannot help you. If you want to understand the paper market and see where your points fit in, re-read the comment(s) above.

Or maybe Jeff is right...

burningfiat said...

Aquilus,

Point 3. is just a function of point 1. isn't it?
We would have 60 years supply overhang even if there was no suppression. If I understand correctly the overhang is the stock divided by the yearly mining supply...

Aquilus said...

Burning

If gold priced equitably you will see more flow, so the overhang ratio should decrease.

john smith said...
This comment has been removed by the author.
john smith said...

Reading "Fallacies – 1. Paper Gold is just like Paper Anything", I thought that FOFOA were saying that:

1) Gold is not consumed.
2) Gold is bought in currency terms, not weight terms.
3) Gold has a 60 year "supply overhang".

were the very differences that enabled gold price suppression.

From your answers, now I see that this interpretation was all in my mind. I thank you all for making me see the light. Thank you for your kind hep!

john smith said...

Aquilus,

Point 2 describes the actions of mostly Western players that want exposure to gold price not bullion per se. This enables the setup and functioning of the paper gold market

If my memory serves well, that also happens in India. That's just an emerging property of gold being a store of value.

3. This is the RESULT gold price being suppressed, not the cause.

If I understood FO(FO(A)) well, that is just a consequence of gold being a store o value and because of that it lies very still, i.e. its velocity is very low by Gresham's Law and that won’t change with the coming of freegold.

Jeff said...

GLD added three tons Friday. Now up 10 from the recent low. And gasoline prices are rising again; what a coincidence.

burningfiat said...

Aquilus,

This is the paradox of Freegold, isn't it?

We have these two competing statements in Freegold:
1) As gold price rises it has a tendency to go into hiding.
2) You just stated that gold flow will be larger once is is priced more equitably (I assume we are talking standard 40-bagger)!

Someone please help me square these seemingly contradictory statements.

Motley Fool said...

burningfiat

The concept you seek is paradigm. The first being true in the current paradigm, the latter in the next.

TF

burningfiat said...

MF,

Thanks, makes sense.
And the way we discern which paradigm we are in currently is to see whether gold prices paper or paper prices gold :-)

Motley Fool said...

Yup

john smith said...

burningfiat,

I think that you are just inadvertently commingling to different dimensions of gold: the price you pay and the ounces you get. As the price increase a smaller number of ounces need to flow, so no paradox. FOFOA describes precisely that in the "Fallacies – 1. Paper Gold is just like Paper Anything", essay:

But that wasn't really demand for 7,575 tonnes of gold. It was demand for $337B worth of gold. Hypothetically, if the price of gold had been $55,000/oz. in Q1 2011, that demand would still have been for $337B worth of gold, the only difference being that the $337B demand could have been supplied by only 190 tonnes (a mild 20% increase in flow rather than an extreme 1,000% increase) and the price of gold would therefore have barely felt a bump in the road, even without a paper market shock absorber.

The only unknown for me is the flow [I do not remember that being discussed in more precise / informed terms], i.e. how much is the flow? The yearly mine supply? More? If so, how much more? Excluding mine supply, did gold have flown from occident to orient since 1980? How much?

DP said...

how much is the flow?

Does he mean the volume, or the price...?[/thinks]

john smith said...

Volume, i.e tonnes.

DP said...

What will be the size of global trade, and how balanced is it going to be?

This would tell us the approximate value of the required flow. But it can't tell us the weight of volume or the price per ounce, until the moment comes & the market is asked to provide the gold.

All we can be fairly sure of is there will be sufficient available on the day, at some price or another.

burningfiat said...

John Smith,

I wasn't commingling price and weight.
I was answering Aquilus, who said:
If gold priced equitably you will see more flow, so the overhang ratio should decrease.

See, Aquilus was talking about a ratio (flow/stock I think). Hence it doesn't matter whether our measuring stick is in currency or weight.
But you're right, it is mind-blowing to think about the flow Aquilus is talking about in buying power terms.
Not only does the flow increase by more than 40 times, from the price (aka buying power) increase alone. Then we have to multiply 40 by the reciprocal of the flow to stock ratio decrease Aquilis mentions above.
If we have to take that literally the flow-increase measured in todays currency could be over 100 times.
Interesting.

john smith said...

Just in case that it was not clear, the flow, was the flow of gold, not fiat.

Motley Fool said...

I would expect very little flow intra-zone, eventually, and very much flow inter-zone.

Net deficits today and say $55,000 per ounce is a start, if one wants to calculate such things, though I expect deficits to reduce sharply.

DP said...

Perhaps, the flow of value.

john smith said...

burningfiat,

If that increased flow is in tonnes, I see a potential problem. That increase in the velocity of the store of value, would make it less valuable...

Do you remember the wealth of generations which lies very still and because of that lack of velocity it is so valuable?

If that is no more the case, now we have paradox.

Motley Fool said...

john smith

Current flow is say 4,000 tonnes a year. 4000*31500*$55,000 ~ $7 trillion. I don't see that much flowing in net settlement.

But even so, the stock to flow ratio would then be the same as it is now.

TF

john smith said...

Motley Fool,

If with freegold trade is expected to be more balanced, doesn't that mean that inter-zone flow on balance [probably thats the keyword] would be small?

john smith said...
This comment has been removed by the author.
john smith said...

Motley Fool,

Current flow is say 4,000 tonnes a year. 4000*31500*$55,000 ~ $7 trillion. I don't see that much flowing in net settlement.

But even so, the stock to flow ratio would then be the same as it is now.

Yes, the explanation is plausible as the flow is in dollars not in tonnes.

burningfiat said...

john smith,

Like I tried to explain above the flow increase (in today dollars) is a combo of price increase and the flow to stock ratio increase Aquilus talked about.
The flow to stock ratio increase can be directly translated to an increase in the weight flow. I estimated that to an increase in weight flow of x2.5. That number was invented out of the thin air.
Like DP and MF hints at, the flow will be enough to counter-act the imbalance in the flow of other goods. Who knows what that will be?
Another interesting math. fact is that the any weight flow above zero will actually be enough to act as counter-balance to any trade imbalances, it is just a matter of price... I interpret this as a weight flow increase is NOT mandatory (Freegold will function without increased w-flow). It all comes down to net. saving needs of the day.

Motley Fool said...

john smith

How much do people save? Let's say 5%. Or hell 10% if we are being optimistic.

What is world GDP? About $60 trillion. 5% of that is $3 trillion and 10% is $6 trillion.

I'd say that's a lot of inter-zone flow as opposed to today wouldn't you?

TF

john smith said...

burningfiat,

Another interesting math. fact is that the any weight flow above zero will actually be enough to act as counter-balance to any trade imbalances, it is just a matter of price... I interpret this as a weight flow increase is NOT mandatory (Freegold will function without increased w-flow). It all comes down to net. saving needs of the day.

I go along with you.

john smith said...

Motley Fool,

How much do people save? Let's say 5%. Or hell 10% if we are being optimistic.

What is world GDP? About $60 trillion. 5% of that is $3 trillion and 10% is $6 trillion.


I go along with you here.

I'd say that's a lot of inter-zone flow as opposed to today wouldn't you?

If the prevision of a more balanced trade comes with freegold, I'd say that the more plausible source of gold for savings would be from the flow of intra-zone gold. That should be the corollary of a more balanced inter-zone trade.

Motley Fool said...

john smith

Not quite. The balance will be bourne of adjusted incentives, as spurred by inter-zone flow.

Gold for savings need to originate from outside one's borders. Consider the stages of man.

TF

Motley Fool said...

Correction : Gold for savings need not originate from outside one's borders. Consider the stages of man.

Motley Fool said...

It occurs to me that FreeGold is a study in nuance.

Examples such as fixed gold versus floating gold price and the implications; flow of gold and the effect thereof on human psyche, a promise of gold versus physical gold, etc.

Peter said...

Yes.

An interesting nuance about intra/inter zone gold flow, is only your locally minted official gold coins are CGT-free (where even they are).

costata said...

JR,

I have a little thought experiment that we might engage in. Just for the fun of it let's assume that these distortions in national accounting I'm discussing do actually exist.

Take Freegold-RPG + currency adjustment and slam this combination back into those accounts. Then apply the trade flows that FOFOA is describing in this post.

Then picture gold as a global FX reserve most of which is in private hands. I think that a role reversal occurs which FOFOA has touched upon with his two wealths above.

That IMF artificial convention reverses in a sense and in the process becomes real. All of that CB/Treasury gold becomes a non-monetary asset reserve which is useful to them in currency management but it is not wealth.

But that global FX reserve gold asset pool is real wealth. Viewed from the perspective of an "association of value" (price) or better perhaps a shared association of value then in a tangible way the world would have a new global unit of account (UoA). It could feel like we were all suddenly in a single "currency" bloc from a UoA perspective.

No-one can cheat this system by creating an artificial exchange rate for their currency. Any attempt to do so would be exposed very quickly in the FOREX market and by a shift in the domestic gold market from "white" toward "black" if there was a complimentery attempt to manipulate gold.

Just like the Club Med countries of Europe this new/old system would encourage countries to make internal adjustments to resolve trade imbalances.

Trashing your currency would still be an option if you are a nation state that issues its own currency. But the risks in attempting to do so should be terrifying for any politician tempted to do this and the rewards would be negligible and fleeting.

India has been running a trade deficit for a long time. So has America. The CAD in their national accounts appear to tell a somewhat similar story. Deficits and over-consumption.

Post transition, if we restate those accounts, we find that India's accounts tell a story of accumulating a massive store of value which translates into a massive store of purchasing power. It emerges that there was very little over-consumption (in reality) for a country of that size.

We don't need to change the way national accounting is structured to recognize this apparent change. Those accounts become an accurate description of reality. At least that is how it appears to me.

BTW I have a theory that I'm exploring. Since double entry bookkeeping (and ultimately national accounting) evolved right alongside money I'm speculating that this system needs gold to function correctly. And by functioning correctly I mean giving us an accurate description of reality.

With this perspective we could view this transition as the Superorganism acting to put us back onto an evolutionary pathway that we should never have strayed from in the first place.

Cheers

JR said...

Hi Costata,

Can you talk abut it in terms of a concrete example? It seems your are highly competent in discussing matters Australian. Can you discuss these ideas in the context of Australia?

Thanks, J.R.

costata said...

JR,

I will attempt to do so. Let me flag one of the examples I will try to present in national accounting terms as I/we become more adept in this subject area.

One of the assertions A/FOA made is that governments will take the gold in the ground. I think the perspective I'm attempting to present on national accounting can allow us to provide a powerful argument that they will be proven 100 per cent right.

Recall the criticism of Gordon Brown for selling off England's gold at the lows. An action nick-named "Browns Bottom". He cost his country a few billion pounds.

Now try to imagine the reaction from Australian and South African voters once someone takes the post-transition price of gold and plugs that price into their national accounts going back several years (pre-transition).

This will disclose that the CADs were much lower or non-existent. It may present a picture to the general public of a massive squandering of national wealth. I think it will be viewed like, say, selling off your oil resources for cents on the dollar. Both of these countries might in fact be debt free if that gold had not been artificially under-priced.

Gordon Brown's action produced controversy. I think that the voters in SA and Australia could be incandescent with rage. They won't need to understand why this happened. All they will need is the ability to read a simple headline in a newspaper.

If this is the political climate of those future times no politician would have a hope of being elected unless they grabbed what was left of the inground gold immediately. IMO this would become a must-have element of a policy platform.

So to be clear, I think this line of thought and enquiry I'm pursuing can help us to further validate this prediction and other theories discussed in these pages. And our favourite Yeti has made a great start to this excercise with this very post (which I, for one, have been wanting to see for some time).

IMO my friends we have broken some new ground at a post level and I expect a rich harvest of validation for this blog once the discussants here begin to explore national accounting from a different perspective.

Cheers

PS. I'm thinking in terms of a harvest as rich, if not richer, than the one VtC is reaping with his work on the ECB's actions. And at least as bountiful as FOFOA and VtC's spade work on the LBMA figures.

Aaron said...

Hi Costata-

This is an interesting perspective you offer. Perhaps you might indulge a few questions for my humble clarification.


"Gordon Brown's action produced controversy."

This sounds like you are talking about the typical UK bloke reading about Brown's Bottom in a 1999 copy of The Times. As if they just saw an article about how a shitload of UK gold was sold at rock bottom prices, but not understanding gold as a store of value they aren't the slightest bit interested in prank calling Gordon on the phone let alone coordinating a live reenactment of the Great Burning Ritual with Gordon oiled up for the grill.

"I think that the voters in SA and Australia could be incandescent with rage. They won't need to understand why this happened. All they will need is the ability to read a simple headline in a newspaper."

But here I'm not sure which audience and which time period you speak about. Do you mean an article in a 1999 Aussie newspaper where Costello's Bottom (is that analogous?) just happened and Aussie's equally don't yet understand gold, but in this case Aussie's would have taken whatever action was necessary to successfully remove Costello six years prior to the end of his reign?

Or if you are referring to an article printed in a 2012+ Aussie newspaper where those Down Under fully realize the store of value utility in their gold markets and reflect back on the same move Gordon did -- that is Costello's Bottom if it had occurred -- that those Aussie's would oust the current head of the Treasury (or go on a witch hunt for Peter C) yet in contrast the UK population would not rush towards the current exchequer (or Brown himself?) with the similar fervor?

Those ideas aside, this was the statement that made me pause for thought.

"If this is the political climate of those future times no politician would have a hope of being elected unless they grabbed what was left of the inground gold immediately. IMO this would become a must-have element of a policy platform."

I don't think anyone would ever run on this platform. The moment we hit the Freegold trigger -- which ever trigger that is -- and the gold market locks up, the CURRENT president would grab "what was left of the inground gold immediately". And naturally no one in their right mind would contest this important decision -- except the private owners of the mines of course. Oh well, sucks to be them.

--Aaron

Aaron said...

To clarify I've added a few words in bold. I should have said:

Or if you are referring to an article printed in a 2012+ Aussie newspaper where those Down Under fully realize the store of value utility in their gold markets (because we are talking about a time post $55K USA MTM AU) and reflect back on the same move Gordon did -- that is Costello's Bottom if it had occurred -- that those Aussie's would oust the current head of the Treasury (or go on a witch hunt for Peter C) yet in contrast the UK population would not rush towards the current exchequer (or Brown himself?) with the similar fervor?

costata said...

Hi Aaron,

I'm not referring specifically to the sale by the RBA/Treasury of Australia's gold reserves back in 1997 and comparing that to Gordon Brown's action. Yes I am referring to the post-transition price of gold in AUD (whatever very high price that may be).

In this instance I'm referring to someone taking earlier national accounts, inserting the Freegold-RPG prices for those thousands of tonnes of gold instead of the prices that were actually received and then restating these accounts to show John Q Public how much "he" has missed out on.

In my experience John Q Public in Australia doesn't demonstrate much foresight in judging politicians. Their judgement is delivered in hindsight. Now let me bring Gordon Brown back into this. He sold about 400 tonnes of reserves if memory serves me. That was enough to get him slapped around a few years later but the UK isn't a major gold producer.

Contrast the likely intensity of the public backlash when, in hindsight, the Australian public becomes conscious (to some degree) and realizes that government here has (a) sold off over a thousand tonnes of reserves and (b) permits the export of over 200 m/t every year worth (in hindsight), say, AU$50,000 per ounce.

Even if politicians (post-transition) have no idea what they would do with the inground gold before grabbing it I think they would support a grab anyway because it would play well with John Q Public.

And we know from the extracts I posted on an earlier thread from that interview with the former Australian Prime Minister and Treasurer Paul Keating that some of the political figures here do "get it" (or most of "it") when it comes to gold's role in the IMFS.

I hope this answers your questions.

Cheers

john smith said...
This comment has been removed by the author.
john smith said...

Quoting costata

I'm not referring specifically to the sale by the RBA/Treasury of Australia's gold reserves back in 1997 and comparing that to Gordon Brown's action. Yes I am referring to the post-transition price of gold in AUD (whatever very high price that may be).

As Mark Twain said - “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

After two years of reading FOFOA's essays and comment sections, it seems to me that yearly mine production and the flow are being inadvertently commingled.

Let’s explore another source of gold. It is reasonable to expect that as people get old, they sell their gold coins savings to meet their needs [that's why they bought them in the first place, they were young savers]. For instance Krugerrands are minted since 1967, so I wouldn’t be surprised that the volume of past years gold coins that that change hands every year at least equals yearly gold mining production in tonnes.

I doesn't seem to be a leap of faith in saying that the flow of gold is twice the yearly mine production or even more. Because of that, some ants might be in for a half pleasant awakening, as they might not became as filthy rich, as they have dreamed on, just half filth rich or even less.

I hope that readers now grasp why the flow is even more important than some might have thought.

john smith said...

The previous message it *not* a critic to costata.

Its only purpose was to bring some thought on how very still gold lies very still.

JoyOfLearning said...

There are two ideas I encountered here that I keep thinking about and I just can't reconcile as to me they seem contradictory. I would appreciate any opinions on this:

1) I felt a central theme of this community was a kind of confidence that the ECB has strong incentives and will keep to it's 2% & stability mandate, that it's separated from the nation state and regardless of what other analysts and sistes say it will do whatever it takes to keep credibility. It is the young currency on the block that is set to take over the role of the aging one and thus it must be vibrant and honest (like the $ once used to be)

2) Yet I remember a number of different passages where it sounded like when the $ falls the Euro will fall too, like all paper, just not so much or in a way that will still keep commerce flowing in this currency. Weather this happens through a quick 40% revaluation or a period of inflation who's rains are then pulled back... the result is the same... a breaking of that 2% contract, a breaking of the confidence. Furthermore this seems to me from other discussions to be a necessary step so that savers across the world might finally get that awakening shock that wakes them all up and convinces them to stop saving in debt and globally simultaneously all develop that misstrust of governments and start using gold as savings.

So my question is, how does 1 not contradict 2? or 2 contradict 1? Or did I missunderstand one of them. I think for both 1 & 2 I heard mentioned multiple times both in multiple Fofoa articles and Another/Foa quotes and in the discussions here in the community. It is hard for me to imagine a nation like the Germans or should they lose the will to fight inflation the past&present savers of the world accepting a story told by the ECB which would go on the lines of: "well, we have and allways will keep to our 2% stability mandate... except in times of need/that one time we had to devalue everything by 60%". Those kinds of stories & spins you hear from every single government institution across time... and if they do the same I think it becomes harder to argue they're unique or different.

I would really appreciate some thoughts on this contradiction in opinions that I see. I may just be reading it all wrong so I would humbly ask for your opinion. Thank you very much to Fofoa and the many very smart and knowledgeable hard working people here for everything!

Jeff said...

John Smith,

Congratulations on your further improvement in English. Funny that you bring up kruggerands; another poster who claimed to not speak english very well, but did, raised the same objection. I'm waiting for you to say we already have freegold, 'John'.

AdvocatusDiaboli:

You assume that this flow of old coins comes from the "desperated" cash raisers. Sure there might be some. But in that magnitude? And the shelves immediately filled up again? And always so random different years (19th century...today) and different type&continents?

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

Robert said...

I have noticed the same thing, JoyofLearning.

I think that all governments are under pressure to overspend, overpromise, and over indebt themselves. And the easy way out is always to print. Austerity results in riots and scares politicians. Inflation, even hyperinflation, causes a lot of pain and anxiety, but it is much better for politicians and central bankers. Remember FOFOA's observation that in Zimbabwe, the same central banker is still in charge? That's why I think a front lawn dump is the cards everywhere, not just the U.S. (some denials on this message board notwithstanding).

Europe cannot keep the 2% stability mandate under the current structure. It will lead to austerity riots on the periphery. It would force a breakup. It fundamentally goes against human nature to voluntarily embrace austerity. No matter what you think about the brilliant structure of the Euro, the structure cannot overcome that aspect of human nature.

I do not see any countries pushing the nuclear button as a conscious policy choice. I think Bruce Krasting is right, and the short term response will be to try devalue the Euro 30% against other currencies because this is the only way to "kick the can" that Germany will accept. The mid-term response will be to keep the currency union together, but with a stronger central bank and with the remaining countries surrendering more sovereignty. In the end, Germany is going to cave on the 2%, but they will succeed in forcing the other countries to surrender their sovereignty. This will preserve the two key features of the Euro: that it has severed its link to the nation-state and to gold (the difference is that when this is all done Europe is going to have a different idea of what a nation-state is).

In the end, the fiat monetary ship is going to the bottom of the ocean. But the Euro will act as a life preserver.


KnallGold said...

Yeah and who sold off 1600t of Swiss Gold at the back of Browns bottom? I think it constituted the largest part of the WAG, what a bleed for the Swiss. Much of the HMS diatribe here stems from that, make no doubt! And I bet that will bring out Desperado soon, foaming at the mouth...

(ah, and I'l shut for a 1 ounce Dragon, game? ;-)

Never knew who the buyer of that Swiss Gold was, guess if 10t tranches have to be bought in utmost secrecy, imagine the surroundings when 1600t had to be placed, although it was 10 years ago. Some suspected it was that part of Gold the SNB held at Fort Knox, achieving 2 goals with one shot. Will we ever know!?

Always suspected the Chinese were the main buyers. Whoever, at least I could cheaply secure my Goldpanda collection during that time... For some strange reason the 1995 was the hardest to come by. Now, early dates already go at ridiculous prices IF you can still find it, smells like Goldpandamania has started (but Silverpandas are actually much hotter!). My local coin dealer said the Chinese are buying it all empty, like crazy.

On a side note, not many know that you can find kilo nuggets in the Swiss alps, this was a huge story then:

http://www.videoportal.sf.tv/video?id=047e2416-7308-413d-b996-012bcbe880b2

Now think a minute emphatically on the Swiss voters and politicians...

FabieuxHabieux said...

So wealth destroyers (consumers) are in a dance with wealth creators (savers).

I have to say that governments are giant groups of cannibals who would rather destroy wealth so that others cannot use it to destroy them--envy: wanting what others have at the same wishing others didn't have it.

Is there some tipping point where there is so much wealth in the world that people won't feel the need to destroy it before others can use it against them? I don't know. I hope so.

john smith said...

Hi Jeff,

I'm flattered for the ad hominem attack, as the thoughts presented remain intact.

On the other hand, the flow might be even bigger, if jewellery recycling is accounted for. How much bigger would be the flow accounting it for? I hope that not too much bigger...

Jeff, como decía Mark Twain: "No es lo que no sabes lo que te causa problemas. Es lo que sabes con certeza y no es así".

Jeff said...

What thoughts? You offer no numbers to back your statement 'the flow of gold is twice the yearly mine production or even more. '. I checked the amount of US gold eagles minted in the largest recent mintage, 1999. It comes to less than 50 tons. Krug mintage numbers aren't available, AFAIK. What else have you got?

victorthecleaner said...


Robert,

I think that all governments are under pressure to overspend, overpromise, and over indebt themselves. And the easy way out is always to print. Austerity results in riots and scares politicians.

Of course, nobody can precisely forecast the decisions made by politicians or even by the ECB. Here are nevertheless some thoughts on Europe and the ECB:

The governments of Spain, Portugal, Ireland, Greece are under brutal pressure to cut down on their deficit spending. Yes, there have been some riots. Yes, some riots may even be understandable, not primarily because of the 'austerity', but because of the level of corruption in some of these governments.

But given the level of spending cuts (Greece's economy is still shrinking at a rate of more than 5% per year), isn't it surprisingly quiet on the streets? You can count on Zero Hedge to report every single broken shop window. Europe is very calm, isn't it? Perhaps it is not that difficult after all to cut down on the sugar treats - at least as long as there is enough pressure.

Remember that I said I thought the ECB would maintain a 2% inflation target - even in the periphery. That's different from an orthodox 'hard money' position in which the monetary base would be fixed whatever proportion of outstanding credit collapses. And the 2% inflation target might entail injecting base money directly into the consumption sectors of some peripheral countries, but not into the core (their SMP). Even a German saver would have no reason to feel cheated by this approach as long as the 2% inflation target is achieved on average in the medium term.

Finally, I don't think that the ECB enforced 'austerity' up to the 2% inflation target would force a break-up of the Euro. The reason is simply that there is no upside for any of the peripheral countries. Should one of them leave the Euro because of some political incidents, you would see the new currency fail rather quickly if they use it just to print the government deficit, simply because people would save in Euros (or gold or whatever else) rather than in the new currency that first needs to earn confidence.

I don't see why the ECB or Germany would want to devalue the Euro 30%..60%. I also think that a 30-60% devaluation relative to goods and services would produce at least as many riots as the present ECB policy.

The major devaluation risk for the Euro that I see is an increase of the velocity of money that is quick and happens before the gold is (can be) used. By increase in velocity I mean that people withdraw their money from the banks and take it out of their sock drawers to spend it immediately on: gold, real estate, stocks, foreign currency, groceries, fuel. Depending what they spend it on, you can get some serious price inflation in some market rather quickly. (Unless it is in goods and services, the ECB might not care that much though).

Victor

Jeff said...

Anyway, I think your name is Legion.

Greets

victorthecleaner said...


I just wrote

Even a German saver would have no reason to feel cheated by this approach as long as the 2% inflation target is achieved on average in the medium term.

So if we assume the ECB maintains the 2% inflation target and needs to inject further base money into some peripheral countries, this means in the non-consolidated Eurosystem accounts that German base money is transferred to Greece, for example. This is the infamous TARGET2 balance. So the ECB fulfils their mandate, everyone gets their 2% inflation on average, and nobody in Germany can complain about higher than promised inflation. Still, there is a non-zero balance of payments left over that is captured only in the TARGET2 numbers.

This cries for eventual settlement in a medium other that Euros, doesn't it?

Victor

john smith said...

Dear Jeff,

Anyway, I think your name is Legion.

I'm afraid that when you stumble upon the truth, you just name call it as the work of the devil.

What thoughts? You offer no numbers to back your statement 'the flow of gold is twice the yearly mine production or even more. '. I checked the amount of US gold eagles minted in the largest recent mintage, 1999. It comes to less than 50 tons. Krug mintage numbers aren't available, AFAIK. What else have you got?

Here, here. According to wikipedia gold uses are divided the following way:

* 50% in jewelry,
* 40% in investments (i.e. coins and bars),
* 10% in industry.

Source: http://en.wikipedia.org/wiki/Gold

On the other hand, according to the Gold World Council:

The best estimates available suggest that the total volume of gold ever mined up to the end of 2010 was approximately 166,600 tonnes, of which around 65% has been mined since 1950.

Source: http://www.gold.org/investment/why_how_and_where/faqs/#q023

So we have 166,600*0.65*0.4 = 43,316 of gold investment tonnes "above" ground since 1950, i.e. an average flow of 722 tonnes/year. Assuming that each generation takes 30 years to build their gold nest egg, we have gold from 2 generations coming to the market, i.e. 1,444 tonnes/year and that did not take into account gold savings from earlier generations nor the flow of gold jewelry as savings.

As a result, it is quite likely that the yearly gold flow is at least twice the early mining production, which would bring freegold price to $27,500. Besides, Victor The Cleaner gives the freegold estimation of $32,700, cf.:

http://victorthecleaner.wordpress.com/2012/02/08/the-many-values-of-gold/

Guess what, you’ll become just half filthy rich, whether you like it or not. That's the importance of knowing the flow.

Hill C said...

As a fellow Freegolder, I would like propose my theory on gold flows and the purpose of Operation Twist besides the obvious benefits to lowering long term interest rates and monetizing long term US debt which has gone no bid. I totally agree with FOFOAs insights on the broken sewer main. Remember, the primary purpose of the original Operation Twist was to stop our gold loss in addition to improving general business conditions. From the Fed (San Fran): “Europe was not in a recession at the time and European interest rates were higher than those in the United States. Under the Bretton Woods fixed exchange rate system then in effect, this interest rate differential led cross-currency arbitrageurs to convert U.S. dollars to gold and invest the proceeds in higher-yielding European assets. The result was an outflow of gold from the United States to Europe amounting to several billion dollars per year, a very large quantity that was a source of extreme concern to the Administration and the Federal Reserve.”
Also note, the current Operation Twist was launched precisely when gold was $1800+ and getting out of control. At the time, the spread between the 30 yr yield and the 2 yr yield was also exploding (ie. Investors piling into short dated Treasuries driving down interest rates). This was a similar situation as the 1960s. Again from the Fed: “The Kennedy Administration’s proposed solution to this dilemma was to try to lower longer-term interest rates while keeping short-term interest rates unchanged—an initiative now known as “Operation Twist” in homage to the dance craze then sweeping the nation. The idea was that business investment and housing demand were primarily determined by longer-term interest rates, while cross-currency arbitrage was primarily determined by short-term interest rate differentials across countries. Policymakers reasoned that, if longer-term interest rates could be lowered without affecting short-term yields, the weak U.S. economy could be stimulated without worsening the outflow of gold.”
If you look at a chart of the spread between the 30 yr yield and the 2 yr yield versus gold there is an amazing correlation. http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p45653390680
I contend the Fed action at the time had as much to do with gold as what was offered by the Fed. They were able to cloak long term purchases with no bid by selling short treasuries in to limitless demand effectively making these treasuries an “attractive” short term alternative to gold. Here’s the rub: the Fed will soon run out of short dated treasuries to sell. At that point, someone (China?) or the Fed will have to step in and buy long dated US debt. If there are no takers the spread will again explode and gold will be off to the races. Btw, you’ll notice the spread compressed during the other QEs as well which were concentrated on the long end.
Thoughts?

Hill C said...

One more point. During the periods when the correlation diverged substantially, oil was exploding higher which would theoretically be a secondary brake on the upward movement of gold since they do no flow in the same direction.

Here is the chart but it is busy:
http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p10248768527

That is it for my tin foil hat rant.

fonoah said...

JoyofLearning raises an interesting question. My (shallow) understanding is that the $ will HI against the whole real world, whereas the Euro might only inflate against one asset (Gold).

Is this on the correct track?

Cheers - FoNOAH

Motley Fool said...

fonoah, Joy

Yes. That's the idea, that when it all goes to hell the ECB should be able to channel most of the rage into gold.

Myself, I think it may be messy, so some devaluation against goods may occur, but this will be as a result of people's actions, and I do think the ECB will try and compensate as best they may.

TF

Texan said...

John Smith,

1. Gold is not consumed. This is the key. Unlike soybeans or oil, the buyer does not have to take delivery, and so generally doesn't take delivery. So a seller can short with impunity. All they have to do is price manage.

In this respect, a better question might be why is there even a futures market for gold? It certainly isn't to help producers hedge their costs by selling gold forward. And I would imagine that anyone who tries to take delivery in size gets all kind of soft pressure not to do so. So what is the purpose of it?

Texan said...

2. Gold is bought in currency terms. This is price management. If there is too much demand, let the price move higher. The demand is in dollars/fiat. So a higher price requires more dollars to buy the same weight. Someone wants 5 tons, let the price move up 5%, or 50%, and clip the demand for physical.

What we are witnessing is the gradual (and probably managed) re-monetization of gold to "absorb" all the cash sitting in government bonds.

Texan said...

3. Gold has a 60y supply overhang. I didn't read this as a reason for the paper suppression. I read it as an indirect proof of it.

Where is all the gold? Why isn't it all for sale "today" at "today's price"? Because gold isn't a commodity. It acts more (to me) like a form of real estate, say farmland. A bit is for sale at today's price, a bit more higher up, a lot more way higher, and some is just not for sale ever at any price. That isn't a feature of commodity pricing. No commodity acts like that. Soybeans and oil are ALWAYS for sale at today's price - all of them - because they can be REPLACED. I can buy beans at 16 and sell them at 16.05 all day long. Forever.


But you can't do that with gold. There is no physical supply. Gold is not like beans, or oil, or copper, or lumber, or milk, or sugar. All of those products are plentiful enough that they can be obtained, and hoarding is prohibitively difficult if not outright impossible over long periods of time for grains, or livestock, for example.


So I took FOFOA's point, like the one I made before, as "why is there a futures market for gold"? You seem to like quotes, the one I learned very early on is, "who benefits"? If the market is not for the mines, and it isn't, since they all sell spot now - why is there a futures market? Who benefits? It isn't the 60y supply overhang that needs the futures market, it isn't the mines.......

Texan said...

Finally, on flow.

First, your math has a giant assumption that is impossible to prove, which is that a buyer over 30 years will sell over the next 30 years. That's just wrong. I know you are trying to figure out the flow, but it isn't linear and it cannot be modeled. If the euro dissolved tomorrow, I suspect all the european buyers would hang on for dear life and sell the clothes off their back before they parted with their gold, and the same could be said for the US if the political situation got dicey. I understand that in China and India, almost no ne one ever sells their investment gold since its viewed as multi-generational.

I have read anecdotally that scarp in the US was estimated at about 7 tons, but I don't know where I got that. And others here have pointed out bullion sales. From my own experience with dealers, even big dealers don't have mountains of gold lying around, I seriously doubt that used bullion sells in much higher volume than freshly minted coins.

But what does it matter? Even if you knew the flow to the ounce, what you know is where buyers and sellers of SMALL SIZE will transact at today's price. It tells you nothing about what happens to flow if there is a crisis, or conversely if the world becomes convinced that "dollar is now good as gold, trust us". And critically, it tells you nothing about what price the big parcels go for - the really chunky strategic blocks of 50, 100, 500 tons. The 5th avenue "trophy properties". Different market, different price, different flow.

costata said...

A Gold Lock-Up Scenario?

I will return to attempting to describe those concrete examples in national accounting that JR requested but at the moment this dichotomy of non-monetary gold and monetary gold has captured my attention. So I would like to talk about that.

The current system imposed by the IMF basically makes gold in the hands of IMF members a monetary asset and gold in the hands of the private sector a commodity from an official sector perspective. (LOL)

FOFOA has posited a couple of scenarios post-transition for gold that are relevant to this discussion. (These are my words so he may have to jump in and correct some of this if I am not stating things correctly.) Firstly gold will operate as a separate savings circuit from the MoE currencies.

Secondly some gold will be usable wealth and gold in the hands of the CB/Treasuries will be a currency management tool. For my part I have described a role reversal. The so-called monetary gold in the hands of the official sector becoming a non-monetary asset reserve and the commodity gold becoming monetary in a sense that doesn't equate to currency.

Now I'd like to advance a few reasons why I think that post-transition the CB/Treasury gold will hardly move at all i.e. only to "smooth" out the volatility in exchange rates. If my arguments are sound we could deduct 30,000 m/t of official sector gold and the entire "white" market flow from the stock.

So the remaining 130,000+ m/t would be the market. I'm asserting that there would be no material net additions to this private sector stock for a lengthy period of time. Currency would be forced to bid for gold and the private market will set the price.

These are my arguments supporting this scenario:

1. I think the innovation that China has introduced to the practice of currency swaps (using them to facilitate trade) will prove to be a positive evolutionary adaptation. So settling net imbalances in the short term won't require gold to move.

2. Most of the large producers of gold will grab the remaining inground gold due to a backlash from their citizens. Note that most of these countries are part of the US dollar bloc. They sold down their reserves to support the existing system. They will seek to rebuild those reserves and use the inground gold as part of their currency management regime by regulating exports.

3. Politicians in countries who have sold down their reserves will be under pressure to either keep their remaining reserves intact or, if they do sell any gold, they will have to make sure it is only sold to their citizens.

4. The BIS will be able to facilitate inter-country notional transfers where necessary without alarming the general public in the short term. But politicians, CBs and Treasuries will need to be very careful to treat these arrangements as a "bridging" excercise while they deal with the underlying causes promptly.

Thus the private sector en masse will be the agent that allows gold to fulfill its "brake and spur" function. And this will be very difficult to reverse. It would require many decades, if not many generations, for the official sector to build up sufficient reserves to outgun the private sector.

To conclude, I think that if any Treasury was seen to be accumulating excess gold reserves they might come under pressure to declare a kind of "social dividend" and distribute that gold to their citizens.

M said...

FOFOA et al

-"The piling up of gold in any country does not signify that it is prosperous;"

I disagree. A piling up of cash or gold or anything indicates that the country has capital goods that are paid for.(factories,machinery ect)

-"it merely shows that the country is giving other countries more goods than it receives;"

The country is not giving anyone anything.They have capital and they are selling things because they don't need them.

-"that it is parting with more usable wealth than it is getting back."

Is consumer products really wealth ? They have value but they are not wealth. Wealth is the factory that they produced the products and that factory is not being exported.

M said...

@ aron

"The moment we hit the Freegold trigger -- which ever trigger that is -- and the gold market locks up, the CURRENT president would grab "what was left of the inground gold immediately". And naturally no one in their right mind would contest this important decision -- except the private owners of the mines of course. Oh well, sucks to be them."

Not so fast. Even the average person knows what happens when a government goes Hugo Chaves on an industry. A few points

-Oil reserves are sold off to anyone with money in Canada. BP, RDShell, Statoil(Norway) all own some reserves in Canada.

-The average working stiff doesn't need gold nor do they care or know what the price is. Contrast that with gas or even electricity. See point # 1

-What will the total amount of cash flow add up to compared to say... oil ?

-The only difference from other industries will be the profit margins.

M said...

lol @ John smith

"On the other hand, the flow might be even bigger, if jewellery recycling is accounted for. How much bigger would be the flow accounting it for? I hope that not too much bigger... "

That amount of flow, or new gold coming into existence each year, is about one and a half percent of the stock. Even if gold production were to be doubled, then the growth in gold, would still only be three percent. THREE PERCENT

Robert said...

Victor,

Thank you for your thought out response. Regarding a near term devaluation of the Euro, Krasting's argument was that this is the only short term fix that can be implemented over a weekend. Other political solutions take a lot more time. Yes, you are right that Europe is calm now. It is August and everyone is on vacation. Greeeks are not foolish enough to riot during peak tourist season. What happens when the tourists go home? As bad as the situation is in Spain, people are turning to their families, and grandparents are supporting multiple generations. For now everything is okay, but we are only 4 years past the peak. What happens 10 years from now? The money is still flowing for now, but what happens when it stops? Tunisia was calm the day before Mohamed Bouazizi set himself on fire, and then everything changed.

Devaluation is bad in the short term, but it gives people hope that they can rebuild, and it often works. Of course it is terrible for savers, but savers always get screwed. It is the most politically expedient solution when things get tough.

In any event, I think that the pace of monetary history will pick up next month when everyone gets home from vacation.

Valora Oro said...

A separate issue. ECB will restart bond purchases (under the Securities Market Programme (SMP)) when the price of gold rises again. It can be observed that there is clear correlation between bond purchases and gold's price increases (or, in other words, quarter-end revaluation of the Eurosystem's gold).

Michael dV said...

V Oro
What is the reason the ECB would increase bond purchases when the POG rises? I am not seeing the connection (I am not questioning your statement but would like your thoughts on why the ECB would do that).

jojo said...

Thanks Mr.Impostor!

john smith said...

Hi, Texan

1. Gold is not consumed. This is the key. Unlike soybeans or oil, the buyer does not have to take delivery, and so generally doesn't take delivery. So a seller can short with impunity. All they have to do is price manage.

¡Aha! I think that I got it --people do not take delivery, not only because it is so much convenient, but also because gold would remain there for the taking, when they really want it. I believe that the reason for the later behavior is that people think they are smatter/faster then the average, although that's impossible in the aggregate... as FOA eloquently said:

Kind of like a house for sale with ten bidders. Each bidder thinks the house is in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time, even though nine others want it to, because all I have to do is bid a little higher and take it! Insane, but that's what is going on!

But there's a chink in the armor: not taking physical delivery is only an option, if exchanges do not do their best to enforce physical delivery, otherwise buyers would demand a discount for the risk and sellers wouldn't like it.

I have read somewhere on the web that gold physical delivery is no more enforced since the 1990s. Is that right?

If that's the case, two problems materialize:

* Prior to the 1990s gold is not the key, due to the enforcement of physical delivery, so selling short with impunity was the same as conceiving without sin, i.e. the depressing argument becomes moot.
* Since the 1990s industrial sellers are being ripped off. They can't be that stupid to do not notice it, can they!? So why they stay in the exchanges?

john smith said...

2. Gold is bought in currency terms. This is price management. If there is too much demand, let the price move higher. The demand is in dollars/fiat. So a higher price requires more dollars to buy the same weight. Someone wants 5 tons, let the price move up 5%, or 50%, and clip the demand for physical.

I beg to defer. Gold is bought in currency terms because it is a store of value. If you do not like my words, you can take FOFOA's words, cf. "India's Gold", instead:

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

john smith said...

3. Gold has a 60y supply overhang. I didn't read this as a reason for the paper suppression. I read it as an indirect proof of it.

At the beginning I thought that FOFOA was explaining how the paper market suppressed gold, now I'm quite confused about the how in that article.

john smith said...

on flow

You are quite right, it is a big assumption assuming that investment gold is only bought by savers, doing what savers do --build their nest egg when they are young to provide for their needs when the get old. I wouldn't even be surprised, if there are also lots o speculators there spinning gold faster and thereby depressing gold by increasing the flow.

In my opinion it shouldn't be glossed over the independent evidence provided by VTC's estimation of freegold price, as it could be used to estimate the flow of gold as being 55,000/32,700=1.7 times yearly mine production.

john smith said...

@ M

lol @ John smith

"On the other hand, the flow might be even bigger, if jewellery recycling is accounted for. How much bigger would be the flow accounting it for? I hope that not too much bigger... "

That amount of flow, or new gold coming into existence each year, is about one and a half percent of the stock. Even if gold production were to be doubled, then the growth in gold, would still only be three percent. THREE PERCENT


Gold price is determined on the margin. If you double the supply for the same demand, price must fall to an half. It's NOT THAT FUNNY, at least for gold owners. As FOFOA says --It's the Flow, Stupid--.

john smith said...

Quandoque bonus dormitat Homerus...

Some corrections to my August 14, 2012 1:55 PM post:

========
Hi, Texan

1. Gold is not consumed. This is the key. Unlike soybeans or oil, the buyer does not have to take delivery, and so generally doesn't take delivery. So a seller can short with impunity. All they have to do is price manage.

¡Aha! I think that I got it --people do not take delivery, not only because it is so much convenient, but also because gold would remain there for the taking, when they really want it. I believe that the reason for the later behavior is that people think they are smatter/faster then the average, although that's impossible in the aggregate... as FOA eloquently said:

Kind of like a house for sale with ten bidders. Each bidder thinks the house is in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time, even though nine others want it to, because all I have to do is bid a little higher and take it! Insane, but that's what is going on!

But there's a chink in the armor: not taking physical delivery is only an option, if exchanges do not do their best to enforce physical delivery, otherwise buyers would demand a discount for the risk and sellers wouldn't like it. That's why it is in the best interest of exchanges that enforcement.

I have read somewhere on the web that gold physical delivery is no more enforced since the 1990s. Is that accurate?

If that's the case, two problems materialize:

* Prior to the 1990s gold not being consumed can not be the key, due to the enforcement of physical delivery, so selling short with impunity was the same as conceiving without sin, i.e. the depressing argument becomes moot.
* Since the 1990s industrial sellers are being ripped off. They can't be that stupid to do not notice it, can they!? So why they stay in the exchanges?
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