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:

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Texan said...

John Smith,

1. I can't answer your question on how the exchanges enforce gold delivery. I believe Eric Sprott has written extensively on tis topic owever, among others. As for industrial sellers, if it's the only game in town, then what choice do they have.

As for buyers discounting the risk, please bear in mind that for decades gold futures were pretty sleepy. It's only in the last, what, 5 years that gold has really moved beyond $500 range? And in that time there has been a surge in products that offer an alternative to futures. Not necessarily better - but still an alternative. So clearly "buyers" are trying to figure out different ways to hold gold. Seems to me to be sort of an evolving process from "my contract will be upheld" to "maybe I want some unallocated warehouse receipts" to "hmmm, I think I'll just build a huge vault in my country house bunker and store it there". I'm being facetious, but you can see ow the method of gold ownership (at least in the West, and even slowly but surely among institutional money) is changing.

jojo said...

john smith my ass.

Texan said...

2. Yes, it is inelastic. It is not perfectly so however. If you doubt me, answer for your self if you are "all in" or not (you don't need to tell me). Or do you have some doubt. Price relative to something - in this case USD - is how most of us determine value. It's a hard habit to break. So naturally seeing the price scream higher might make some pile on, and some hesitate and wait for a pullback. price movement, rightly r wrongly, will affect behavior. Until such time as the barn door is clearly open, and the horses have gone.....(which everyone "recognizes" at their own speed and time).

Texan said...

3. I dont know how to respond on that. Again, I think it was a "proof" of the ret of the post. But if FOFOA cares to respond to it himself, he will.

M said...

@ JOHN smith

No thats wrong. You are correct if you are talking pork bellies or copper but not gold. It took gold 6000 years to get the stock to flow ratio it has today. Even some metals like palladium or platinum have some good physical characteristics but they will never have the stock to flow that gold has.

Edwardo said...

On a somewhat different note here is Stewart Thomson, who Uncle costata likes to feature from time to time, on (why there will be more) QE.

"The fiscal cliff is the driver behind (Fed Governors) Rosengren and Williams “coming out of the closet. I think more governors are in that closet, and only monthly QE provides a practical mechanism to manage the effects of the fiscal cliff."

One can not necessarily be sure, (not that it matters too terribly much anyway) but Mr. Thomson seems to recognize that all the QEing is, when push comes to shove, about supporting Uncle Sugar's lifestyle.

http://www.321gold.com/editorials/thomson_s/thomson_s_081412.html

Hanzo Itami said...

@ John Smith

It is immensely gratifying to see the "light bulb turn on" for someone, almost as gratifying as having it turn on for one's self!

To provide some further evidence, consider this:

Kyle Bass to COMEX: “What if 4% of the people want delivery?”
COMEX: ”That never happens…”

KB: "And if it does?"
COMEX: “Price will solve everything.”

KB: "Thanks, give me the gold."

via http://wealthcycles.com/visual-economy/smart-money-says-comex-can%E2%80%99t-back-its-gold-contracts


Regarding your question:

"* 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? "

I would think that it's because they are "the only game in town", and they are making a profit (which might be greater in real terms, compared to what is likely under the very different political environment of Freegold).

-Hanzo

Michael dV said...

Obfuscation is the pastime of fools and politicians . Genius alone can simplify.

costata said...

Phat Expat,

Good luck with your silver roll.

JR,

This isn't specifically about BOP related issues. I'm still on this gold mine production under Freegold-RPG thing. But this may fill in part of the local picture for that BOP discussion.

M,

I'm not envisaging a Chavez style nationalization and replacement of the operators with a state owned corporation. I think that if the government does grab the gold the best way to do it would be to convert all of these gold miners into actual or de facto contract miners. IMO they will then become more like a utility than a typical mining operation. They won't get to keep the windfall but they will be rock solid profitable on every gram they can produce.

Australian Gold Production Post-Transition Scenarios

Part 1/3

This isn't a sermon from Uncle costata BTW. If anyone can show that these scenarios are factually unsound then jump right in. I’m happy to be shown to be wrong and improve my understanding as a result.

Just for the sake of argument let's assume that the post-transition price of gold is AUD $50,000 per ounce and total cost of extraction is $5,000 per ounce. (That cost base may seem ridiculously high but once the trade unions here got their hands on these guys a janitor at one of these mines would be on 250 grand a year for a 3 day working week.)

Any readers interested in this exercise I'm conducting please note this: These gold mines are now akin to currency printing presses from the perspective I’m using.

The second thing to note is that Australia only has around 80 m/t of RBA/Treasury gold reserves these days. We'll assume that the Reserve Bank of Australia (RBA) will wish to use gold reserves to manage the value (price in gold) of the Australian dollar. Not, I hasten to add, the price of gold itself.

Thirdly neither of these scenarios have ownership of the gold reserves taken over by the Australian government. Where I refer to RBA assume that means RBA and/or Treasury functions. The other thing to bear in mind is that miners don't "mine" ore. They mine cash of the legal tender variety. Gold (in and of itself) is of no more intrinsic worth to a gold miner than copper or lead is. It’s merely a “product” they extract and process in order to sell.

Continued/

costata said...

/Continued

Part 2/3

Scenario 1: Foreign Owned Gold Mining Company (assume it's a US corporation for simplicity).

Each ounce of gold extracted is exported and paid for with US dollars. For the purpose of this scenario the miners costs are all spent locally. And they pay a total of around 30 per cent in taxes, royalties, levies etc. So around $20,000 of the $50,000 US dollars for each ounce may need to be exchanged into AUD. (We don’t care where the other $30K ends up.)

If it wants to avoid an impact on the exchange rate the RBA can hold these US dollars as an FX reserve or the government can transfer it into a sovereign wealth fund and invest them outside Australia. If it decides to exchange these US dollars for AUD we can’t assume that the impact of an exchange would be neutral. The FX market is also subject to the forces of supply and demand. It doesn't operate in a vacuum.

But let’s assume that the RBA attempts to exchange them in the FX market anyway. If that increased demand pushes up the exchange rate and the RBA wants to push back against it they would either have to issue currency to devalue the AUD or lower interest rates (which historically weakens the AUD in the FX market). If this $20,000 is then spent into the domestic economy it injects (at least) that much purchasing power. Assuming that growth rates in most other sectors of the economy are not growing this would be an inflationary impulse to the economy.

I would also argue that this is the equivalent of base money creation because there is no bank lending involved. I see this as mostly new demand for AUD which banks can only meet through creating digital deposits in the banking system. In turn these deposits are supported by an implicit guarantee from the government to exchange them for currency if required. So it is new base money either way. Supplied by banks on request or from the government.

I’m also assuming that prior to the transition any excess, or shortage, of base money in the Australian economy would have been addressed by the RBA as part of its normal activities. In other words supply and demand were balanced. All in all I think this AUD price increase of gold should be viewed as new money rather than a transfer within the existing money stock.

Now there are two conventional options for sterilizing new money. Issuing bonds by the Federal Government or reinstating a formal reserve requirement for the Australian banking system to lock up this extra money. Neither option is limitless and gold production is ongoing. The RBA can't sell gold to sterilize any currency issued because their reserves of around 80 m/t are outgunned by annual production of over 200 m/t.

The RBA now has only one option left in its tool kit with which to respond to an inflationary impulse - raise interest rates. This would also tend to counteract any weakness in the exchange rate from inflation of the money supply. Historically higher interest rates encourage the exchange rate of the AUD to move higher. However, the rest of the economy is flat so pushing up interest rates would depress other sectors.

The only neutral way to balance these forces and maintain a stable currency is to have gold reserves and to own and control the revenue from the domestic mine supply if you don’t have large enough aboveground reserves. So this scenario is a bust in my opinion as an attempt to leave foreign owned gold mines, their in-ground gold and revenue in private hands from an inflation, deflation, exchange rate and interest rate management perspective.

Continued/

costata said...

/Continued

Part 3/3

Scenario 2: Locally Owned Gold Mining Company (assume all of its stock is owned by Aussies).

This is the high capacity printing press scenario. Every ounce is generating demand on the money supply for some, or all, of this AU$50,000 because these miners report their profits in AUD, issue dividends to the stockholders in AUD, pay taxes in AUD and so on. Initially every ounce has to be absorbed locally by the money supply.

This could produce a deflationary impulse to other sectors of the economy by crowding out demand from those sectors for AUD. If it did then that problem could take a long time to cure naturally through structural adjustment in the economy. A "solution" which conveniently ignores the distinct possibility that few Aussies would enjoy the structural changes by the way.

This could also result in a rising exchange rate if the FOREX market perceives this increasing domestic build up of aboveground gold in Australia as implicit support for the currency. Any attempt to counteract this deflationary impulse by injecting more currency into the economy to devalue the currency would deliver an inflationary impulse. If that overshoots rather than balancing out the deflationary impulse then the RBA is back to square one. It has an inflation problem.

As for scenario 1 the options for sterilizing an inflationary impact are issuing bonds by the Federal Government or reinstating a formal reserve requirement for the banking system. The RBA can't sell gold to soak up currency because it is outgunned by the miners. That leaves interest rates as the only other tool in the RBA's tool kit. But with the rest of the economy not growing then pushing up interest rates could plunge the overall economy into recession (or worse).

So this second scenario is also a bust as an attempt to leave these locally owned gold mines, their in-ground gold and revenue in private hands from an inflation, deflation, exchange rate and interest rate management perspective. Once again the only neutral way to balance these forces and maintain a stable currency is to have gold reserves or to own and control the revenue from the domestic mine supply if you don’t have large enough aboveground reserves.

Even if public opinion would permit the Australian government to leave this windfall in the private hands of miners and their stockholders the RBA will be confronted with too many conflicting problems to deal with. So IMHO they will want to grab the in-ground gold because of the voter backlash I discussed in earlier comments (here and here) and if the government seeks currency stability they will need to do so in order to deal with the economic disruptions this gold production will cause.

Edwardo said...

One can only speculate on what the upshot of this scholarly endeavor may be, but the IMF has recently published a paper entitled "The Chicago Plan revisited."

http://www.imf.org/external/ns/search.aspx?NewQuery=The%20Chicago%20Plann%20revisited&col=SITENG&filter_val=N&lan=eng

Victory said...


....where is Aristotle?

athrone said...

re:Chicago Plan Revisited

If there was a return to 100% reserve backing (the Chicago Plan), this would separate the function of money and credit (sounds familiar).

Imagining a scenario where they have a one time devaluation of currency to wipe the slate clean (re-issue notes), while simultaneously moving to 100% reserve backing. Wouldn't that be one half of Free Gold, without the Gold?

The other half is the universal reserve currency for Balance of Payments, but with FX markets presumably much more stable/transparent, is Gold really necessary?

-athrone

M said...

@ costata

I want to tackle your scenarios but I don't have time atm. On a drive with the other half.

Anyway, the fate of gold miners does have allot to do with the way gold is viewed from a BOP prespective.

FOFOA was saying that gold will flow to surplus zones because the surplus zone is exporting more usable goods then it is using itself. The way he words it implies that the export country is on the short end of the stick cuz they are exporting more real goods then they are using and gold is just the unless thing they get in return.

I think this is wrong because the surplus country is not giving up wealth. It is selling consumer goods that they don't need. The factory that makes the goods is the wealth.

d2thdr said...

M commented

I think this is wrong because the surplus country is not giving up wealth. It is selling consumer goods that they don't need. The factory that makes the goods is the wealth.

I agree. The country selling goods can demand what to accept for their goods. They may accept fiat but they may prefer gold. May be they do not trust the other party to settle the final debt in real gold. BIS could theoretically impose harsh penalties which could make the life of the deficit country even more difficult.

Seems the world is suddenly going to become a very large place.

JR said...

No athrone,

Returning to a hard money credit system has nothing in common with Freegold.

Dr. Octagon said...

M commented: "FOFOA was saying that gold will flow to surplus zones because the surplus zone is exporting more usable goods then it is using itself. The way he words it implies that the export country is on the short end of the stick cuz they are exporting more real goods then they are using and gold is just the unless thing they get in return. I think this is wrong because the surplus country is not giving up wealth. It is selling consumer goods that they don't need. The factory that makes the goods is the wealth."

It's not a question of whether the wealth is in consumer goods vs manufacturing equipment. It's a question of real-world useful items compared to monetary-world items. A factory is useful, as are the goods it produces. For example, a warm sweater is a real-world valuable thing to have, especially on a cold day. If a country exports sweaters instead of using them, aren't they exporting something of real-world value, something that can be considered real-world wealth? The sweater is useful, as was the wool that it was made from, which also got exported.

athrone said...

JR,

I realize the mechanisms are different, but the end result of separating the store of value from the supply of credit is still the same.

Why would the government prefer Free Gold, where they have essentially zero control over the store of wealth vs. something like the Chicago Plan, which would increase tax revenue while also giving the government direct control over the primary medium of savings?

If either method can resolve the current monetary/economic crisis, why would they choose the less desirable option (from their perspective)?

athrone said...

From a political standpoint, it also seems much more likely for the government to increase the bank reserves from 10% to 100%. That is something that anyone can understand, and it solves the most common fear of the public (bank runs).

A re-evaluation of Gold, which 99% of people do not even own, is very difficult to understand and thus very difficult politically.

The Chicago Plan would also prevent turning the world on it's head (first world becoming third world, and vice versa) because Free Gold is all about Balance of Payments. At first glance the Chicago Plan also seems to let the US retain most of it's world power.

Maybe others who are more knowledgeable can comment as well..

john smith said...

@ Hanzo Itami & Texan

Thanks for the pointers. I'll evaluate if I should keep the baggage of gold physical delivery not mandatory on gold markets settlements or not, as now I know were that info should be.

As for industrial sellers, if it's the only game in town, then what choice do they have.

Sounds likely. Before miners were lured and then fleeced. hehe

john smith said...

@ athrone

The Chicago Plan would also prevent turning the world on it's head (first world becoming third world, and vice versa) because Free Gold is all about Balance of Payments. At first glance the Chicago Plan also seems to let the US retain most of it's world power.

I'm not that knowledgeable, but politicians are deemed to try all the wrong solutions first before they do the right thing, eventually. So even if it turns out to be the wrong solution, it still might delay the final outcome of freegold considerably.

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.”

Edwardo said...

It truly is something of a wonder to see what people come up with when one posts a bit of "reading material". The Chicago Plan was devised at a time when the condition of U.S. indebtedness was vastly different than at present. And while the plan might well have more than a little merit, it has no purchase on how to extinguish the present level of indebtedness, not one jot.

As JR commented, though not in so many words, it does not resolve FOFOA's dilemma, and, presently, said dilemma stands at the front of the line with respect to that which begs for a solution, pronto.
I wouldn't expect the IMF folks to stumble upon freegold, let alone advocate for it. In the meantime, changing the banking model is certainly advisable, but, as has been pointed out here, banking will be profoundly different when physical gold, and not sovereign debt, is firmly ensconced as the asset in which to save.

They can change the banking system all they want, or at least, by looking into the hoary past, raise the spectre- via a published paper- of doing so, but it's not THE problem now. It probably never was THE problem though among a certain group of blogosphere die hards, I can think of a few names- I'm sure you can too-it always has been.

athrone said...

Edwardo,

The Chicago Plan was devised at a time when the condition of U.S. indebtedness was vastly different than at present.

The paper you linked was released in August 2012. The authors conduct their analysis based on the current debt levels and come to the conclusion that the Chicago Plan still solves the four problems it sought to solve 90 years ago. So I think the questions I raised still stand.

As john smith mentioned, politicians are not looking for the "ideal" solution nor are they looking to solve things like FOFOA's dilemma. I doubt highly any have ever heard about it, or could understand it even if it was presented to them. Just look at the ridiculous system we live under today.

If something like the Chicago Plan were to be implemented, I think that would push out Free Gold very far into the future, perhaps beyond our lifetimes, do you disagree? It is true that the ECB (and Another) were/are pressing for Free Gold, but what about the US or other countries? It's certainly possible people have different solutions in mind for this crisis -- and I can guarantee you each has their own interests in mind.

Jeff said...

It's not up to the US or other countries; they are debtors. Full reserve banking would probably bring on freegold in a hurry, though.

FOFOA: "It's just a shift in the perception of savers. Can't change that."

athrone said...

Jeff,

Why do you think full reserve banking would hasten rather than delay Free Gold?

There are no savers in the west, certainty not after the forced austerity of Free Gold. Saver's in the West save < 5% and do so in paper (stocks, bonds, cash). Saver's in the East save > 20-30% and are already doing so in Gold.

What perception is there to shift, for those on either side?

Unknown said...


Hyperinflation and Kotklikoff's Figures by Gary North

http://mail.aol.com/36786-111/aol-6/en-us/Suite.aspx

Interesting article that argues that unfunded Social Security and Medicare promises from the USG would not be wiped out by hyperinflation.

Snippits:

When the Social Security trust fund administrators or the Medicare trust fund administrators estimate the obligations of each program, they use the figure of 75 years. They talk about what is owed over the entire 75 years. This means that any period of hyperinflation that is less than 75 years will be insufficient to abolish the political debts of the United States government. It cannot escape the obligation by paying retired citizens whatever they are owed over the entire time period. Hyperinflation will enable private corporations to escape their obligations to creditors, but it will not enable the federal government to escape. The government will be able to escape the burden in the years of the worst time of hyperinflation, but when the hyperinflation ends, and the central bank issues a new currency, this does not solve the problem facing the government.

[...]

All those forecasters who say that hyperinflation is inevitable in the United States never discuss this problem of the 75-year obligations. They never spell out in detail how hyperinflation will enable the United States government to escape its obligations. These obligations stretch out over 75 years. No hyperinflation has ever lasted longer than 20 years, and most of them have not lasted longer than about three years.



Jeff said...

Athrone,

Here is a quote from Victor which answers both your question on fractional reserve banking and John Smith on how paper suppresses the price of gold. 2 for 1.

Victor: I like the following explanation. Think of a small closed economy that is based on physical cash. Some of the cash circulates as people buy and sell things while some other cash is kept under the mattress and saved for the future.

Now they invent banks. People carry their saved cash to the bank. This cash forms the reserve of the bank. The bankers advertise and induce people to take out consumer loans. They reserve these loans only fractionally.

This way, the money supply increases (the correct definition of money supply in this situation is the total volume of bank credit), but their real economy has not changed. More money meets the same amount of goods and services. Prices increase, the value of money decreases. (This mechanism for getting price inflation is empirically studied).

Now replace cash by physical gold and bank credit by unallocated gold, and there you are.

In order to lower the value of gold compared to real goods, you simply create a form of 'credit gold', aka unallocated accounts, and lend this sort of gold on a fractional reserve basis.

athrone said...

Jeff,

That quote explains how fractional reserves expand the money supply, to which I think there was no question. Fractional reserve banking is conceptually, ridiculous for this very reason. Why should a bank be able to expand the money supply any more than a coffee shop owner?

I'm more interested to hear your thought process on why you think switching to full reserve banking would hasten freegold.

Jeff said...

If fractional reserves expand the money supply what does full reserve banking do? What happens to asset prices?

Michael dV said...

john smith
Josh Billings is usually given credit for your Mark Twain quote....and quoting an author in a language other than what he wrote in seems a tad pretentious.

athrone said...

Jeff,

Nothing because the effective money supply doesn't change with the Chicago Plan. During the transition the debt merely moves from the government to the banks.

Any bank with reserves less than 100% would have to borrow from the treasury, and that money cannot be lent back into the economy. Instead it simply becomes an asset on the bank's balance sheet.

So, government debt is greatly reduced, bank runs are now impossible, and people gain confidence in the USG/$USD. The banks won't be happy because now they are paying interest instead of receiving (creating) free money -- but what is the current worldwide political sentiment towards banks right now?

I still can't see how that would hasten Free Gold.

-athrone

M said...

@ Dr Octogon

"A factory is useful, as are the goods it produces"

The factory is raw wealth or capital. The good it produces have value but they are not wealth. Pornography has value but its not wealth.

" For example, a warm sweater is a real-world valuable thing to have, especially on a cold day. If a country exports sweaters instead of using them, aren't they exporting something of real-world value"

If you already have enough sweaters, then the ones you are producing have very little value to you.

spaul67 said...

I agree that the Chicago Plan would significantly increase the stability of the (MoE) function of money by stabilizing the money supply and eliminating the debt is money feedback loop.

What it won’t address though is the equally critical (SoV) and international trade aspects of money. Without Gold as both a Spur and Brake the monetary abuses we are currently suffering under locally and internationally will just continue even with non-debt based money.

FreeGold would still work ‘without’ the Chicago Plan but getting a better handle on the MoE would still be good thing and support a more orderly exchange rate with Gold. After all FreeGold needs something else to be the MoE.

The ‘other’ interesting aspect of the plan is how the government exchanges significant amounts of private debt for public debt in order to get a better handle on the effective money supply (Base + Credit).

Guess I’ll be making my mortgage payments to Uncle Sam in the future? That is until he makes me an offer to liquidate that debt for physical Gold, capital gains free. Seems like this debt consolidation would specifically enable the government to liquidate debt for Gold (Plan 3?).

So in sum the MoE and SoV functions of money are finally separated, savers are now holding international money (Gold) that also backs the local MoE currency the world over at local market based prices.

M said...

@ Dr. Octangon

Post freegold, Germany and Japan are going to produce like hell , just like they always have. And Greece will spend whatever it can, like usual. Savers will save, spenders will spend. From what I can see, there will be less spurring and braking going on and more of the same, except freegold will be better for the savers and better for the consumers.

Savers will have the ultimate place to park surplus wealth and spenders will not have volatile and bubbly prices to deal with.

From what I understand, freegold will produce MOE currency appreciation. ?

M said...

@ spaul67

"Without Gold as both a Spur and Brake the monetary abuses we are currently suffering under locally and internationally will just continue even with non-debt based money. "

The spur and brake feature will not stop producers from producing. But how is that a bad thing ?

It just means higher gold prices.

Michael dV said...

I realize I am a couple of weeks behind on this but FOFOA just pointed me to the Frances Coppola comments. I found some of her observations surprising as many of the things she noted in freegold are common to all gold bugs. The message to buy and hold physical gold is not unique to freegold. What is different than the usual stuff you will hear from most goldbug is that fiat currency has a place, gold will rise and stay there (ie we are not going to have the usual gold bull market, the medium of exchange and the store of value aspects of money need to separate, a recognition that the existence of a paper gold market suppresses the price of gold (even without manipulation, a return to a gold backed currency would be a disaster and will not happen, the future will eventually unfold to a freegold world without any effort on anyones part because it is a Nash equilibrium, and finally FOFOA still needs contributions even if he is not Moses....did I miss any major points (just in case she comes back for more?

spaul67 said...

@M

“The spur and brake feature will not stop producers from producing. But how is that a bad thing ?

It just means higher gold prices.”

Not necessarily.

Even net producers eventually get old, at which point they need to exchange wealth (ie Gold, SoV) for the excess income (ie Local Fiat, MoE), of current net producers that are trying to do the opposite, exchange excess MoE for SoV.

Gold prices only go up if the local supply of MoE grows faster than economic activity and population and/or negative trade imbalances within the MoE currency zone minus Gold Flow.

Remember we are talking physical gold, for every buyer there is a seller. One person is getting gold the other is getting MoE to spend. It all balances both locally and internationally at the market price.

Phat Expat said...

@costata
May the silver gods be kind. And of course if you have additional insights/info, please share.

@knallgold
Your observation on the panda was quite interesting. Though not entirely relevant to Freegold, as an investor/collector of PMs, one should recognize the value (above and beyond FG?) that Pandas hold, especially for the Chinese. In fact, comparing the mintage to say the Eagle, one would find a significant difference up until about 2010. Of course, one must be cautious when dealing with pandas since (gasp) counterfeits abound. :-)

One thing I have observed during my time in Asia is the Nationalistic (and oddly enough Racist) tendency of the Chinese. In fact, this is something that should be of great concern to the West; though I bet people won't really 'get it' for quite some time yet. An interesting deviation on the path to Freegold might be the evolution of another Cold War scenario resulting in a massive can kick. Is this possible? Desperate govies do desperate things...

costata said...

M,

I'm looking forward to your comments on my scenarios.

Edwardo,

Thanks for the link to that IMF paper. This may be a timely find for me. It sounds like it may dovetail with some things I have been thinking about recently.

costata said...

Re: 100 per cent reserving.

I haven't read that IMF paper yet so I will hold off on commenting on this issue in case this paper brings something new to that ongoing debate. Instead I want to focus on a dimension of Freegold-RPG that still demands gold regardless of what steps you take to deal with specific problems in a banking system, currency and so on.

It's the RPG part - reference point gold. The IMFS requires a stable reference point of value (price) for currencies. And if you are attempting to achieve currency stability one has to ask: Stable compared to what?

Even if it was possible to keep your currency stable in terms of some basket of goods, or currencies, it isn't desirable that prices (which are economic signals) remain stable. They should fluctuate as freely as possible. A brief investigation into the history of price controls should resolve any doubts on that score.

After the revaluation of gold to correct it's undervaluation and to recapitalize the system gold should be highly stable. It will be the price signals from currency exchange rates (another price) with gold that will alert the central economic planners to the impact of their latest screw ups.

If the planners don't listen, or can't interpret the signals, then in extremis official gold would flow to settle international trade. But if currencies are being well-managed and they are stable then official gold won't generally need to flow in large quantities.

Economic signals from the private sector gold market will be transmitted rapidly. FWIW I think the "dialogue" within a currency zone between the citizens and their central economic planners will be very lively.

Under Freegold-RPG politicians may watch the gold price and other stats on gold for their turf as closely as they monitor opinion polls and focus group research today.

Valora Oro said...

@ Michael dV

I do not see a direct link but (with the numbers) it seems clear that it is. I was wondering for what reason the ECB was purchasing or not purchasing bonds. It occurred to me to check if there was correlation with the quarterly adjustments of gold. And yes there is.

On the other hand, “the liquidity provided through the Securities Markets Programme (SMP) is currently absorbed by weekly collections of fixed-term deposits”. (Sterilization). In the week ending 10 August 2012:

Asset item 7.1: Securities held for monetary policy purposes
(“Value of accumulated purchases under the SMP amounted to EUR 211.3 billion”)

Liability item 2.3: Fixed-term deposits 211.5 billion
(“The intended amount for absorption equals the cumulative size of settled SMP transactions at the end of the preceding week, rounded to the nearest half billion”)

*******

Possible explanations to this time correlation between bond purchases and gold's price increases may be that, in this way (and with the MTM revaluation), ECB protects the total assets figure in his balance sheet. Or, in other words, quarter-end revaluation of gold (when POG rises) may compensate, in some way:

- SMP purchase prices below current market prices, or
- fall of the MTM price of the SMP purchases, or
- decreases due to the redemption of securities purchased under the SMP

¿?

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

Interesting what I did not know.

I would only add two questions.

Which of the choices would banks lobby for?

1. Chicago Plan;
2. Freegold.

Would the House of Saud & Co. [assuming that they even care] gladly accept the bribe of more time to buy more gold? [It might relieve the pressure for (quite?) some time.]

On the bright side, people would get used to the separation of MoE and SoV. hehe

costata said...

john smith,

Your silliness is starting to annoy me.

You wrote:
Would the House of Saud & Co. [assuming that they even care] gladly accept the bribe of more time to buy more gold? [It might relieve the pressure for (quite?) some time.]

If you have some special knowledge of the House of Saud's current gold purchases please disclose it. A/FOA indicated they had enough (15+ years ago) to offset any loss in the value of their oil.

spaul67 said...

@John Smith
“Which of the choices would banks lobby for?

1. Chicago Plan;
2. Freegold.”

Answer: Both

They are not mutually exclusive but complementary. The Chicago Plan for MoE and Freegold for SoV functions of money. Stability in both functions of money is mutually beneficial for all concerned.

I agree with the Bill Still that the world needs to return to a ‘sovereign’ debt free money supply. He is also right in that ‘if’ governments the world over could be trusted to prudently manage the local MoE money supply it could ‘also’ be a SoV.

But if monetary history has taught us anything it’s that governments will attempt to use their monetary power as a form of stealth tax and trade manipulation if given the opportunity.

Thus the counter balance of ‘physical’ Gold keeps everyone honest both locally and internationally with regards to games we all play with regards to MoE manipulation.

It reminds me of the old joke concerning future airplanes. In the future airplanes will consist of an autopilot, one pilot and a dog. The dog’s role will be to bite the pilot if he attempts to disengage the autopilot.

john smith said...

Hi costata

If you have some special knowledge of the House of Saud's current gold purchases please disclose it. A/FOA indicated they had enough (15+ years ago) to offset any loss in the value of their oil.

So far I agree with you.

The only knowledge I also have is that A/FOA said 15+ years ago they had enough. That's why I commented "assuming that they even care".

On the other hand, it is the nature of humans to want ever more, or, as Romans said: auri sacra fames. Because of that, it occurred to me that those agents might willingly accept the bribe of more time to get more gold.

If there is anything that bothers you, please correct me, as I do not like to be wrong for long.

JR said...

link

FOA (01/01/00; 22:49:45MDT - Msg ID:22020)
Reply
canamami (01/01/00; 21:08:25MDT - Msg ID:22013)
Question re Remedies for US Breach of Contract
This is open to the entire Forum, though it may be of particular interest to FOA.

Hello Canamami,
Your thoughts:
--------Is it possible to distinguish between pre-August 1971 Bretton Woods/gold-backed dollars and post-1971 dollars? It would seem that only those dollars which existed prior to August 1971 represent a breach of contract by the US. ---------

I have to put your items in context. Why would it be important to separate the pre and post gold backed dollars? That was not the thrust of the logic presented. The point was that foreign entities would take the US to task in trying to reclaim their gold at $42 per dollar. Simple international contract law does not allow the same contract to be honoured today and not yesterday?? Our present dollars have not changed in legal interpretation from their beginning. Only the Treasury committed an outright default by not supplying gold back then. Truly, the government should have reissued a new currency at the time of default.
Today, any return to backing the dollar with gold would open up a can of worms for the US. Especially in light of the success of the German and Swiss WW2 payments. Again, the whole reason for pointing this out is to highlight the political repercussions from backing the dollar with gold. Many suggest such an avenue and we point out that a new currency would have to be printed to avoid this. It's just another reason why an argument for backing the dollar with gold is impossible and dollar assets are at risk. The US gold stocks valued at any price will not save the dollar.

------Further, even on a purely moral basis, given that the rest of the world accepted US dollars after the 1971 breach of contract, would such acceptance constitute a waiver of the breach, thereby nullifying even a moral claim to US gold? ------------

Would the US risk such a move using this light argument as a loophole? I doubt it and so do a lot of others.

--------Moreover, it appears that by the early 1960's the world knew that the dollars outstanding exceeded the gold backing, yet the world continued to use the dollars? Again, the world accepted the US dollars knowing there was realistically no gold backing, thereby nullifying the moral
claim.---------

So, in the same light, if the world stopped paying off dollar debts they could not pay, does this action nullify the moral claim that everyone should pay dollar debts? Further, if you buy a junk bond that is trading without payments, does your purchase relinquish the issuers obligation to pay you any interest? This logic does not work in your presentation or mine as offered.


cont.

JR said...

cont.

-------Does not the continued prominence of the US dollar reflect value to US currency which stems from more than mere "gold backing" or "acceptance for oil settlement"?---------

I ask you, does not the high level of the US stock market reflect it's prominence rather than mere earnings or rational P/E ratios? Truly, the mind in a crowd thinks the common thought, no? Again, Western views are skewered by group acceptance of the contract that "bookkeeping entries" are representing real wealth. It's a fragile view that can be fractured from the competition of a less leveraged alternative. The Euro!


------(Kindly note I am not diminishing the possible importance of the Euro as a competitor to the dollar, or that at some point the huge overhang of foreign held US dollars and the trade deficit will have an impact. ---------

It is impossible for the production of any country to support it's currency if it's currency always flows "out" in a trade deficit. In this country, the negative effects of a reversal of this long term trend will bring on a dollar currency crisis that runs the price of gold well before local price inflation. This is the primary reason why recent investment profits will never transition into gold before it overtakes the illusion of these realized gains. This is the focus of our "reasoning" and push for the purchase of
gold "before the fact". Gold will run well before price inflation is evident (in a large degree). And before resource stocks create an up-trend based on this performance. All in conjunction with a severe downturn in local equity markets that will overwhelm all forms of paper investments (gold stocks included).
Yes, we may see minor runs in these areas prior to the crisis, but these moves will not be connected with the major bull market in gold that is coming.

Thanks FOA

costata said...

john smith,

The gold:oil ratio has not moved much outside its 60+ year range in the past 15 years. Dollars for oil producers buy roughly the same as they did 15 years ago.

New faces in the physical gold market, such as China's citizens, have emerged over the past 15 years. If the House of Saud was competing with the new faces the price of gold should reflect this competition.

The means of buying gold off-market diminished with the end of the gold miner hedging programs. So it appears to me that the big players have already reserved their seats at the big table.

Cheers

PS. Your facility with the English language is humbling to me since you claim it is a second language to you and it is my first. The way you use parentheses to indicate an aside is particularly adept.

athrone said...

spaul67,

What it won’t address though is the equally critical (SoV) and international trade aspects of money. Without Gold as both a Spur and Brake the monetary abuses we are currently suffering under locally and internationally will just continue even with non-debt based money.

I agree Gold is still the best SoV, but if we assume the Chicago Plan can greatly stabilize the MoE, wouldn't that put Gold more at the role it is today (by Eastern savers) vs. the preeminent role it would have (worldwide) in freegold?

With regards to international trade, if the MoE is stable, might the FX markets be enough to settle the balance of payments? Part of the "monetary abuse" the US has been pulling is convincing others that exchanging $USD for their own currency on open markets is a bad thing. Well, what if it's not?

Jeff said...

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

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

Jeff said...

Cash4Gold past peak?

http://www.bloomberg.com/news/2012-08-15/gold-runs-out-in-lisbon-as-falling-prices-compound-money-misery.html

JR said...

Hi athrone,

Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.

And a false premise can skew a brilliant analysis 180 degrees in the wrong direction.


This premise of yours athrone, is not well thought out, no? Is it?

Why would the government prefer Free Gold, where they have essentially zero control over the store of wealth vs. something like the Chicago Plan, which would increase tax revenue while also giving the government direct control over the primary medium of savings?

Another: Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

JR said...

hi spaul67,

You comment:

I agree that the Chicago Plan would significantly increase the stability of the (MoE) function of money by stabilizing the money supply

Why would we want to do this?

Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time- there is a basic minimum amount of money that is needed for something to even function as money. Take the quote that Mish uses from Rothbard and compare it to FOFOAs quote.

Rothbard Quote:
Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

FOFOA Quote:
"So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

There is no contradiction between the two. Mish is interpreting FOFOA as saying that we need money in UNLIMITED amounts, but FOFOA clearly says we need it in UNRESTRICTED amounts. The difference here is clear- for FOFOA the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy. This does not mean that expanding or contracting causes more economic growth, but that it allows for economic growth.

FOFOA: In my post I addressed "two simple, but seemingly, apparently impossible-to-comprehend concepts." The first was the splitting of the concept of "money" into separate units for separate roles. And in the medium of exchange role, I did use the term "unrestricted." But I also clarified it in this way: "Unrestricted by artificial constraints." A fixed, unilateral gold standard is an artificial constraint. A floating multilateral "gold standard" is a natural, free market constraint that allows for currency flexibility while, at the same time, exposing the exchange value (in gold) of a currency to the judgment of the marketplace.

athrone said...

JR,

My premise is that the government would maybe prefer the Chicago Plan while the banks would maybe prefer Free Gold. Is that an irrelevant topic? The topic of who has the power, the governments or the banks? Who has the power is who will force the system to their benefit. Freegold seems to assume that there is only one actor with one vision for the future (the ECB). Is that true or no?

Linking to a post I have already read (which does not even contain the words Chicago Plan), I think, cannot ever address this premise.

I am not claiming to have my (new) thoughts as well developed as someone who has had the same thoughts for five years. That is the burden of new ideas...

-athrone

athrone said...

JR,

FOFOA: "So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

FOFOA: "the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy."

You want the money to flow, and you want it to lubricate trade. How exactly does the Chicago Plan not achieve those goals?

-athrone

Peter said...

Yes.

Let's get this economy lubed-up! Even the disc pads.

spaul67 said...

@JR

“Why would we want to do this?”

I think we agree?

When I said a stable MoE I didn’t mean unchanging. The various local MoE needs to be flexible. That’s one of the best aspects of fiat money its ability to expand or contract rapidly; the shock absorber of the overall monetary system if you will. You can’t do that with physical gold which is also its best aspect as a SoV relative to the more variable MoE. Just like car going down a bumpy road, some parts of the car you want to flex others you don’t.

What the Chicago Plan fixes is that most of our current MoE is bank credit which causes the boom/bust cycles. While Ben and Co are attempting to plug the 2008 credit collapse with base money they are taking a knife to gun fight.

The US Treasury needs to assume ‘full’ control of the money supply and make it debt free money just like US coins are now. As many are coming to understand, control of the money supply is not unrelated to the power to tax, both are the fundamental and complementary powers of any sovereign.

At present those with the money power (ie private for profit banks) can use the credit boom bust cycle as a wealth accumulation pump. Extend easy credit; inflate the price of real assets; encumber those assets with debt; pull the credit plug; take over those assets at fire sale prices using credit only you can effectively supply; repeat.

Under the Chicago Plan our ‘elected’ representatives will regain the money power; as intended by the Constitution. So even if our elected representatives continue the boom bust cycles at least the wealth accumlation will benefit the ‘average’ citizen. Right now it just keeps accumulating in pockets of the 0.1% that control the money supply, ditto for low interest rates and new base money issuance by the Fed.

Almost no ‘new’ money/credit reaches the average Joe. The low interest rates just encourage leveraged gambling and the base money just shores up bank balance sheets while the US taxpayer get stuck with the toxic ‘assets’ from the bets gone bad, what a deal.

Meanwhile ‘real’ capital accumulation is shut down due to the artificially low interest rates. No incentive to work (socialism), no incentive to save (negative real interest rates), no incentive to risk savings (taxes and regulations).

The danger though (and one solved by Freegold) is that these same voters will likely attempt to use the money power to take wealth from net producers and savers by issuing more MoE than warranted; attempting to lower their taxes. Thus the Chicago Plan 'in' combination with Freegold is a bit of truce between the easy and hard money camps both within and between nations.

Now Freegold would still work even under the current MoE meme but the boom/bust cycles, QE, trade manipulation, race to the bottom etc. which will produce an out of control MoE resulting in a wildly changing physical Gold price even in a Freegold world.

Social/International cohesion and monetary policy are not unrelated, exhibit A the French Revolution. Given how interdependent the world is on free trade a French Revolution on a worldwide scale is too horrible to contemplate.

That is why I hope this paper by the IMF is an indication the Giants are thinking ahead at what replaces the Post 71 $IMF/Oil monetary system. They may have also tipped their hand by suggesting that Gold become a tier one asset. Add the innovation of what the Euro did with regards floating exchange with Gold and it’s not a big leap from Plan 2 of the Chicago Plan to Freegold for ‘all’ nations’ local MoE that wish to engage in world trade. Basically unless your nation practices Freegold we won’t trade with you. A Freegold trading block if you will.

Motley Fool said...

I'm reading the modern Chicago plan.

Thus far my thoughts are. Are they fucking stupid? Do they think at all? Do they have any idea what any of the words they use mean?

Thus far it seems like : Yes; yes but they do not think much about the human element ie. absurd versions of ceteris paribus; and no.

spaul67 said...

@athrone

“You want the money to flow, and you want it to lubricate trade. How exactly does the Chicago Plan not achieve those goals?”

The Chicago Plan only addresses the MoE ‘not’ what net producing individuals and nations do with excess MoE.

Right now under the debt money system, excess MoE accumulated by net producers just goes to feed the ability of net consumers/nations to go further into debt. Basically a dangerous positive feedback loop. So ‘wealth’ at present is largely just promises of individuals and nations habitually unable to be self-sufficient let alone save? No thank you. When you think about it real wealth transfer can ‘only’ occur between net producers.

In addition, given that interest is charged on the entire money supply the interest paid must grow geometrically year after year or credit defaults are guaranteed somewhere in the system. Under ‘any’ debt money system it’s only a matter of time before just the interest alone equals the GDP of a nation. A mathematically impossible situation as some resources must always be left over to feed and house even slaves. Add a generous social welfare system and you have the seeds for a real disaster. Thus default is reached well before this point. It varies from nation to nation but basically once the net productive capacity is less than the money consumed by interest the end is near.

So in sum the Chicago Plan fixes the issues above, yah Chicago Plan. So now we have a debt free money supply issued by the sovereign nation for the benefit of its citizens, imagine that. I agree if ‘all’ the nations of the world only issued enough MoE to lubricated local/international commerce and if ‘all’ the nations of the world had a perfect balance of net consumers/producers than the MoE could become a SoV. Maintaining both conditions at the same time over the time scales that savers are after though is not likely IMHO or even desirable based on demographics alone. It’s entirely natural for individuals and nations to go through periods of net production and net consumption.

Thus Freegold keeps individuals and nations on the straight and narrow with regards to their respective management of their nation’s MoE and SoV.

Basically the dog at the ready to bite the pilot if he does something foolish with regards to the MoE. That‘s Freegold.

My sense is that post collapse ‘no’ nation is going to trust one another, I can’t blame them, there is plenty of blame to go around BTW. Individuals and Nations are going to demand some assurance that the new international monetary system is neutral to all parties and won’t just collapse like the last one did. A non-debt based sovereign MoE interchangeable with physical Gold at local market prices without capital gains anytime you wish seems to fit the bill.

As in any complex system imbalances will develop even under a Chicago Plan/Freegold monetary system. The benefit of this system is that those imbalances can be worked out over decades rather than weeks or months.

Dr. Octagon said...

I have only had a chance to skim the Chicago plan so far, and plan to give it more attention this weekend. My initial impression is that it is very MMT-like. The transition reads a lot like the front-lawn dump, printing currency to exchange for debt. I haven't yet figured out their explanation for what foreign countries are expected to do with their fresh US currency.

JR said...

Lotsa chatter on "governments or the banks" and not much chatter on "savers" = failwhale!

K.I.S.S.:

The term FREEgold seems to be hopelessly confusing a great many of you, especially the ones suffering a myopic obsession with the "elite." So I would like to suggest a new name for this system, which is not really a system at all. It is more like the lack of a system: the dollar reserve system and the paper gold system. Without them, Freegold is what we have, along with whatever "system" develops. It is not something the debtors or the elite can fight. It's just a shift in the perception of savers. Can't change that.

Mmmkay? See:

FOFOA "It's just a shift in the perception of savers. Can't change that."

Yes!

athrone said...

JR,

And who controls the perception of the savers?

No matter how hard I try to change my perspective, I still can't manage to hold physical bullion in a 401k. People can only exercise (perceive) the options that are presented to them.

Aaron said...

And who controls the perception of the savers?

*facepalm*

Athrone, this one is really simple.

The Savers control the perception of the Savers!

Why are you contributing to a 401K? Just take the money and buy gold.

jojo said...

LDO

jojo said...

Athrone, quit thinking like a shrimp.

spaul67 said...

@JR

“K.I.S.S.:

The term FREEgold seems to be hopelessly confusing a great many of you, especially the ones suffering a myopic obsession with the "elite." So I would like to suggest a new name for this system, which is not really a system at all. It is more like the lack of a system: the dollar reserve system and the paper gold system. Without them, Freegold is what we have, along with whatever "system" develops. It is not something the debtors or the elite can fight. It's just a shift in the perception of savers. Can't change that.

Mmmkay? See:”

The fact is that the cost of adding incremental Gold to the system (ie mining) is well below the Freegold price predicted here. The only way Gold achieves this elevation in price over cost is because the system will use it as ‘tool’ to save itself post $IMF collapse.

The IMF is simply attempting to get a plan in place before this occurs. Add this paper to the already announced suggestion of turning Gold into a Tier 1 asset and it’s pretty easy to fill in the blanks. The increased accumulation of Gold by CB the world over is also a big clue. Again we must think like a Giant which by definition is the System.

The replacement international monetary system must maintain social cohesion, local commerce, international trade and transform past debt into the new system. Gold is the obvious choice to both transform past debt (thereby also setting the new price) ‘and’ providing an outlet for future savings once sovereigns regain the money power (ie non-debt based MoE money). The last thing they need is for savers/net producers to bid up the price of stuff people actually need. The System has been pretty good at holding the Gold price down; my guess is that they can hold it up really high as well.

So the “The System” is very much required for Freegold but it will be an act of desperate self-preservation not benevolence to shrimp savers that drives them there. Further it’s not at the national level but international level that drives this. All nations are guilty of currency manipulation. Thus the only way to firewall MoE manipulation is via Freegold. Thus the environment will finally ‘also’ be in place for all savers the world over to safely use Gold as SoV at prices 50x its actual incremental mining cost. BTW an important safety tip for mine stock owners, the Gold still in the ground isn’t yours yet. All sovereign nations will be actively managing both MoE and Gold supply within their political sphere.

The scenario you seem to envision above is some quiet revolution among fellow savers? I just don’t see it happening without the system elevating Gold to become the fulcrum/impartial referee if you will of the international monetary system required for efficient world trade (the main objective).

Warren Buffet is right; would you rather own a 65’ cube of gold or all the Farmland and most of the Fortune 500 companies in the USA? My guess is that absent a system supporting the Freegold paradigm most ‘savers’ will continue to chose the latter right now. That is certainly what the market is saying anyway.

Gold is just an Element in the periodic table up until it’s not.

JR said...

Hi spaul67,

That's pretty much completely awful.

The only way Gold achieves this elevation in price over cost is because the system will use it as ‘tool’ to save itself post $IMF collapse.


The LTV is simply wrong. Get Marginal.

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

P.S. - "Karl Marx also dabbled in economic theory and wrote a manifesto that was fairly popular, but he never had much fantasy football success because he believed kickers should be treated as the equal of quarterbacks."

LOL

Aaron said...

JR, where the hell do you come up with this stuff?!

I was reading the football article and I'm like, wtf is this? So I go from reading to skimming to scrolling to oh -- A-ha!

Too funny.

Hanzo Itami said...

@ Costata and M:

Hanzo would very much like to hear your thoughts on the lesser white metal, as he is interesting in exchanging it at better rates as well!

He also has some thoughts on why the GSR may be more favorable in the future, which is the only reason he has retained any at all.

Perhaps one of you could start a blog?

Arigato!

-Hanzo

athrone said...

Aaron,

The Savers control the perception of the Savers!

If we accept this, then we are forced to believe the worldwide group of "savers" (regular people mind you, with average IQ barely 30 points over what is medically defined as mentally retarded) are they themselves going to change their own perception? By what, reading this site? Taking a college class on international trade? Meditating on a mountaintop?

No.

The net perception of "savers" (just like anything else) is primary influenced by outside sources -- government, leaders, media, culture, religion, tradition etc.

Seven billion people aren't going to just wake up and "start thinking" one day, even after a crisis. Their perception will be steered in the appropriate direction by those with the power to do so.

Why are you contributing to a 401k? Just take the money and buy gold.

Because putting 100% of your net worth into Gold is extremely foolish? Barely worth responding to but there it is.

Jojo said,

Athrone, quit thinking like a shrimp.

Applying critical thought to what I read, trying to entertain alternate explanations, attempting to hedge against all possible scenarios = thinking like a shrimp? What is thinking like a giant?

spaul67 said...

@JR

Look I understand LTV or else I wouldn’t be able to rationalize Gold’s SoV price at 50x mining costs, unlike Marx. But 50x mining cost only comes about ‘if’ Gold becomes the fulcrum of Global Trade, not because of some Braveheart rebellion on the part of Savers.

Take a paper 1000 dollar bill; its manufacturing cost to its current SoV is say 2000x. That 1000 dollar bill has a major problem though and it’s not its current manufacturing to SoV ratio of 2000x. It’s the fact that its quantity is entirely dependent upon the actions of the US.

If during Earth’s formation Copper switched abundance with Gold we would have Gold wires and Copper money. It doesn’t matter. What matters is that Gold can’t be expanded orders of magnitude by a push of button. In addition, a 50x increase in gold prices won’t leave anyone hungry plus we just so happen to have a huge supply just sitting above ground gathering dust, how lucky is that (ie one of these is not like the other).

Thus Gold is the only SoV that is available, not needed for life, and neutral to all individuals and nations for the purposes of forming the SoV foundation of the MoE used for local commerce and international trade. If Gold going to 50x mining cost achieves that objective post $IMF collapse, great, next issue.

I can’t image a sovereign nation on the Earth enduring social breakdown in order to maintain Marxian view of what Gold’s LTV on should be. Amen to that. As by product this shift is then what sets up the environment in which savers the world over can finally store value outside the clutches of the Soft money camp 'if' they so chose. A neutral zone if you will; between the powerful forces of the Soft Money and International Trade Giants.

Sorry, I just don’t see the organic path of shrimps bring about Freegold, if I understand you right? Again Giants rule the world, but being a smart shrimp is good too.

What Warren Buffet doesn’t understand is that ‘if’ that 65’ cube of Gold becomes the fulcrum of international monetary system that in turn enables trillions of dollars of goods/services to efficiently flow within and between nations then the value of that cube is most definitely more than its mining costs.

poopyjim said...

athrone sez...

The net perception of "savers" (just like anything else) is primary influenced by outside sources -- government, leaders, media, culture, religion, tradition etc.

No.

It's primarily based on real performance of their "savings" at the grocery store. This is what will fail. This is what will cause their perception to change.

Aaron said...

Another new release from Freegoldtube!

No Time To Lose

The firemen putting out the flames with more dollars is...priceless!

Aaron said...

Hi Atherone-

I said...

The Savers control the perception of the Savers!

And you said...

If we accept this, then we are forced to believe the worldwide group of "savers" (regular people mind you, with average IQ barely 30 points over what is medically defined as mentally retarded) are they themselves going to change their own perception? By what, reading this site? Taking a college class on international trade? Meditating on a mountaintop?

So from this perspective I imagine you believe the shrimps are going to push Freegold to its inception? Okay, if you say so. I'm sure it has nothing to do with the big holders refusing to let go of their gold.


The net perception of "savers" (just like anything else) is primary influenced by outside sources -- government, leaders, media, culture, religion, tradition etc.

The PBoC just got religion? The Sauds made this choice based on -- huh? Leaders and media?


Seven billion people aren't going to just wake up and "start thinking" one day, even after a crisis. Their perception will be steered in the appropriate direction by those with the power to do so.

Good thing seven billion people aren't driving Freegold.

And then I said...

Why are you contributing to a 401k? Just take the money and buy gold.

And you said...

Because putting 100% of your net worth into Gold is extremely foolish? Barely worth responding to but there it is.

Putting 100% of your net worth into dollar denominated contracts isn't foolish?

enough said...

Sorry, I'm a heretic too.....

I agree with spau67

TPTB or a faction thereof are going to bring gold back into the system, not an arab spring.

So many here have mentioned gold's proposed tier 1 status. I have asked the question, why are TPTB proposing this? It has gone unaddressed.

Surplus CB's buying gold like mad, BIS re-introducing the western monetary world to gold and TPTB are going to be blindsided by a shrimp revolution?

Looks like TPTB are pre-empting it....

Get ready for an offer you cant refuse by the Don Corzineolies

JR said...

Enough,

FOFOA and others have been clear Tier 1 gold is an accounting change designed to "improve" the BBs' capital position. It is why the BBs released the LBMA Q1 2012 turnover numbers-to help support their efforts to lobby for this accounting change.

costata said...

JR,

Regarding the Tier 1 change in the treatment of gold I wanted to mention that my earlier thinking that this was a game changer has changed. It amounts to tinkering with the existing system.

Hopefully it's a "thin end of the wedge" move by the BIS that will allow gold's role to become more important later on. But at this stage I have to admit it isn't a game changer.

Cheers

costata said...

IMF Paper On The "Chicago Plan"

This quote is from the abstract of that paper:

We study these claims by embedding a comprehensive and carefully calibrated
model of the banking system in a DSGE model of the U.S. economy.


http://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium

The claims made in this paper supporting this plan need to show that the DSGE modelling on which they are based is sound. If the model is unsound then the claims based on the model are dubious at best.

By way of disclosure I agree with Robert Solow's comments here:

The United States Congress hosted hearings on macroeconomic modeling methods on July 20, 2010, to investigate why macroeconomists failed to foresee the Financial crisis of 2007-2010. Robert Solow blasted DSGE models currently in use:

"I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way...

The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether."[7]


And that Wikipedia entry provides this passage:

Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, acknowledges that DSGE models were not very useful for analyzing the financial crisis of 2007-2010.[6]

Nonetheless, he argues that the applicability of these models is improving, and that there is growing consensus among macroeconomists that DSGE models need to incorporate both price stickiness and financial market frictions.


Improving? I suppose progressing from being comatose to being merely unconscious could be seen as an improvement.

JR said...

FOFOA: We have no idea what the "stock" of paper gold is. The LBMA survey only gave us a glimpse of the flow (paper gold turnover) over a given time period (Q1 2011) and in a given market (loco London spot, forwards, options and swaps, with spot transactions being 90% of the reported trades). That turnover was 2,700 "tonnes" of paper gold per day with 64% of the LBMA members reporting. We only got a lucky glimpse because the largest banks in the world (bullion banks like JP Morgan Chase, Goldman Sachs, HSBC, Barclays, Deutsche Bank, Credit Suisse and UBS) are lobbying for a technical rule change that will make their overall Basel III compliance easier.

anand srivastava said...

I am not sure why people are even considering Chicago plan as practical.

There is no way that a govt can accept 100% reserve banking. It is so impractical that I cannot even fathom how anybody could even consider it.

100% reserve banking means people have to pay banks to hold money. Why would people do that?

Secondly the govt still can print. How does it help inflation?

Also lets see the current scenario, and does it make any sense. Yes the govt will print money to convert all the credit money to base money. And then then the inflation will be so high that the banks will not be able to lend. Yes at that point it will be 100% reserve banking. LOL.

I also had the same question, why would govts choose freegold, when it reduces their power.

But now I realize the govts do not have an option.

USG is a junkie. It has to print 1trillion (growing by the day) a year. This is not negotiable. They will not reduce it, and it can only grow. So we conclude from it that USG has no power. If anybody thinks that a junkie has power you haven't met a junkie.

The Euro is ready and has to do nothing to get into FreeGold. The ECB will not do nothing to stop the change. The Euro countries have no power over the ECB to make it do anything to stop the transition. ECB will not do anything to hasten the process also. The speed of process is entirely dependent on the USG.

China is doing everything to position itself as the most important factor in the post USD world. It is getting into currency agreements with as many countries as possible.

BRICS countries are also getting into currency agreements. Japan as well.

This political situation does not allow a single country to become very powerful and force the rest to use its currency as the USD replacement. Neither would USG/ECB/China accept another currency in place of USD or their own currency. So it is a deadlock.

So the future will move to countries using their own currencies for transactions, and then swapping for Balance of Payments.

Gold will rise in value when the Paper Gold crashes and burns. I would expect around 5x rise just because of that reason alone. This intial rise will make the savers sit up and take notice. Also they will realize that they have lost most of their paper savings in the crisis. The two facts together will hammer into their heads that they must store in Gold. There would be another big rise due to this perception change.

So when savers start saving in gold, majority of the balance of payment will not need to be done as the gold will flow into a surplus nations savers account, due to saving in gold.

Since gold will become very important in international trade due to this balancing effect, currencies will start to get measured in gold. Which will give rise to Reference Point Gold quite naturally.

So the driving force is the 1Trillion dollars deficit. The consequence is Freegold and RPG. The govts have no power to affect anything during this transition. This game will go forward in a predetermined manner. There are no major decision points in this progression.

The actors can only delay the transition, but cannot affect the outcome.

Woland said...

Hmm. First Cenex in July, now this. "Barrick is in talks with China
National Gold Group Corp. regarding its' 73.9% stake in Tanzania
focused African Barrick Gold Plc." Seizures and nationalizations
are always less likely with both State approval and an aircraft
carrier battle group or 2 in the background. Stacks of Benjamins
on th move?

Woland said...

Nexen. Not Cenex. DOH.

Aiionwatha's Nation said...

Gold is an asset, tier I capital is a liability. I think the zero percent risk weighting was the most important part of the proposal. Prior to that change banks have to hold capital in reserve to hold gold as an asset using a 50% risk weighting. So to hold say $100 million in bullion you would have to have roughly $4 million of capital. At a zero risk weighting you need none. Just like cash or T Bonds.

DP said...

… to the extent that you also have corresponding gold bullion liabilities, of course.

john smith said...

@anand srivastava

Gold will rise in value when the Paper Gold crashes and burns. I would expect around 5x rise just because of that reason alone. This intial rise will make the savers sit up and take notice. Also they will realize that they have lost most of their paper savings in the crisis. The two facts together will hammer into their heads that they must store in Gold. There would be another big rise due to this perception change.

So when savers start saving in gold, majority of the balance of payment will not need to be done as the gold will flow into a surplus nations savers account, due to saving in gold.

Since gold will become very important in international trade due to this balancing effect, currencies will start to get measured in gold. Which will give rise to Reference Point Gold quite naturally.

So the driving force is the 1Trillion dollars deficit. The consequence is Freegold and RPG. The govts have no power to affect anything during this transition. This game will go forward in a predetermined manner. There are no major decision points in this progression.

The actors can only delay the transition, but cannot affect the outcome.


That's the first time I see explained in quite crystal clear terms how do we go from now to freegold. Thanks.

BTW

The two facts together will hammer into their heads that they must store in Gold.

I don't think that this is sufficient. After that, gold still needs to visibly rise in currency terms. Otherwise people will dismiss that increase as a one time event, if after gold goes nowhere, as old occidental habits die hard.

We'll see the staying power of paper gold markets. At least I'm quite sure that GATA was wrong 10+ years ago, when it claimed that bullion banks were naked short. If that were the case, they would be bust by now. So...

Almost everything flows naturally from this:

Gold will rise in value when the Paper Gold crashes and burns.

That is the corner stone of all argument, so we must be quite sure that it will happen.

Anyone care to show their evidences that Paper Gold will crash and burn?

spaul67 said...

@ anand srivastave

“I am not sure why people are even considering Chicago plan as practical.”

The Chicago plan fixes two big problems characteristic of every nations’ money supply;

First, debt based money ‘must’ geometrically increase in order to provide the new money needed to pay interest. The only other option is default at which point you have depressions.

This is one of the key problems of any debt based money system in that it attempts to both be a MoE and a SoV. (ie FOFOA dilemma). Another key problem of any fiat system (debt base or not) is that the supply can be expanded at will (not fixed by the plan BTW). So savers in a debt based money system will either be defaulted on from time to time or slowly or dissolved away by inflation, most times both. Any savers ‘real’ gain in this system is ‘always’ someone else’s ‘loss’.

The second problem fixed by the plan (directly related to the take over of the money supply by private banks) is that 90% of the money circulating is actually bank credit; as such the money supply can go through wild gyrations resulting in the boom/bust cycles. Some say on purpose.

“100% reserve banking means people have to pay banks to hold money. Why would people do that?”

In the new system banking will go back to what it once was;

Commercial banking is for the flow or real goods that will be consumed in less than year. Think, receivable factoring or how Money markets work now (ie Real Bills). Short term credit held on very liquid assets the near term consumption of which liquidates the debt.

Investment banking uses savings (now stored in Gold); for speculative ventures that have higher risks and longer payback times but also greater returns ‘if’ successful.

Long term savers put their money in gold existing in the neutral zone between Commercial and Investment banking & in the neutral zone between national fiat MoE and international trade settlement.

A good investment portfolio in the future will in include a balance of all three that will shift as you get older to Gold. Cash/Money Market for near term needs, Investments for long term capital growth, and Gold to protect you from the MoE issuers. Really diversified investors will also cross national borders as well. But at the very center will be Gold, the ultimate international currency.


“I also had the same question, why would govts choose freegold, when it reduces their power.”

They won’t, the need to continue international trade will force Freegold upon everyone (currency manipulators all) as the only form of ‘international’ currency acceptable for resolving trade deficits (ie excess MoE of the deficit nation in the hands of the surplus nation). The gold will flow in the direction of the surplus nation based on the local exchange rate of gold for the deficit nations MoE. Eventually the price of gold in the deficit nation will cause the gold to flow in the other direction because it buys more real stuff than in the surplus nation. At which point the roles reverse.

For example Germans exchanging one oz of gold for a great vacation in Greece and truck load of olive oil. That one oz of gold won’t buy even close that much in Germany.

Freegold will exist at the nexus of two very powerful Giants; namely the easy money camp that would love nothing better than to exchange paper and IOUs for real stuff forever and the absolute need for international trade.

“The Euro is ready and has to do nothing to get into FreeGold.”

It will only take the stroke of pen to get the US Dollar or any other currency for that matter on the same path. In fact it will be required in order to trade at all. Think of it like rules to football game. You play by the rules or you don’t play.

The US has a lot of gold both above and below ground. On the other hand we also have a lot of dollars out there as well. The needed change in the PoG relative to the MoE will be truly epic for the US dollar.

JR said...

Anyone care to show their evidences that Paper Gold will crash and burn?

Start with these:

The 21st Century Bank Run

Who is Draining GLD?

The View: A Classic Bank Run

Today's (quote-unquote) "Gold"

GLD Talk Continued

Fallacies – 1. Paper Gold is just like Paper Anything

Edwardo said...

It seems The Fed is opening the sluice on M1 to the tune of an annual rate of 11.3 percent based on a three month run rate.

http://www.federalreserve.gov/releases/h6/current/h6.htm

Hat tip urbansurvival

Here's another tidbit from the same source:

There are only a couple of possible inferences from this:

1.)The Fed is being loose to goose markets over resistance at the S&P 1,422-1,425 range once past options expiration (today) so going into next week. Or...

2.)They are printing to bail out Europe....or,

3.)They are seeing the financial cliff America is about to drive over and this could be the leading edge of hyper-inflation as a fix-all.

Around here we are partial to no.3 aka supporting the junkie's (alias Uncle Sugar's) lifestyle.




The blog's proprietor offers three

athrone said...

costata,

The equations used in that paper (DSGE) are clearly ridiculous. However, I am curious about your thoughts on the high level concept of the Chicago Plan. Is it something you see in conjunction with freegold, in place of it, or something not likely at all?

It least to me, the concept seems like a sound way to address many of the pressing financial problems at hand and at the very least, kick the can down the road. One question would be whether moving to 100% paper reserves would also spur the same movement in physical gold. In which case, it would act not as an alternative, but as a catalyst.

To everyone else,

If one were to design a monetary system from scratch, it seems only logical (to me) to require 100% reserves. Again, just because banks lend money, why should they be given the "exorbitant privilege" of creating it? Today the system works like this:

Fractional reserve system:
1. Bank receives a $1000 deposit
2. Bank lends out $900 at say, 4%
3. The bank pays 1% interest on the $1000 deposit, while earning 4% on the $900 loan. Net profit is approximately 3% -- on money that is not even theirs. That is, they have zero capital at risk. Meanwhile they created $900 out of thin air, which adds to general price inflation. As this money makes its way into other banks, the money is multiplied even further.

This is absolutely ridiculous. Who would ever dream up a monetary system like this aside from a banker? Why should banks be able to create money (credit) in order to make a profit? Can a baker do this? Coffee shop owner? Small business owner?

Chicago Plan:
1. Bank receives a $1000 deposit
2. Bank takes out a $1000 treasury loan at 1% (100% reserves)
3. Bank lends out $1000 at say, 4%
4. The bank pays 1% on the $1000 loan to the treasury, and 1% on the savings, while earning 4% on the $900 loan. Net profit is still ~2% assuming they pay the same rate of savings.

It's really not that big of a change from the perspective of (core) banking profitability.

-athrone

spaul67 said...

@athrone

Chicago Plan; Page 34

“This means that banks cannot lend by creating new deposits.”

“For the reasons discussed in section II.B, we assume that this funding ˇ ft is supplied
exclusively by the government treasury, with private agents limited to holding either bank
equity or monetary instruments ˇ dt that do not fund any lending.”

Remember the Banks hated the Chicago plan because it removed their money power. The US Treasury will now have control of what we current understand as Base and Credit Money under the Chicago plan.

Banks will now have three roles under this plan; one as just a retail outlet of the US Treasury, two as a Commercial bank and three as Investment bank. Banking is fundamentally transformed under this plan. Hence why the current banking establishment will also hate it. The existing banks (at least the ones that survive) will become just a utility of commerce and the money supply not the masters of either. In fact I can see the rise of State banks again under this plan.

Given the benefits accrued to both Wall Street and DC under the existing fraud riddled Kelptocratic Ponzi scheme though a collapse of the existing order will need to happen before the Chicago plan and Freegold has a chance.

The current cabal may attempt to set up a new Ponzi scheme with fresh lip stick but my hope is that both the US citizens and the world at large will have had just about enough of these crooks at that point.

Who thought that anything with the name Chicago in it would be the instrument that ended fraud.

Aaron said...

Gold - Kaile Goh

I've been thinking about the boy by the door and lately, much more, I think I like him

He's the one all the girls think is strange

But something has changed, the way I see it

Notebook fantasy, can I stop and see

Would you draw something for me, take me somewhere different

Hair in your eyes, pretty in disguise

Maybe you are hiding and I know why

Cause there's something much more, are you the special one?

I feel like gold

Down among the crowd of loneliness

I felt you touch my soul

I didn't know that I was missing you

Meet me on the open road

Only for the special one

You touched my soul, when it's just you and me

I feel like gold

I know everybody wants to belong, but this is what's wrong

It doesn't matter

I would rather have a talk with the stars and play my guitar than phony chatter

Let it freak 'em out, gossip all about, you caught me talking hanging out with him

Now I'm a weirdo

Oh, I could sit and cry, panic, wonder why, maybe I'm not a follower

Everyone knows that the smartest - the artist - is a renegade

I feel like gold

Down among the crowd of loneliness

I felt you touch my soul

I didn't know that I was missing you

Meet me on the open road

Only for the special one

You touched my soul when it's just you and me

I feel like gold

First kiss, take this, now you are mine

Oh I've had this dream so many times

The darkness how the moon shines

For you and me only

And I feel like gold

Down among the crowd of loneliness

I felt you touch my soul

I didn't know that I was missing you

Meet me on the open road

Only for the special one

You touched my soul when it's just you and me

I feel like gold

Notebook fantasy, can I stop and see Would you draw something for me, take me somewhere different

Hair in your eyes, pretty in disguise Maybe you are hiding and I know why

Cause there's something much more, are you the special one?

You touched my soul when it's just you and me

I feel like gold

Motley Fool said...

athrone

"The equations used in that paper (DSGE) are clearly ridiculous."

Really? On what do you base that statement? Do you understand said equations and are familiar with multivariable dynamic system theory?


Furthermore your examples show you have very little understanding of how the banking system works at present. If you had even read that paper (ignoring the maths bits), you would have had a better understanding of the current system.

The models seem reasonable and well thought out to me. Given the assumptions, the conclusions look correct. And there is the key, that these economists don't seem to understand much about the fundamentals and made some very screwy assumptions.

TF

anand srivastava said...

@spaul67
"First, debt based money ‘must’ geometrically increase in order to provide the new money needed to pay interest."

This is what I am hoping Freegold will solve. This is a problem only when substantial amount of savers money is being stored in banks. Then only banks have too much money, and they need to generate too much interest, creating the boom and bust cycles.

"The second problem fixed by the plan (directly related to the take over of the money supply by private banks) is that 90% of the money circulating is actually bank credit;"

This is the problem with policies. IMO Reserve Ratio should never go lower than 30%. 10% is insane.

dojufitz said...

Soros has just bought a stack of paper Gold....why would he buy paper?

costata said...

Hi All,

FOFOA gave me some feedback that I was annoying some other long term readers with the length and lack of clarity in some of my recent comments. So I'm going to concentrate on trying to distill some of the things I want to discuss offline.

I'll try to keep my replies to other commenters brief and mainly stick to posting links for a while.

Cheers

Edwardo said...

Soros would buy paper for one reason, to make a profit. So, either he has reason to believe that the paper gold game is still a goIng concern - as opposed to going the way of the dodo imminently- or his paper ihas been arranged for convertibility to physical, or he's buying paper in error and is going to get fleeced. Take your pick. I'll choose door no. 1.

Beer Holiday said...

@Costata,

Just like to let you know that I enjoyed reading and thinking about everything you posted recently.

I hope to post some links that people here might like soon too, been busy recently.

Cheers and thank you.

costata said...

Beer Holiday,

Don't get me wrong, I appreciate the feedback. I think it's the sign of a true friend when they are prepared to tell you something you may not wish to hear.

Cheers

JR said...

Silence is golden.

d2thdr said...

Dojufitz said Soros has just bought a stack of paper Gold....why would he buy paper?

The rich peoples money is the most nervous money. It never sits still because there is a belief that they will loose money by keeping it still. Buying paper gold gives the still money a chance to generate a return. We can never understand this as we are all shrimps. But as FOFOA has elaborated on this concept in another post, it makes a lot of sense for Soros and people of his ilk to be a part of the paper game.

JR said...

"The second problem fixed by the plan (directly related to the take over of the money supply by private banks) is that 90% of the money circulating is actually bank credit;"

Where is the problem?

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

debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

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


The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

But what does this have to do with me in 2011? I can almost hear you thinking this question now. Well, I'm going to share a secret with you. The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.

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

@ Cosata

Again, Hanzo suggests it is time for you to start a blog such as Blondie's, VTC's, etc., perhaps?

Many things there related to Freegold could be discussed.

Hanzo has appreciated the majority of your missives over the past years, and has no problem skipping those that did not hold his interest.

Arigato!

-Hanzo

Motley Fool said...

Amusingly, my back of the envelope estimation is that under the Chicago plan base money would increase from about $3 trillion now, to about $30 trillion.

(/s)This will have no inflationary impact at all, of course, as we know that base money and credit money are the same thing.(/s)

victorthecleaner said...


For your information, GLD gained just over 11 tonnes or 359000 ounces yesterday. This was a sell signal for my GLD puke 'strategy' - the first signal since May 22.

Between May 22 and yesterday (Friday, August 17), we had a price gain of 3.58%, annualized about 15.7%. That's below of the average performance of the 'strategy'.

Victor

Dante_Eu said...

It really has been quiet on the Gold Front last couple of months. Is it calm before the storm?

BTW, I wonder if OBA has quit his daily job? :-)

enough said...

Hi Costata,

you wrote.........

"Regarding the Tier 1 change in the treatment of gold I wanted to mention that my earlier thinking that this was a game changer has changed. It amounts to tinkering with the existing system."

It seems like a very risky move by the $IMFS just to "tinker"

Risking a light bulb going off in the minds of both ignorant shrimp and giant alike.

IMHO the BB/$IMFS/TPTB strategy of creating the appearance of extreme volitility in "gold" is intended to undermine the view that gold represents a safe and "stable" store of savings.

By alerting the savers big and small that TPTB/$IMFS themselves believe and condone gold holdings as on par with the safest of assets, undermines their undermining.......

If TPTB are tinkering, it's a very poor decision and strategy and risks releasing the Kraken......

costata said...

enough,

I suppose it could be a case of the BIS giving the BBs a technical change that the BBs wanted for their own purposes but with a broader strategic vision guiding the BIS decision to do so.

If I understand what you are saying you think that the symbolism of making gold a Tier 1 asset may signify something to onlookers that the actual rule change doesn't accomplish. We'll have to wait and see I guess.

Texan said...
This comment has been removed by the author.
enough said...

IMHO, the public's current perception of gold:

Public meaning: individuals (wealthy or not), institutional money managers, corporate treasurerers etc.

1)paper and phyical are synonomous

2)gold is extremely volitile

3)gold is speculative

4)If at all, it should represent a small portion of a "portfolio"

This is the mantra/perception, TPTB/$IMFS/Investment banks have pushed/manage/created/maintained for 40 years.

Now The King of the Monetary Hill, the BIS comes along and says, no, "physical gold" is a safe, stable store of value on par with cash and govt bonds.....

Now this might not change the perception of the drooling, intellectually obese Housewives of New Jersey viewer but any of the above defined "public" that has 3/4's of a brain will find the mirror being shattered by this.

That:

1) physical and paper gold are NOT synonomous

2)paper gold volitility should not be confused with the stabile nature of physical gold

3) physical gold is not speculative but a growing core asset/form of savings of the Giants (CB's)

4) Physical gold holdings should be on par and in equal proportion with cash and govt bonds.


This is the message the FDIC and the BIS are sending out to anyone that hears the message.....

This is not tinkering IMHO, it is a material shift in molding the perception of physical gold by the system managers......why?

Because IMHO they are going to "use" gold as spaul67 has said. I dont know about this chicago style pizza plan but TPTB are sending a important message here......

Motley Fool said...

enough

I do not think practically any of your public will hear that message, over the cacophony of other 'important' information and entertainment out there.

TF

enough said...

Hi MF,

I disagree and it doesn't matter anyway. The ones that get the message will benefit greatly. However few that may be. But I would bet money managers are studying the implications of physical gold's potencial movement up the asset hierarchy very carefully.

The money market fund is on it's deathbed. There's alot of savings (trillions) that will transfer into other "safe" (as defined by tier one status) assets. Physical doesn't need to see much of that for a big move.

So it's just coincidence that monetary authorities in USA and Europe are disemboweling the money mkt product, the savings that seek liquidity and safety and at the same time raising physical gold's status to super safe tier one? I dont pretend to be the sharpest tool in the box but come on.............

I have no idea what this means for paper gold though. It is clearly being differentiated from physical by the BIS and FDIC proposal.....

Motley Fool said...

enough

On this reclassification my only comment thus far has been : fucking accountants.

This doesn't help money market funds or normal banks or hedge funds, or anyone except bullion banks, nor does it give any of the former any incentive to buy physical gold.

In fact this change will allow bullion banks more leverage and give them more ability to suppress the price of gold.

TF

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

Would anyone like to speculate on what exactly is stopping Iran or Venezuela from blowing up the paper gold market by offering to sell oil for gold at a discount? Would Iran make such a move if it were actually invaded and could they pull it off? Or would an invasion destroy their oil production & export capacity too quickly to make such a move feasible?

enough said...

MF,

maybe you're right but there is one thing I want to clarify. I did not mean money market funds buying physical gold. The money mkt fund is going the way of the DoDo........I'm saying that some of those trillions exiting will certainly, well probably, maybe find it's way into bullion. This is money looking for safety and stability.

You may want to have a read on what's happened recently to euro money mkt funds and proposed SEC (with FED blessing) rule changes in the USSA..........

Vanessa said...

gold and oil will never flow in the same direction..well said..Prime Electronics

Peter said...

MF,

maybe you're right


Yes.

I think you have read what's happened recently to euro money mkt funds and proposed SEC (with FED blessing) rule changes in the USSA

Cuz:

This doesn't help money market funds or normal banks or hedge funds, or anyone except bullion banks, nor does it give any of the former any incentive to buy physical gold.

In fact this change will allow bullion banks more leverage and give them more ability to suppress the price of gold.

Yes.

Motley Fool said...

Unknown

Two thoughts.

Perhaps they are still not aware that this game is afoot.

Also, even if they are nobody will want to be blamed for this crisis. It will be too terrible, and it will happen anyway.

TF

Edwardo said...

This idea that no one wants to be blamed for the profound tumult that will ensue when the paper gold markets (and paper savings vehicles aka sovereign debt) are sucked into the freegold event horizon is, for me, something of an irritating curiosity. I'm not sure why though I suppose the irritation is caused by the idea that all these potential freegold actors are cowering in fear afraid to take the crucial step for all the tantruming that will ensue when the obviously (rotten) apple cart is overturned.

But I'll set that image aside for now as I'm put in mind of the idea that, perhaps, just perhaps, war will be the catalyst for inducing - in the manner of a very late stage pregnancy- the birth of freegold.

War, of course, has an interesting track record, especially in more recent times, of ushering in change, at least where monetary events are concerned. After all, Bretton Woods came directly on the heels of WWII, a conflict which was both causative of, and correlative with, the new monetary order. Vietnam preceded Nixon's closing the gold window, and, now, here we are, with the glorious WOT now in the early years of its second decade. War, the ultimate in man made mischief, is marvelous cover for instituting all sorts of lesser mischief. All someone needs to do is take that into account and act accordingly.

athrone said...

Motley Fool,

On what do you base that statement? Do you understand said equations and are familiar with multivariable dynamic system theory?

My mathematical background and common sense. Economics is a social science, and modeling human behavior with equations is just silly. Even if you come up with a complex equation which accurately correlates with past human behavior, would it be able to predict future behavior?

Nope.

So what good is a theory which cannot predict future behavior? This is why economics is not a hard science and why one must review economic problems at a conceptual level.

Amusingly, my back of the envelope estimation is that under the Chicago plan base money would increase from about $3 trillion now, to about $30 trillion.

And will that newly created base money move, or lie still? Remember it has to be held by the banks as reserves, it cannot be lent out (in fact it already has, which is why they must borrow from the treasury). If it does not move, how will it cause inflation?

From the present, the only thing that changes is suddenly the banks start paying 0.5% (e.g) interest on 27 trillion dollars.

-athrone

JR said...

Meeting the Variable Demand for Cash
The public typically obtains its cash from banks by withdrawing cash from automated teller machines (ATMs) or by cashing checks. The amount of cash that the public holds varies seasonally, by the day of the month, and even by the day of the week. For example, people demand a large amount of cash for shopping and vacations during the year-end holiday season. Also, people typically withdraw cash at ATMs over the weekend, so there is more cash in circulation on Monday than on Friday.

To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited. Some smaller banks maintain their required reserves at larger, "correspondent," banks. The smaller banks get cash through the correspondent banks, which charge a fee for the service. The larger banks get currency from the Fed and pass it on to the smaller banks.

When the public's demand for cash declines—after the holiday season, for example—banks find they have more cash than they need and they deposit the excess at the Fed. Because banks pay the Fed for cash by having their reserve accounts debited, the level of reserves in the nation's banking system drops when the public's demand for cash rises; similarly, the level rises again when the public's demand for cash subsides and banks ship cash back to the Fed. The Fed offsets variations in the public's demand for cash that could introduce volatility into credit markets by implementing open market operations.


NYFRB

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

hyperinflation turns physical (as in physical cash) very quickly once it takes hold. So if you're expecting some sort of electronic currency hyperinflation, fuggedaboutit. If you think we're more technologically advanced than bass-ackward Zimbabwe or ancient Weimar, you are not understanding what really happens during currency hyperinflation. It cannot play out electronically all the way to the bitter end because, when prices are rising that fast, physical cash always brings a premium over electronic deposit transfers which require some amount of time (and thereby devaluation) to clear.
http://fofoa.blogspot.com/2012/04/peak-exorbitant-privilege.html

JR said...

"...First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).

Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat...

...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."...

You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply. Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!...

And now that you have a little bit of understanding about the difference between economically-tied credit money and base money (cash or its equivalent), as well as the power of fear and velocity, I want you to notice that the hyperinflations of the past have all played out with base money, not credit money, at the helm.

This is where all those "excess reserves held at the Fed" become very dangerous. You see, those are monetary base reserves, not credit money. They may not be physical cash yet, but they are contractual obligations of the Fed to print actual cash. And if velocity picks up in a panic, that's exactly what the Fed will have to do in order to keep the banking system from collapsing. Deflationists think this is a choice the Fed will have to make, but it is not.

It is already happening to a smaller degree with the Friday bank failures. Ever since the FDIC ran out of "reserves," every failed bank has been propped up with more fresh base money. "Saving the savers' deposits!" Converting them from credit money into base money in whatever amount exceeds the failed bank's marked-to-market assets.

So there is already enough fuel in the system to feed the fire when it starts.

And when it starts, that is when prices start to rise... price hyperinflation. And as prices rise, the government will need more money to pay for the same amount of "governing" in each successive cycle (monthly). This is when the monetary hyperinflation takes over and gives the price hyperinflation its HYPER boost.."


http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html

JR said...

Think back to Exter's pyramid, and how demand collapses downward during a crisis. Think about "commercial bank credit money" as being higher on the pyramid than FRNs, actual physical cash. This is true. As we collapse downward to gold the banks themselves will shun each other's credit receipts in favor of central bank liabilities.

This is where all those excess reserves held at the Fed will finally come into play...

...Not through economic lending, but through interbank clearing preference, as the banks first try to jettison each other's "digits" as fast as possible. Once the bank run on physical gold begins, these banks are going to be very nervous about holding each other's liabilities, even over night. They will only "sleep well" holding Central Bank liabilities.

This is how the transition from plastic to wheelbarrow begins. We may not see a bank run on Fed cash by the people before we see it within the banks themselves, as interbank faith vaporizes during the run on gold.

By this time, the bond will be gone. As the people are running on the Bullion Banks the Fed is going to be very busy monetizing the entirety of US federal spending, from Social Security to Medicare, national defense and even Nancy Pelosi's entourage's per diem. It will all have to be monetized. Meanwhile the Fed will have to keep its remaining banks happy with Fed liabilities to clear the private liabilities, or else they will cease to circulate. Printing dollars and buying up private equity so that each bank only has to hold Fed liabilities.

And as the US Government starts spending its fresh new Fed credit, the Fed will have to supply the banks receiving those trillions in USG payment transfers fresh cash to back the massive inflow of new Fed liabilities...


http://fofoa.blogspot.com/2010/04/21st-century-bank-run.html

JR said...

But no matter what quantity of financial assets are wiped out, the cash in the system will remain. And the obligations for more cash printing will remain. And that's all the cash it will take to spark the most amazing hyperinflation the world has ever seen, as the fear turns from 'running out of dollars' to 'running out of food' in the wake of a devastating financial collapse.

In parts two and three of my September hyperinflation posts I explained how the US government MUST respond to a currency collapse by printing more currency in order to keep its stooges doing its bidding. I explained the mechanism by which the hyperinflation will become a physical cash hyperinflation, not an electronic credit money hyperinflation because bank credit money will devalue faster than the cash. And I explained the mechanism by which million dollar Federal Reserve Notes will find their way into the hands of hungry, impoverished and unemployed people on food stamps. Hint: It's not through credit expansion or rising wages! LOL


http://fofoa.blogspot.com/2011/04/big-gap-in-understanding-weakens.html

JR said...

The question was asked: Is this inevitable with any debt-based system?

Short answer for now. ;) Systemic collapse is inevitable as long as the item used for lending is the same item used for saving.

In a gold money system with gold lending (which is always demanded by the collective will) fractional reserve banking is the inevitable result. And from there, bank failures are the inevitable result at the first sign of panic (loss of confidence). And from there, some of the savers lose their money.

In a fiat system, the fiat is lent and the savers hold the notes, one way or another. This lending and note holding always increases the money supply just like gold lending and gold-denominated notes expand the gold money supply. You lend something and then you can claim it in the form of a note while the borrower claims it in the form of the currency. Even the notes circulate as they become marketable.

So lending always expands the money supply, whether it is gold or fiat. And when the savers save in the same thing being lent, collapse ultimately comes (or at least threatens), whether gold money or paper. And then the system must undergo a fundamental change one way or another.

The problem is that the expanding money supply due to lending always lowers the value of a unit of currency. Even if it is gold. If I loan you a $1 gold money, you now have $1 gold and I have a $1 gold note. The money supply has just doubled, and the value of $1 gold just dropped in half.

This is a fact of money systems. We can try to get rid of it by outlawing lending, but that is like outlawing swimming in the summertime, or beer drinking.

The solution is quite simple. And I didn't come up with it. The problem is that at the point of collapse, some of the savers are wiped out, whether gold money or fiat. Think about those at the back of the line during the bank runs of the 1930's. They didn't get their gold. They lost their money.

Today we don't have this problem anymore. The guy at the back of the line gets all his money, it's just worthless in the end. We solved the problem of bank runs (bank failures) but not the problem of value.

The solution is that the monetary store of value floats against the currency. It is not the same thing that is lent! It is not expanded through lending and thereby diminished in value. Instead, as $1 is lent, and now becomes $2 ($1 to the borrower + $1 note to you the lender) and the dollar drops to half its value, the saver, the gold holder will see the value of his gold savings rise from $1 to $2.


http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-2.html

DiverCity said...

A story today on CNBC (http://www.cnbc.com/id/48721839) claims that Lord Jacob Rothschild -- a giant I would think if there ever was one -- has made a $200,000,000.00 bet against the Euro. Obviously a short position can mean and quite likely in this instance merely means he sees it losing "value" against other fiat currencies in the near term and is not a bet against the Euro's ultimate viability. However, I'd be interested to hear any contra opinions and the reasons therefor.

Jeff said...

I doubt Rothschild telegraphs his gigantic bets.

DP said...

I wonder how much of the "1.9 billion pound investment trust" is long euro-denominated assets?

Perhaps Rothschild merely knows where we're going and understands how to make some extra coin over and above what he already has.

I wonder if his euro hedges will pay out in dollars?

Edwardo said...

Regarding the story on CNBC, here's a little story about The Rothschilds: One of that family's great trading successes, perhaps its greatest trading success, came as a result of fooling their fellow traders by selling hard around the time of The Battle of Waterloo. A lot of folks sold as well thinking that The House of Rothschild must have had superior information about the outcome of that titanic military conflict. Those folks who sold with The Rothschilds were correct, The Rothschilds did possess superior information, but those same folks were disastrously wrong about what said house were doing their very valuable information. You can guess the rest, and think of it as a cautionary tale on the release of certain types of news and its apparent value.

athrone said...

DiverCity,

A story today on CNBC claims that Lord Jacob Rothschild -- a giant I would think if there ever was one -- has made a $200,000,000.00 bet against the Euro.

So he bet 0.2 billion against the Euro; I wonder where he has the other 49.8 billion?

-athrone

DiverCity said...

@athrone,

I don't think he's betting against the Euro's ultimate viability. I think it's short term and CNBC is just hyping. Nevertheless, the bet is a short and could pay off handsomely, even though I accept the thesis that most of his inert wealth is likely in gold.

DiverCity said...

@Edwardo,

That's kind of what I was thinking in terms of sleight of hand but didn't know those particulars concerning the Napoleonic War.

Motley Fool said...

athrone

A fair enough objection, though perhaps one should not throw out the baby with the bathwater. I agree that in extremis one can't make too many predictions, but during stability, which is most of the time, perhaps one could assume ceteris paribus and not be too far wrong.

As to your other question. Go read Moneyness. Inflation is a tricky thing. Correlation is not causality.

The current tension in fungibility between credit and base money would be lost under this plan. That has some implications, never mind the reference point being altered.

TF

spaul67 said...

@JR

“Where is the problem?”

Well if you don’t mind have 90% of the MoE go poof resulting in wide scale defaults and 10x up and down swings in the relative price of gold than all is fine in the world of “debt is money”.

Are you even aware that right now more than the world’s net productive capacity is going to pay for just the interest on the money supply thereby accelerating the geometric expansion of the MoE supply?

Yah no big deal, how could I be so wrong (sarc). More than a few gold holders didn’t have their heads or gold after the dust settled from the French Revolution? Monetary stability = Social stability which is absolutely critical for the success of Freegold’s (SoV).

Look for Freegold to work efficiently as a (SoV) it needs a good partner in the (MoE) realm.

Remember what FOFOA said he was absolutely surprised to find that a fiat (MoE) was absolutely essential for the success of Freegold. Do you still agree with him?

The Transparent Unicorn said...

An interesting speech delivered by American economist Benjamin Anderson (1886-1949) before the Chamber of Commerce of the State of New York on February 3, 1944:

International Currency: Gold vs. Bancor or Unitas

http://mises.org/etexts/anderson_international_currency.pdf

Quite relevant to this discussion, I believe.

thetransparentunicorn said...

Some remarkable parallelisms between FOFOA's concept of usable versus useless wealth and Frédéric Bastiat's discussion of gold versus "useful things" in "What is money?" (translation of "Maudit Argent!"):

http://www.mises.org/journals/qjae/pdf/qjae5_3_7.pdf

F: And if gold is considered to be riches, the natural conclusion is, that displacements of fortune take place among men, but no general progress. It is just what I said when I began. If, on the contrary, you look upon an abundance of useful things, fit for satisfying our wants and our tastes, as true riches, you will see that simultaneous prosperity is possible. Money serves only to facilitate the transmission of these useful things from one to another, which may be done equally well with an ounce of rare metal like gold, with a pound of more abundant material as silver, or with a hundredweight of still more abundant metal, as copper.

[…]

F. To a certain point, gold and silver have a value. To obtain this value, men consent to give other useful things which have a value also. When, therefore, there are mines in a country, if that country obtains from them sufficient gold to purchase a useful thing from abroad—a locomotive, for instance—it enriches itself with all the enjoyments which a locomotive can procure, exactly as if the machine had been made at home. The question is, whether it spends more efforts in the former proceeding than in the latter? For if it did not export this gold, it would depreciate, and something worse would happen than what did sometimes happen in California and in Australia, for there, at least, the precious metals are used to buy useful things made elsewhere. Nevertheless, there is still a danger that they may starve on heaps of gold; as it would be if the law prohibited the exportation of gold. As to the second supposition—that of the gold which we obtain by trade: it is an advantage, or the reverse, according as the country stands more or less in need of it, compared to its wants of the useful things which must be given up in order to obtain it. It is not for the law to judge of this, but for those who are concerned in it; for if the law should start upon this principle, that gold is preferable to useful things, whatever may be their value, and if it should act effectually in this sense, it would tend to put every country adopting the law in the curious position of having a great deal of cash to spend, and nothing to buy. It is the very same system which is represented by Midas, who turned everything he touched into gold, and was in consequence in danger of dying of starvation.

B. The gold which is imported implies that a useful thing is exported, and in this respect there is a satisfaction withdrawn from the country. But is there not a corresponding benefit? And will not this gold be the source of a number of new satisfactions, by circulating from hand to hand, and inciting to labor and industry, until at length it leaves the country in its turn, and causes the importation of some useful thing.

JR said...

Hi spaul67,

You appear confused. Of course we want monetary stability, that's what Freegold provides. You are focused on supply stability. But what about demand? Money supply = Monetary instability.

Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time- there is a basic minimum amount of money that is needed for something to even function as money. Take the quote that Mish uses from Rothbard and compare it to FOFOAs quote.

Rothbard Quote:
Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

FOFOA Quote:
"So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

There is no contradiction between the two. Mish is interpreting FOFOA as saying that we need money in UNLIMITED amounts, but FOFOA clearly says we need it in UNRESTRICTED amounts. The difference here is clear- for FOFOA the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy. This does not mean that expanding or contracting causes more economic growth, but that it allows for economic growth.


FOFOA: In my post I addressed "two simple, but seemingly, apparently impossible-to-comprehend concepts." The first was the splitting of the concept of "money" into separate units for separate roles. And in the medium of exchange role, I did use the term "unrestricted." But I also clarified it in this way: "Unrestricted by artificial constraints." A fixed, unilateral gold standard is an artificial constraint. A floating multilateral "gold standard" is a natural, free market constraint that allows for currency flexibility while, at the same time, exposing the exchange value (in gold) of a currency to the judgment of the marketplace.


As posted above from Unambiguous Wealth 2 – The MF Global Chronicles

cont.

JR said...

cont.

You write:

Are you even aware that right now more than the world’s net productive capacity is going to pay for just the interest on the money supply thereby accelerating the geometric expansion of the MoE supply?

Yah no big deal, how could I be so wrong (sarc). More than a few gold holders didn’t have their heads or gold after the dust settled from the French Revolution? Monetary stability = Social stability which is absolutely critical for the success of Freegold’s (SoV).


From The Return to Honest Money posted above:

debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

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


cont.

JR said...

cont.

Look for Freegold to work efficiently as a (SoV) it needs a good partner in the (MoE) realm.

Remember what FOFOA said he was absolutely surprised to find that a fiat (MoE) was absolutely essential for the success of Freegold.Do you still agree with him?


Yes:

1. Remember when Aristotle wrote this? "In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."

FOFOA wrote:

FOFOA: In my post I addressed "two simple, but seemingly, apparently impossible-to-comprehend concepts." The first was the splitting of the concept of "money" into separate units for separate roles. And in the medium of exchange role, I did use the term "unrestricted." But I also clarified it in this way: "Unrestricted by artificial constraints." A fixed, unilateral gold standard is an artificial constraint. A floating multilateral "gold standard" is a natural, free market constraint that allows for currency flexibility while, at the same time, exposing the exchange value (in gold) of a currency to the judgment of the marketplace.

Windmills, Paper Tigers, Straw Men and Fallacious Fallacies (I mistakenly linked this as from Unambiguous Wealth 2 – The MF Global Chronicles above).

An MoE "Unrestricted by artificial constraints." See that. Why? Because the transactional medium is credit - money is a concept, not a thing. Talking about full reserved banking reveals a poor understandign of how people use money. For the most part, money is simply the remembered relative value of trade goods and services, and then the ledgers to keep track of our current surplus or deficit.

The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

But what does this have to do with me in 2011? I can almost hear you thinking this question now. Well, I'm going to share a secret with you. The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.


Moneyness

spaul67, the question is:

Do you still agree with him?

JR said...

So spaul67,

Are you even aware that right now more than the world’s net productive capacity is going to pay for just the interest on the money supply thereby accelerating the geometric expansion of the MoE supply?

The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today... "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.

AKA:

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

jojo said...

"The prominent presence of gold on the balance sheets of the modern Central Banks is the CBs front running the market! Freegold (or "Reference Point Gold") is an unfolding market force creation. Mish says, "unlike FOFOA I think money is whatever the free market says it is." That's not "unlike" me. It is simply misunderstanding me. Gold IS the market choice. And the real market for this "store of value" is the Giants with "value to store." Luckily we shrimps can tag along for the ride. But we can no more override this market choice than we can crash the Treasury market by dumping our stockpile.

http://fofoa.blogspot.com/2010/12/windmills-paper-tigers-straw-men-and.html

jojo said...

Listen to this! That is the Freegold party train bearing down on us

spaul67 said...

@JR
I agree with your posts concerning the MoE so I don’t think we are that far apart if it all?

My point is that any debt based MoE, 90% of which is generated by private banks in the form of credit, is not a good partner for Freegold because at its very foundation it attempts to join the SoV and MoE functions of money. As such a debt based MoE paradigm can ‘never’ by definition be a good partner to Freegold.

While Freegold remains a rock solid foundation upon which to construct the world’s new monetary system, having a wobble (MoE) building on top of this solid (SoV) foundation is not a good thing for an efficient monetary system. A monetary system that must be both a MoE & SoV, work in both Local & International Trade, and provide an efficient transfer of wealth between Commercial and Investment Banking.

As the Chicago plan outlines, we need to go back to a debt free money (MoE) that is exclusively supplied by the ‘sovereign’ nation.

The Euro was a nice try but it’s clear that a monetary union ‘without’ a political union is not workable at a practical level. At this point either Germany will break from the Euro or the Euro will break from Germany, there is no third way.

In addition, the Euro like the US dollar is also a debt based MoE with bank credit forming a major component of the effective money supply. As such while the Euro has a Freegold like foundation it still suffers from the rotten MoE structure above. So the Euro is the poster child of why the MoE above the SoV foundation is ‘also’ very important.

Returning the money power (MoE) back to each sovereign enables rapid adjustments in the local money supply that is driven by maximizing productivity; increased productivity being the best way for any sovereign to generate tax revenues efficiently without harming the underlying economy. Happy and healthy cows if you will.

Failing that savers and trading partners will still be insulated via Gold's (SoV) function from any Sovereign that attempts to abuse their money power if they chose to issue more fiat (MoE) than needed for efficient commerce.

This very existance of this feedback loop will naturally deter them from attempting various forms of covert or overt printing of the MoE in the first place while still allowing for global adjustments due to miscalculations.

So the basic question to you is this; is the current debt based MoE largely issued by private banks the best MoE foundation upon which to build Freegold? I would suggest that since it combines MoE and SoV it is not ‘by definition’ compatible with Freegold.

In fact it’s the very attempt of the current monetary systems fiat MoE to add a SoV function capability via the debt is money approach that sits at the very heart of rot that is the current MoE system.

MoE needs a true SoV just as much as SoV needs a ‘pure’ fiat MoE. In this way both currency systems combined to form a very effective system than either alone because each serves only one master; one for immediate exchange and one for long term savings.

athrone said...

JR,

How do you justify giving (for-profit) banks the exorbitant privilege of money creation, given the level of ethics present in said industry?

From a practical level, how is creating money through a complex and obscure fractional reserve system where debt is created and re-created more efficient, or more desirable, as a foundation for the MoE than the transparent, debt-free creation of base supply by the (non-profit) treasury?

-athrone

Michael H said...

athrone,

"...the transparent, debt-free creation of base supply by the (non-profit) treasury?"

Here is something to think about. The more concentrated the source of power, the bigger the risk that it will be co-opted and used for "evil" purposes.

Having the money-creation powers in the hands of a handful of large banks is bad. Having it in the hands of a single government agency would be worse.

JR said...

Hi athrone,

How do you justify giving (for-profit) banks the exorbitant privilege of money creation, given the level of ethics present in said industry?

Huh? That's what banks do - create money via lending. Lotsa of unethical people exists - politicians, attorneys, agents, salesman, etc, etc. Why are bankers any different?

Without the moral hazard enabler of net-producers holding debt as their reserves and savings, how are bankers any different? The absence of “foreign structural support with CB storage” and “paper savers buying bank securities” as moral hazard enablers will be quite a constraint on the bankers.

Blondie: Let the banks create all the money they want; without the savers saving in it money creation not supported by productive activity is detrimental to those to whom it is owed, and that would be the banks themselves. Misallocation of capital is owned by the bank that enabled it if the savers did not, end of story. Currently it is the savers' capital the banks misallocate (for a fee), but if the savers choose another media for their value storage it is the bank's capital they misallocate. You don't think this will change the bank's behaviour?

Sure there are people in the banking sector taking advantage today (more lending means more fees, and if it's not your capital being put at risk who gives a damn?), but without that crucial decision from the savers that enables the whole thing banks return to being a simple utility. They have no alternative. No need for rules and regulations when their own self interest will suffice. Moral hazard off, prudent lending on.

If savers make their SoV anything but currency, please demonstrate how the banking sector can do anything about it; how they can 'game' this.


JR said...

Holla:

#FOFOA: With people's savings no longer captive in a financial system that lends them out at will, interest rates will once again be a direct function of the supply of (as well as demand for) capital inside the system. Yes, banks will still be able to conjure "thin air money" on their balance sheets to make loans, but the aggregate of loans within the banking system will once again be constrained by the capital ratios in the banking system as no secondary market for this debt will exist. And as a result, we will witness the return of prudent lending standards.

athrone said...

Michael H,

Here is something to think about. The more concentrated the source of power, the bigger the risk that it will be co-opted and used for "evil" purposes.

First, What evil purposes would those be? Creating money to boost one's own profit at the sake of everyone else? Isn't that by definition what all banks are doing? Second, isn't the power already concentrated (in the banks hands). Private banks have one charter: make money. At least the treasury would have a better charter (maintain a stable MoE) don't you think?

JR,

Your answers are nonsensical. I asked why you justify giving banks the ability to create money via lending, and you responded with "banks create money via lending." Under a 100% reserve system this would not be the case. So again, how do you justify the current system?

-athrone

Candy Sange said...

Frances: Please sirs, can I have some more?

JR said...

athrone,

Banks create money and lend it to people. I don't justify anything, that's a statement of fact - its what banks do.

You want to change this to make someone else decide who get the money. That's dumb-the problem is not banking, the problem is the enabling effect of people saving in the currency.

Got HMS?

Their foundational thesis is that fiat currencies and the CBs that manage them are the most fundamental flaw in today's system from which all other problems flow. This directly conflicts with my thesis that using the same medium in both the primary and secondary monetary roles is the fundamental flaw from which all other problems flow. My thesis applies to both hard and easy money systems. Their thesis points to the CBs as the bad guys. My thesis holds up a mirror and says, "We have met the enemy, and it is us."

Jeff & Blondie's Open Forum

JR said...

The solution is that the monetary store of value floats against the currency. It is not the same thing that is lent! It is not expanded through lending and thereby diminished in value. Instead, as $1 is lent, and now becomes $2 ($1 to the borrower + $1 note to you the lender) and the dollar drops to half its value, the saver, the gold holder will see the value of his gold savings rise from $1 to $2.

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-2.html

Victory said...

LCH-Clearnet just announced that as of August 28th, unallocated gold will be accepted as collateral for margin cover purposes

this can't be good for long-term gold price stability...one mare unstable variable added to the an already unstable non-linear model....I see margin calls and unallocated liquidation somewhere on the horizon....FOFOA's $300 papergold....then gold trading lock-up....re-open @ FREEGOLD $$$'s.

That's long/medium term...short-term this looks to me like an extension for the usage function of unallocated gold.

What a shame if they had specified allocated only that could have been a near-term catalyst for the price parity separation between allocated and unallocated....coming either way though....in the end this will make it worse

-v

athrone said...

JR,

The problem is banking. In freegold international trade is settled in physical bullion, but banks still cause boom/bust cycles and still cause general price inflation. Most people do not save in significant amounts (at least not in the west) so they could care less about having a good SoV. What they care about is the MoE and how much things cost compared to their take home income.

You seem to be having a hard time understanding how a bank could exist without "creating money from lending." Why?

Imagine there are two people: Joe six pack and Ben the banker. Joe works hard and saves up $100,000 from his surplus production, which he then lends out at 10% (for a profit). In the meanwhile, Ben lobbies the government for a special license to create $100,000 out of thin air, which he then loans out at 10% (for a profit). Ben has done no work and has zero capital at risk. He also earns a profit at the expense of everyone else who uses the currency (as he is devaluing it).

How is this fair or desirable? Why should Ben get special privileges vs. anyone else?

Under the Chicago Plan, Ben would have to take out a loan from the treasury for $100,000 (and pay interest on it) or raise money the same way as Joe (through savings) if he wanted to earn a profit from lending.

Motley Fool said...

athrone and spaul67

Perhaps unknowingly, you are both advocating for a form of hard money socialism, and both try and justify it with moral argument.

Credit is not something a bank gives, it is something a man already has. - JP Morgan (paraphrased)

Perhaps you both could do with some consideration of the nature of money; debt-free money? Ha!

Debt : The first 5000 years

Maybe the above will help with a bit of background.

TF

Aquilus said...

1 of 3

Re: Full reserve banking

I don't have a lot of time for back-and-forth these days (so don't look for immediate further responses from me) but I would like to add a few observations on the practicability of reserve banking.

Traditional banks are in the business of maturity transformation.

The depositor would like to deposit currency in the bank and ensure 2 things: that the currency can be withdrawn when needed and that a reasonable interest is paid for depositing the currency.

I'm using the example of regular savings accounts here. CDs and others are extensions of this.

-----------

1. In a fractional reserve system (forget the moral hazard of today - just traditional "honest" fractional reserve), the bank will make a loan based on its assesment of the borrow's credit and ability to repay the loan.

MMT (Modern Money Theory) is actually correct (gasp!) in saying that the bank will make the loan first and worry about reserves later.

If you think about it, this makes sense from an efficient economy standpoint. Any indvidual/business that needs funding can obtain it as long as they prove that they are able to pay it back.

The economy is lubricated by MoE, so everything works efficiently.

Sure, more credit is created (on demand), but is that not the role of MoE? As MoE, its long term value is not important, its ability to lubricate the economy is its main purpose.

That's how a growing economy is not stunted. (The caveat here is the moral hazard of the quality of the loan, but this caveat is the same in full reserve banking).

On the depositor side, if a depositor wants to withdraw the currency from their account, it is no problem in a fractional reserve system.

If they insist on hard cash, the depositor might have to wait for the cash to be trucked in from a different branch or the Fed, but because of the nature of the system, the bank can always access its reserves, borrow from the Fed, or take a loan against its assets (we assumed good loans).

Removing the reserves from the bank one day does not impede the bank's operation in fractional reserve banking as more reserves can always be obtained if the bank's assets (which way supersede its reserves) are of good quality.

The Fed's role is to "provide liquidity" to solvent banks when needed (lots of withdrawals) and that is good news for the borrowers as their loans do not need to be called in - no stressing the "real" economy.

I understand this greatly disturbes any "hard money" theorists to see money "appear" on demand to ease the banking system's need for cash at times, but as long as the bank's assets are performant, why should that not be the case?

Yes, the crux with the hard money advocates is that the fractional reserve system allows for the creation of more credit and dilutes the MoE (see JR's posts for this), but it is MoE, not a store of value after all. That's the whole crux of FreeGold - separation of the two.

That's why people who understand FreeGold embrace the flexibility of fractional reserve banking and fiat MoE!

Aquilus said...

2 of 3


2. In a full reserve banking system on the other hand, an individual/business might have all the valid credit and need for a loan, but might be turned down by the bank because there are no deposits in the system (Ex: "Please check back tomorrow, today we don't have enough deposits to make loans.")

Is that good for the real economy? If MoE cannot be provided when needed, the economy is impeded and slows down.

Also, in a full reserve banking system, because of the maturity transformation that banks do, when currency is withdrawn, assets must be sold or loans must be called.

Who will do the buying of assets to provide cash every time depositors withdraw money if all credit providers have the same restrictions?

Banks' balance sheets would fluctuate wildly based on deposits/withdrawals, and it will be hard to make that maturity transformation because banks will need to keep a buffer of cash on hand at all times.

Which means not only that less money is available for loans, but also that interest rates are a lot higher and deposit agreements a lot stricter (maybe longer CD/deposit terms, etc) so that banks can make a profit.

Basically it leads to a harder MoE (the dream of hard money advocates) at the expense of the convenience of having a well oiled (by MoE) economy. Less innovation, higher hurdles, many ideas that will not be funded, etc.

Aquilus said...

3 of 3



So in summary, as JR tried to point out above, the rules of credit creation affect the MoE. And those rules affect the relative hardness of the MoE.

But it's not the hardness of the MoE that we should be concerned about.

We should be concerned about the hardness of the SoV (Store of Value) and let the MoE be as efficient as possible even if that leads to it losing purchasing value in time.

Focusing on full vs fractional reserve banking in MoE is concentrating on the wrong subject.

Focusing on removing any kind of fractional reserve from the SoV is the part that's worth looking at.

Aquilus

JR said...

Back in October of 2009 I wrote a series of posts called Gold is Money.

Gold is Money - Part 1
Gold is Money - Part 2
Gold is Money - Part 3

In this series I introduced the concept of the separation of monetary roles into different media, not fixed at parity to each other. It's like saying "fiat is for earning and spending while gold is for saving." Or you could even say "silver is for spending and gold is for saving" as Ender likes to say.

[...]

A Flaw

In Part 2 I explained how the evolution of the money concept over maybe 2,500 years led to what we think of as money today: the three functions all tied into one. And I also explained how the modern bastardization of the money concept led to a fatal flaw in today's system:

[...]

I went on to explain how the value of the transactional medium of exchange will inevitably be sacrificed in a vain attempt to save the system. And that this is why it is so dangerous to hold your wealth in that same transactional medium today. This is why there are "two monies!"

[...]

This is the very beginning of starting to understand the concept of "two monies" not tied or fixed to each other by value, but floating against each other in value. We understand this instinctively, but today's system fools us into doing something that is very dangerous to our wealth today:

[...]

Clarify the View

This concept that the traditional monetary functions are now separating into non-fixed (i.e. floating) media has been both an epiphany for some and a stumbling block for others. My goal here is to clarify the view for those who cannot seem to get it. When comparing any two monies, circulation velocity (or the demand for money to the Austrians) correlates to, and is a measurement of, their respective store of value properties. In other words, the currency that circulates with greater velocity is in low demand, it's the "bad money" with a short store of value timeframe, while the slower currency is in high demand, it's the "good money" with a greater ability to store value through time.

This is a clear example of how the transactional and reserve functions of money are able to separate right before our eyes into two different media. Think about Zimbabweans quickly spending Z$s while hoarding US$s. Ludwig von Mises called it a "secondary media of exchange."

The term "secondary media of exchange" obviously implies the existence of a "primary media of exchange." But why only two? Well, the answer is simple: because we are dealing with two needs, two separate functions or roles in which we use "money." The two roles are transactional and reserve (store of value). Another clear example can be found on the Eurosystem's Consolidated Financial Statement. The primary medium of exchange is on the right-hand side, and the secondary medium of exchange is on the left. Look at how Line #1 has grown in proportion to the whole of the reserves (secondary media of exchange) from 30% to more than 65% in a decade. Now that's how you spot a focal point!

Here's the new "FOFOA's dilemma" once again (with an added hyperlink for the adventurous!):

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


The Return to Honest Money

JR said...

Yes Aquilus,

Killing it as always:

Focusing on removing any kind of fractional reserve from the SoV is the part that's worth looking at.

No doubt about that Aquilus!!


The Free in Freegold

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

This is the free in Freegold.


Freegold Foundations

Edwardo said...

Victory wrote:

"That's long/medium term...short-term this looks to me like an extension for the usage function of unallocated gold."

I could be mistaken, but I'd say that, given the nature of the financial landscape these days, i.e. rotten in more ways than one can count on one hand, this will speed up the day of reckoning considerably. Think Murphy's Law meets The Law of Unintended Consequences.

athrone said...

Motley Fool,

How is it hard money if the bankers can create as much as they want? The only thing that changes is the interest rate on the credit they create.

With 10% reserves, a banker creates credit at 0% interest. With 100% reserves, they create credit in the exact same way, but are forced to pay 0.1% interest on it. So if the interest rate I am suggesting changes from 0.0% to 0.1% suddenly I am a Hard Money Socialist?

I'm sorry but many here seems to be missing the point.

The system functions exactly the same in terms of MoE (and it's ability to lubricate trade), the only thing that changes is the bank's lending costs (and thus profit margin)...

-athrone

Motley Fool said...

athrone

The term "hard money socialist" refers to what advocates of this group want.

They think all our problems will be solved if it is harder to repay debts.

I understand that you think that if banks only had to pay more interest on their loans instead of getting a 'free ride' you foresee all problems solved.

This is not the case, and misses the forest for the trees.

TF

JR said...

How is it not hard money if the bankers can create as much as they want so long as they can meet the terms specified by the government that provides them necessary reserves

yup, how could it not be?

JR said...

Woa,

but banks still cause boom/bust cycles and still cause general price inflation.

Really?

...They believe that FRB (for demand deposits) as well as borrowing short and lending long (for time deposits) is fraudulent and creates the Austrian Business Cycle of booms and busts. You can listen to the very beginning of this for a quick view of the debate from Walter Block, another Rothbardian. And from Paul's End the Fed:

Rarely do people ask what the fundamental source of instability really is. For an answer we can turn to a monumental study published in 2006 by Spanish economist Jesús Huerta de Soto.[1] He places the blame on the very institution of fractional-reserve banking. This is the notion that depositors' money that is currently in use as cash may also be loaned out for speculative projects and then re-deposited.

[…]

The institution of fractional reserves mixes these two functions, such that warehousing becomes a source for lending. The bank loans out money that has been warehoused — and stands ready to use in checking accounts or other forms of checkable deposits — and that newly loaned money is deposited yet again in checkable deposits. It is loaned out again and deposited, with each depositor treating the loan money as an asset on the books.

In this way, fractional reserves create new money, pyramiding it on top of a fraction of old deposits...


This is obviously a problem, but I'm not going to spend much time on this FRB issue because there is a very simple and elegant solution that the remainder of this post will explain. Do you remember earlier when I drew your attention to the recurring concept of "two monies," be it gold and silver bimetallism or Ron Paul's hard currency competing with (floating against) the Fed's dollar? Well, we can apply this "two monies" concept to the term "fractional reserve banking" as well.

In this iteration of the concept, the "fractionals" are the easy paper notes circulating as currency and the "reserves" are the store of value for those paper notes. We solve the issue by simply cutting the parity fix between the two and allowing them to float in value against each other. Fractionals can then always be exchanged for an equal value of reserves and vice versa, but the floating reserves are never lent.


cont.

JR said...

cont.

The debate mentioned above within the Austrian/Libertarian community boils down to a free market solution versus a government dictate against FRB. But either way, all Austrian Economists agree that the real issue is credit expansion, which is at the heart of one of Mises' greatest insights – the Austrian business cycle theory (ABCT).

Briefly, ABCT blames the boom-bust economic cycle on fractional-reserve banking, or the expansion of credit without an actual act of saving by someone in the economy. When credit is expanded beyond reserves, the resulting drop in interest rates is artificial (i.e. not due to actual increase in loanable funds). This sets in motion an unsustainable boom period of malinvestment and erroneous capital consumption that sows the seeds of the inevitable bust. This process is supplemented by government intervention to protect privileged bankers from being “caught” short by the market and allows credit to expand far more than it would without such intervention. This practice of absolving privileged bankers of their legal obligations via intervention was institutionalized in 1913 with the creation of the Federal Reserve.

And an understanding of ABCT provides the context for understanding why Freegold is unfolding. Freegold simply offers a different way of controlling credit expansion that is more effective than the modern Austrian suggestions of making money harder and/or limiting or eliminating fractional reserve banking. There is no need for all that convolution, just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch...


The Return to Honest Money

athrone said...

If you can't answer fair questions (imho) which relate to this theory on very practical levels without calling someone an HMS idiot who thinks like a shrimp and misses the forest the the trees -- is it really others who need to re-read posts 10 times or the commenters here who have lost the ability to maintain a neutral bias in their arguments?

I never once suggested the Chicago Plan would solve all the world's problems. What I am suggesting is that an economic system where a select group (bankers) gets to borrow money at 0% interest is a ridiculous concept which has only one result: the one we are experiencing today.

Kind of like a system where a select group gets to export inflation to the rest of the world. Ironic that the posters here raise the problem of the USG exporting inflation but endorse bankers doing the same?

At any rate, how is any of this incompatible with freegold? Apparently bank credit available for 0.0% interest is a-OK and compatible with freegold, but the same at 0.1% is a ridiculous concept not worth discussing? This isn't something brought about by some fringe poster, this was a paper published by the IMF.

It's your net worth at risk, or maybe it's all a charade and the posters here barely even own any physical gold, but what do you gain from a circle jerk of insulting others and posting links to unrelated material? The world is changing and several important issues have been raised in the last few posts (imho) -- none of which have been addressed.

-athrone

Motley Fool said...

athrone

The intent is not to insult. On my journey I have walked many miles in your shoes. I understand where you are, because at some point I held the same views.

Is paying 0.1% on their reserves better than 0%? Perhaps, but honestly this is irrelevant in the bigger scheme of things.

I have no easy answers in this regard. It will take a lot of your time and thinking to let go of this particular obsession. All I can say is that I found it worth the time to deeply consider.

TF

JR said...

What I am suggesting is that an economic system where a select group (bankers) gets to borrow money at 0% interest is a ridiculous concept which has only one result: the one we are experiencing today.

Blondie:Let the banks create all the money they want; without the savers saving in it money creation not supported by productive activity is detrimental to those to whom it is owed, and that would be the banks themselves. Misallocation of capital is owned by the bank that enabled it if the savers did not, end of story. Currently it is the savers' capital the banks misallocate (for a fee), but if the savers choose another media for their value storage it is the bank's capital they misallocate. You don't think this will change the bank's behaviour?

FOFOAWith people's savings no longer captive in a financial system that lends them out at will, interest rates will once again be a direct function of the supply of (as well as demand for) capital inside the system. Yes, banks will still be able to conjure "thin air money" on their balance sheets to make loans, but the aggregate of loans within the banking system will once again be constrained by the capital ratios in the banking system as no secondary market for this debt will exist. And as a result, we will witness the return of prudent lending standards.

FOFOA [edited] Their foundational thesis is that [Banskters] are the most fundamental flaw in today's system from which all other problems flow. This directly conflicts with my thesis that using the same medium in both the primary and secondary monetary roles is the fundamental flaw from which all other problems flow. My thesis applies to both hard and easy money systems. Their thesis points to the [Banksters] as the bad guys. My thesis holds up a mirror and says, "We have met the enemy, and it is us."

JR said...

This isn't something brought about by some fringe poster, this was a paper published by the IMF.

Date: Fri Dec 12 1997 21:33
ANOTHER (THOUGHTS!) ID#60253:

Even Korea will find out that oil is all that counts. Their paper will die! Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno. If one owns real gold, it will be with ease to view the world currency developments. They will be truly of biblical proportions!"


FOA: Truly, the evolution of this story will be how that war ended then and now the dollar's war with the Euro began! A very large part of that war strategy, employed by the ECB/BIS, was to let the dollar/IMF faction hang themselves by expanding and supporting the whole arena of this dollar paper gold market. Inflating the gold marketplace with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.


FOA (5/8/99; 20:16:12MDT - Msg ID:5772)
BOE!

Many different factions are maneuvering gold these days, and each has their own agenda. The IMF / dollar faction, many years ago, went along with Europe in lowering the gold price in dollar terms. It made the dollar look stable and enforced its continued use as the "currency of settlement" for strategic commodities.

[...]

When Central Banks (mostly the European, at first) began to lease / lend gold, they were beginning what was to become "the master plan". The creation of a broad, liquid paper gold market that would ultimately undermine the dollar, in time. As I said above, initially it was offered as an "appeasement" for continued dollar use. However, even the IMF / dollar faction never expected the successful creation of another competing reserve currency, the Euro! Right up to its offering, the political money was on the side of a complete failure, 100% with ten to one odds.

Not only did they lose, the Euro even accepted a percentage of gold as Euro reserves. If that wasn't enough, the ECB also instituted a policy of "marking to the market" its gold reserves and effectively blocking any new sales or leases. These actions, as subtle and misunderstood as they were have had the effect of officially making gold money again. Yes, this new broadly traded paper gold market, standing side by side with the physical market has become a world currency.

The problem this creates for the IMF / dollar is that most, if not all of this new gold market is settled in dollars! Dollars that broke a contract with the world in 1971 and went off the "gold exchange standard" at $41 to the ounce. The same dollar reserve currency that is not supported when the gold price rises. If the ECB does nothing but stand firm by not allowing physical out of its vaults, the dollar will be trapped by gold. The US treasury cannot use gold as a backing reserve as the ECB does, because the BIS would claim it at $41 to settle trade imbalances. They have that authority and as such it leaves the US the only option of outright gold sales. However, with the dollar as "the" reserve currency, we can expect many nations to bid "aggressively" for any US gold. China, among others comes to mind! That is what America found when they tried to auction its gold in 1978. The Euro carries no such baggage.

This all leaves us in the present political situation, where the IMF entity, that was formed to replace the gold standard, is now trying to back the present paper gold with physical to prevent a run on the dollar. It is a futile effort as the ECB / BIS have grown the gold market into massive proportions by encouraging the many year expansion of holders through paper securities

JR said...

As our own Blondie likes to say (and I paraphrase for clarity), "you don't own your baggage, it owns you."

Deflation or Hyperinflation?

Woland said...

Soooo...
Is it fair to say the following?
With a 100% reserve ratio between the fiat and the
new reserve asset (gold), the fiat price of gold is 1 to 1, but:
as a 20% reserve ratio develops between the two, the fiat price of
the reserve asset (gold) rises to 5 to 1? And as the credit (fiat) money
volume continues to EXPAND, the fiat price of gold rises in direct proportion, both protecting the saver in the reserve asset (gold)
while neutralizing the rewards of fiat seignorage?
Is the one the RECIPROCAL of the other? Is that the theory? Is that
what the free, 5 day cash only settlement market for gold is
expected to achieve?

Aaron said...

MF-

Thank you for that most excellent link to David Graeber's presentation on credit. When I combine his ideas with JR's recent repost of FOFOA below I think we can draw one critical conclusion that eventuates in prudent lending.

JR's repost of FOFOA:

With people's savings no longer captive in a financial system that lends them out at will, interest rates will once again be a direct function of the supply of (as well as demand for) capital inside the system. Yes, banks will still be able to conjure "thin air money" on their balance sheets to make loans, but the aggregate of loans within the banking system will once again be constrained by the capital ratios in the banking system as no secondary market for this debt will exist.


If savers of the world are no longer willing to save debt as their wealth reserve and as such the secondary market for said debt is left limp as a demasculinised politician -- lending must and will be constrained by capital controls. Simple as that. Move outside those controls and you are insolvent. If there's no secondary market to offload the risk to - banks that made the bad loans are on the hook for the default.

Meritocracy!

Prudent lending.

And Freegold!

--Aaron

Edwardo said...

I believe it was in the context of a different (but fairly recent) conversation that VTC noted that they didn't seem to be rioting much in Greece lately. Someone else, I can't recall who, remarked that it was August and therefore not so conducive to displays of social unrest and dissent, broadly defined. Well, hold on to your hats.

We have this from ZH:

"It started Friday on the island of Hydra, a tourist spot of 2,700 souls. Officers of the financial police checked taverns, bars, and souvenir shops for tax violations. At a seafood tavern, an inspector discovered that patrons weren’t given Value Added Tax receipts, though required by law."

To investigate the case, the owner was taken to the police station, where she fainted. So she was taken to the hospital under guard. Her 25-year old son who worked at the tavern and copiously insulted the inspectors was also arrested—the straw that broke the camel’s back. Enraged, people threw rocks and firecrackers at the police station, shut off water and power, and demanded that the guy be released. Others blocked the port to prevent ferries from docking so that police couldn’t transfer him to Athens. Some forced their way onto a ferry and scuffled with the crew."

http://www.zerohedge.com/contributed/2012-08-21/euro-optimism-surges-greek-tax-revolt-flares-it%E2%80%99s-decision-time?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

In the meantime, though Freegold hasn't happened just yet, some folks aren't waiting around for such developments to realize their own brand of (r)evolutionary behavior. To wit:

"As the BBC reports, the feeling in Greece is that a "whole generation is on hold" and there is a growing trend towards the creation self-sustaining eco-communities - free of the ties of money and modern civilization."

http://www.bbc.co.uk/news/world-radio-and-tv-19289566#TWEET200800

We do live in interesting times.




http://www.zerohedge.com/news/goodbye-civilization-so-simple-greekman-can-do-it

spaul67 said...

@JR

I agree with most of what you have reposted/wrote so I’ll focus on what I perceive is our disagreement? namely;

“If savers make their SoV anything but currency, please demonstrate how the banking sector can do anything about it; how they can 'game' this.”

Easy, they game it right now. Savers have all kinds of SoV to choose from, farmland, houses, silver, gold, oil, equities, paintings, fast cars, plastic surgery etc. They all have one thing in common though; every last dollar spent acquiring these SoV (individual results may vary) eventually ends up as a ‘new’ bank reserve that then gets amplified through the fractional reserve system.

It may bounce around 30 hard assets savers like us before it gets there but eventually some grey haired lady goes down to the local branch and puts it into to her account. The banks then proceed to loan that new deposit out for say 30 year mortgages, while ‘still’ allowing for on demand withdrawal, beginning the cycle over again.

So not only is the same dollar pledge to multiple ‘savers’ but the durations between the assets and liabilities are way out of whack (i.e. demand deposit vs. 30 year loan).

Another thing all these existing SoV have in common is that periodic expansions and collapses in the MoE (Supply x Velocity) causes wild MoE price fluctuations of all these possible SoV (even Gold) which ironically scares savers towards the very debt is money system that is abusing them.

After all a great way to make everyone sell hard assets is to make them desperate for cash. Cash only the private banks are allowed to conjure up out of thin air. Heck, banks can bounce the same dollar back and forth amongst themselves to achieve whatever money supply they want cutting the ‘savers’ out of the loop altogether.

Ironically, if you are a saver and wanted to ‘crash’ the system you’ll store value in the form of physical cash. Anything you may purchase (SoV or not) eventually makes it way home to mama ‘except’ cash in a mattress.

Of course attempting to store purchasing power in the physical currency is foolish within a debt based monetary system because the MoE must always expand in order to pay the interest on the existing money supply or savers will be defaulted upon, take your pick.

For example if enough defaults happen (hello Muni’s, Student Loans etc) it opens up the government and banks to expand the money supply yet again paving over the savers defaulted on (i.e. 2008). So some savers are sacrificed to make room for more printing, oh the joy.

If by some miracle you manage to make a any gain, the IRS is right there to take that away from you too, effectively taxing there inflation, which includes Gold I might add. Try to pass on wealth to the next generation even in the form of gold, ditto. So basically you’re hosed.

The only giant powerful enough to stand toe to toe with the Easy Money giant (firmly in control of MoE right now) is the international trade giant. He alone must be feed or people will starve. It's that giant that will bring about Freegold and then only out of desperation after the collapse of the $IMF of the Easy Money Giant.

I think the “Gold must Flow” post is right on the money with regards to that. Gold is the only currency that is neutral on the international stage and abundant above ground. Once this is in place, then and only then will Freegold for savers become a SoV option.

At which point I agree with you; how a particular country manages its MoE, debt or non-debt, $1 Capital vs. fractionally reserved, government or private issued etc. is up them.

IMHO, some MoE management approaches are better than others but all will have consequences with regards to the local price of Gold in their MoE.

So I guess we’re in agreement as to end state dynamics (MoE to SoV) just not in terms of the order of operations?

You say a grass roots savers revolt (i.e. Braveheart) will bring forth Freegold, I say a collapse of the existing order (private debt based fiat as both a MoE and SoV) will force Freegold on the Easy money camp.

JR said...

FOFOA said...
Hello Kicker,

No, Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.

The transition to Freegold is all about the big players.

Sincerely,
FOFOA
August 3, 2011 2:16 AM

JR said...

Savers have all kinds of SoV to choose from, farmland, houses, silver, gold, oil, equities, paintings, fast cars, plastic surgery etc. They all have one thing in common though; every last dollar spent acquiring these SoV (individual results may vary) eventually ends up as a ‘new’ bank reserve that then gets amplified through the fractional reserve system.

It may bounce around 30 hard assets savers like us before it gets there but eventually some grey haired lady goes down to the local branch and puts it into to her account. The banks then proceed to loan that new deposit out for say 30 year mortgages, while ‘still’ allowing for on demand withdrawal, beginning the cycle over again.

So not only is the same dollar pledge to multiple ‘savers’ but the durations between the assets and liabilities are way out of whack (i.e. demand deposit vs. 30 year loan).


Yeah, so the MoE devalues. What is the problem?

The solution is that the monetary store of value floats against the currency. It is not the same thing that is lent! It is not expanded through lending and thereby diminished in value. Instead, as $1 is lent, and now becomes $2 ($1 to the borrower + $1 note to you the lender) and the dollar drops to half its value, the saver, the gold holder will see the value of his gold savings rise from $1 to $2.

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-2.html

JR said...

Glimpsing the Hereafter

But when the debtors are borrowing too much currency and consuming too much in the physical plane, there is a mechanism in Freegold that ultimately slows them down. That mechanism is the purchasing power of the currency. When the debtors are consuming too much they'll experience price inflation which will force them to consume less. So it is the purchasing power of the currency that regulates the debtors.

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

The Return to Honest Money

Freegold simply offers a different way of controlling credit expansion that is more effective than the modern Austrian suggestions of making money harder and/or limiting or eliminating fractional reserve banking. There is no need for all that convolution, just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch (which comes from this comment by yours truly). Snippet:

But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

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

JR said...

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

/SleepingVillage/ said...

I love it.

The whole balance mechanism idea within Freegold is such a simple, elegant concept once you ditch the baggage. Some of us have "heavier" baggage than others. It is often more difficult to toss the heavy baggage, due to the mass and gravity.

My mind is out here on another wave, covered in hair

/SleepingVillage/ said...

Oh yeahs,

Caught this piece at the Turd's, while surfing.

"Aug. 18 Hat Trick Letter

"## GOLD PRICE SMELLS AUGUST RUSH

◄$$$ THE WILD CARD FEW ARE TALKING ABOUT, EVEN INSIDE THE GOLD COMMUNITY IS THE ALLOCATED GOLD ACCOUNT SCANDAL BREWING. IT LIES JUST BENEATH THE SURFACE, YET IS NOT NOTICED BY MOST ASTUTE GOLD ANALYSTS. OVER 40,000 METRIC TONS HAVE BEEN ILLEGALLY SEIZED BY THE BIG WESTERN BANKS, REPLACED WITH GOLD CERTIFICATES. THE LAWSUITS HAVE BEGUN, BUT IN PROTECTED SWITZERLAND. WHEN THE SCANDAL BREAKS, AND IT WILL, THE GOLD PRICE WILL DOUBLE, THEN DOUBLE AGAIN AND CONTINUE UPWARD. $$$

A gem of a note came from my source, the German gold trader. He rarely if ever is wrong about important things. Maybe about tomorrow's weather, or the restaurant menu, but not concerning matters on Gold. His insider dealings and contacts are unmatched worldwide. He has billionaire clients on every continent. What makes his integrity and wisdom so beyond reproach is the hatred that Swiss bankers have for him. They are the principal violators of Allocated Gold accounts. Together with the London bankers and New York bankers, they have illegally taken for their own gold structured deals well over 40,000 metric tons of private account gold. Several important lawsuits are in progress in Switzerland, class action cases with over $1 billion in gold accounts challenged where the Gold bars are gone. Some day before long, obviously uncertain when, the Western bankers will be obligated to return the gold via open market purchases or vast taps on either Basel or the Vatican. If those dark corners are tapped, bankers will be found hanging in basements as vengeance. The Eastern nations will not help them. They will tell them to go to hell, where most worship anyway. As footnote, a German finance delegation was turned away by the New York Fed in late July, when they inquired as to the whereabouts of a German Govt gold account. The noose is tightening on the bankers. "

"I had a very long conversation with an old trusted friend with the most impressive ties to the gold industry. We shared information and feedback that we obtain from various people from very deep inside the system. One of the issues we explored in great depth was where the precious metal market will be heading, due to certain developments. My friend is pretty certain that we shall see a price of at least US$50,000 per oz in today's dollar, once the gold fraud perpetrated by the banks in selling Allocated certificates (having no metal behind them) and the ETF fraud by Zurich Kantonalbank blow into the open. This will happen with the beginning run by ETF certificate holders. They will someday before long make a run on the bank(s) demanding their metal to be delivered. This run has now started and is gaining momentum in Switzerland. At the same time banks are pulling lines of credit they previously had granted to mining companies. We also agreed that the current Au/Ag ratio of currently approx 54:1 will come down to anywhere between 18:1 and 25:1 over time. This will be happening as the price for Au will go through the roof, as in when it will be defined by the market."


Green Machine

anand srivastava said...

spaul67 and athrone

Let me take a stab at explaining in simple terms. I don't really understand the financial terms :-).

The problem with 100% reserve banking is that the banks cannot lend it out to even deserving people. The business of banks is to give loans to people, get the interest and pay the people depositing money in the bank some part of the interest. Unless they can give loans, they cannot make money and they cannot operate their business.

The problem here is that you think that it is wrong for the banks to be able to create money out of thin air. But you are missing that you can also do that. This is not either god given gift or the govt given gift. Anybody can become a bank. What you need for being a bank is trust. The trust that people think the money put into the bank is safe.

The problem presently is that there is too much trust. The other problem is that people who do not trust the banks, don't know where to turn to. They don't understand gold.

The solution is not to make the govt so powerful, that they can restrict the business of banks, but to remove the excess trust people have in banks and to provide the knowledge to them that they can store their excess income in gold.

By advocating for 100% reserve banking you are advocating for a much more powerful govt. You are actually looking for a socialist state where the govt directly controls banks.

Freegold actually moves the power back to the people. It reduces power of the govt. It also reduces the trust in the banks, which curtails their excess money making.

What you are pining for is a hard currency. Where you can store your excess saving. But that is the antithesis of freegold. Freegold makes the currency soft, so soft in fact that people do not have much faith in it, and will trade it immediately for gold.

Regarding your concern that even if the currency goes through 10 people storing their value in gold eventually somebody will store it in the banks. But don't you think it will require much less credit and base money if people store their capital in gold. Freegold is a Utopia. We will never be 100% freegold, because people do need to use MoE for other purposes also, and some people will still store in MoE because of carelessness or stupidity. So what still majority of the money will not end up in banks.

Lets say currently 80% of the capital created gets stored in banks, so they are able to multiply it by 10 and make it 800% of the actual capital. This is how you get exponential boom and burst. But if only 10% capital goes into banks, the 10x multiplier doesn't do much. The boom will be more of a simple growth, and busts may not happen.

Please rethink your premises. There is a lot of wrong in Hard Money. Freegold is naturally superior.

Also 100% reserve banking is not even practical, unless people pay a fee for storing their money in the banks. Do you really think you would want to pay a fee to store a currency that will devalue. Not because of banks, because banks will not be create more credit. But because of govt because it still can and will print money. Nobody can take that power from govt. They will change the constitution to get that power. The people want them to give them freebies, and they will do so.

So why ask for something that doesn't help you at all. Makes your govt more powerful. Makes private enterprise more difficult. Takes away essential liberties.

You have a lot of deep thinking to do.

costata said...

The first part of this is for Phat Expat and any other readers who are waiting for the opportunity to roll silver for gold:

http://www.321gold.com/editorials/thomson_s/thomson_s_082112.html

Silver staged a “breakout” against gold from the red down channel, simply by trading sideways. From there, it formed a symmetrical triangle, and yesterday it staged an absolutely majestic breakout to the upside.

This snippet is for all of the readers. A little food for thought:

Please click here now. You are looking at the monthly chart for the Dow Transports, and what is arguably one of the most bullish price patterns in the history of markets.

There appears to be a truly gargantuan bull continuation reverse head & shoulders pattern in play. It has been forming for five years. I think that most stock market investors are probably underestimating the amount of quantitative easing being planned by the Fed.

The size and shape of that pattern indicate that the Transports could rise to about 10,000. Could the Dow Industrials double in price, from here?

I think the Dow can double in price, and will do so, because another round of quantitative easing would make institutional money managers begin to view the dollar as the “risk-on” trade, and the Dow as more of a currency and a “risk-off” trade.


I was recently reading a book which cited a statistic from the Weimar HI period. The author cited German unemployment as being around 1.4 per cent versus 14 per cent for Britain just before the wheels finally fell off. After that it was a dramatically different story.

One way to look at these numbers Stewart Thomson is discussing is to invert those price targets for the Dow etc and view a rise as being inverse to the depth of the perceived problems that the Fed is addressing.

It doesn't matter how critics view their policy responses. Given their perception of the problem and the required solution then their responses are not at all irrational. What matters ultimately is that they are pursuing a solution in their minds and part of that solution is to increase the money supply and devalue the currency.


Edwardo said...

Costata,

I know you didn't post ST's latest for the purpose of discussing the stock market, but, since it came up, I'd just like to offer that some very good analysts that I follow have marked this week- one marked yesterday- as a major long term top in shares. Can they be wrong? Certainly, but, if they aren't, then we may be looking at some very serious policy failures. In any event, FWIW, and I'm sure you know this, the fall is a seasonally weak period for ye-olde stock market.

Xavi said...

Check out the interview with Ned Neylor-Leyland in the last Keiser Report (E330), you can skip the first part of the video.

http://www.youtube.com/watch?v=QnCcrCmj5ok

Michael H said...

/SleepingVillage/,

"Together with the London bankers and New York bankers, they have illegally taken for their own gold structured deals well over 40,000 metric tons of private account gold. Several important lawsuits are in progress in Switzerland, class action cases with over $1 billion in gold accounts challenged where the Gold bars are gone. Some day before long, obviously uncertain when, the Western bankers will be obligated to return the gold via open market purchases or vast taps on either Basel or the Vatican. If those dark corners are tapped, bankers will be found hanging in basements as vengeance."

If you're going to lie, lie big, I guess.

Though the author is obviously wrong, because he is not taking into account the 80,000 metric tonnes of gold that the cartel recovered from the basement of WTC building 7, before they demolished it.

(/sarc)

costata said...

Edwardo,

I think it will invert FWIW.

Cheers

Edwardo said...

I tend to agree that nominally the market will hold up. But, as far as the cycle inverting, that's unlikely given that what is under discussion are long term cycles. Equally the time frame for the change in trend is now. And since there is no low in shares presently an inversion just isn't in the cards.

Asserting that the severity of the cycle will be muted seems defensible, however, given our outlook on how the monetary authorities around these parts are apt to behave going forward. Having said that, a marked deterioration in global economic activity, massive money printing notwithstanding, should not be underestimated with respect to its potential dampening effects on shares.

A final note:

If the K-Wave cycle has any validity in our time, then assuming that we are near an economic trough, aka a depression, we should not be surprised by the outbreak of a large scale war in the next year or so. Rarely, except in a few select cases, are wars beneficial to most human endeavors, the stock market included. All this by way of saying that, given the complexity of human affairs, there are a wide variety of variables to consider.

Ryan said...

Xavi,

Max Keiser is intolerable, imo. Naylor-Leyland didn't have much to offer beyond basic allocated v. unallocated insights, all of which are probably understood by most commenters here.

Ryan

athrone said...

Here is a list of questions that at least for me, have emerged as a result of reading through the volumes of posts and comments on this blog, and have yet to be sufficiently addressed. If these resonate with anyone else in terms of validity or importance, please feel free to share your thoughts on possible explanations/answers.

1. Are these prominent world leaders (e.g.) expected to have a full awareness/understanding of freegold, yes or no:
a. Barack Obama?
b. Hu Jintao?
c. King Abdullah?
d. Mario Draghi?
e. Ben Bernanke?
f. Rothschilds/Rockefellers?
g. Soros/Paulson/Buffet?

2. If the ECB is planning for the Euro/freegold to emerge after the collapse of the dollar, what is the USG planning for? What is China planning for? Are these countries aligned with the ECB/EU or do they have their own (opposing) goals?

3. Who is actively front running freegold? Given that there hasn't been so much as a peep from any governments, central banks, or billionaires in the last 15 years -- Doesn't this necessitate a rather impressive conspiracy of silence?

4. Is physical gold in size currently being purchased at prices much higher than spot? If so, what recent transactions/transactors are suspected as an example?

5. Freegold requires forced austerity for debtor nations as all trade deficits must be settled in Gold or immediately eliminated, how will countries like the US deal with this? Greece is already showing increased signs of violence and unrest.

6. Freegold will discourage excess trade balances (positive or negative) so the overall reserves held by countries will tend to zero. Will this not make the role of reserve currencies and the duration of holding (quality of SoV) less relevant?

7. Post freegold, trade balances are settled by purchasing Gold on the open market. Later this gold will be sold to purchase local currency, again on the open market. If the US is no longer exporting inflation ($USD is no longer the world reserve currency) and countries presumably have more control over their own currency (internally isolated MoE) and trade balances oscillate around zero, why not simply hold local currency and cut out the middleman (Gold)?

-athrone

JR said...

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

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


Unambiguous Wealth 2 – The MF Global Chronicles

======

Good news

A bankruptcy trustee sifting through the remains of MF Global Holdings Ltd. expressed confidence that the failed securities firm's U.S. customers will get all their money back.

In written testimony submitted to the Senate Agriculture Committee for a hearing Wednesday, trustee Louis J. Freeh said farmers, ranchers, traders and other investors still owed an estimated $1.6 billion "eventually will be made whole," according to a copy of the testimony reviewed by The Wall Street Journal.

JR said...

1. Are these prominent world leaders (e.g.) expected to have a full awareness/understanding of freegold, yes or no:
a. Barack Obama?
b. Hu Jintao?
c. King Abdullah?
d. Mario Draghi?
e. Ben Bernanke?
f. Rothschilds/Rockefellers?
g. Soros/Paulson/Buffet?


I would suggest you read:

FOFOA comment at neutralnetwriter
Open Letter to EMU Heads of State
"The Gold Man" (not Goldman) at the BIS

=====

2. If the ECB is planning for the Euro/freegold to emerge after the collapse of the dollar, what is the USG planning for? What is China planning for? Are these countries aligned with the ECB/EU or do they have their own (opposing) goals?

Open Letter to EMU Heads of State

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

3. Who is actively front running freegold? Given that there hasn't been so much as a peep from any governments, central banks, or billionaires in the last 15 years -- Doesn't this necessitate a rather impressive conspiracy of silence?


The prominent presence of gold on the balance sheets of the modern Central Banks is the CBs front running the market! Freegold (or "Reference Point Gold") is an unfolding market force creation. Mish says, "unlike FOFOA I think money is whatever the free market says it is." That's not "unlike" me. It is simply misunderstanding me. Gold IS the market choice. And the real market for this "store of value" is the Giants with "value to store." Luckily we shrimps can tag along for the ride. But we can no more override this market choice than we can crash the Treasury market by dumping our stockpile.

[...]

In fact, my position is that silver will rise just fine against a falling dollar. In fact, it may gain a little additional levitation over other commodities due to the lingering monetary sentimentality put forth by Trace and others. But it will also be limited by the economy. Where it will not follow gold is through the change in both market and function that will deliver a real, non-inflation-adjusted massive one-time return. The Freegold reset as the gold market turns physical and the gold function becomes the monetary store of value par excellence. A free market Giant event being front run by the Central Banks and a few small physical gold advocates.


Windmills, Paper Tigers, Straw Men and Fallacious Fallacies


JR said...

4. Is physical gold in size currently being purchased at prices much higher than spot? If so, what recent transactions/transactors are suspected as an example?

Open Letter to EMU Heads of State
This comment on the SE/PE membrane

5. Freegold requires forced austerity for debtor nations as all trade deficits must be settled in Gold or immediately eliminated, how will countries like the US deal with this? Greece is already showing increased signs of violence and unrest.

So if the gold in private hands in the US doesn't flow in sufficient amounts, given that US debt has been discredited through the Freegold phase transition, the government will have no choice but to continue printing money in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people. And in a last-ditch effort to support its own failing currency, it will have to ship Fort Knox gold overseas. FOA mentioned something about this: "…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates."

In this scenario, the need to continue printing in the face of an ongoing currency collapse will obliterate any miniscule gain that comes from the few shrimps who actually decide to sell their gold in an untimely way and pay the tax. The US has precious little gold in private hands as it is. And it will need that private gold to flow. It needs you to sell your gold to your dealer so your dealer can export it to our trading partners. That's how trade flows will resume under the new paradigm, with savers choosing to let their gold flow because of the amazing purchasing power it delivers.

And with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital in its purest form based on the silly notion that the hungry collective deserves a windfall nine times greater than the gold investors who kept gold inside the zone through a turbulent transition. The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.


The Gold Must Flow

JR said...

6. Freegold will discourage excess trade balances (positive or negative) so the overall reserves held by countries will tend to zero. Will this not make the role of reserve currencies and the duration of holding (quality of SoV) less relevant?

Let's get Randy!

[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.

Randy's Comment: Although I should be well used to it by now, it still amazes me every time I see comments like the final remark here regarding any significant shift from dollars will lead to the destruction of central banks’ portfolios. It’s almost as if the commentator is trying to help indoctrinate a paralyzing fear as a means to prevent any such attempt on the part of the CBs, and to also create enough grass-roots doubt against such an attempt ever being made that we the people won’t perceive any benefit in trying to front-run with our own flight out of dollars and into gold...

It is an error in thought or judgment, however, to believe that a “destruction” of the dollar portion of the portfolio would therefore proportionately destroy the portfolio as a whole. That would only be the case if all other things remained unchanged, but life seldom works out so neatly as that. Sometimes an action can set forth an immediate chain reaction that literally changes EVERYTHING you thought you knew about the situation!...

In the world of the “new normal,” it is indeed possible (and someday soon desirable) to let the fuse be lit and allow the CB store of dollars be consumed. And to be sure, it is singularly the latent potential energy of the gold component that allows us to make this analogy with gunpowder. The natural chain reaction in the tiny open market for physical gold would immediately bring to bear massive “heat” and “pressure” upon its price… **POW** thus swelling the “volume” of its value relative to all other things. So even without radical changes to the quantity of physical holdings, a simple expansion in golden value will more than compensate the average portfolio of the central banks against the destruction of the dollar component.

Still can’t wrap your head around it? Bear in mind that the gold price is not a simple one-to-one inverse relationship with the dollar. There is a great leverage lurking in there, but it has been largely masked by the artificial abundance of paper gold which weighs down upon the equilibrium price. And even so, since 2002 the dollar value has decline by just 20% on a trade-weighted basis, whereas the gold price has responded with a 300% gain. And the moreso that the public and private parties of the world rightly gravitate toward physical gold instead of the illusion of paper derivative gold as the solid foundation of their savings and diversifications, the moreso you will see this price leverage grow in favor of larger multiples of gold price gains against modest dollar losses....

Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.


cont.

JR said...

cont.


WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.

R.

JR said...

7. Post freegold, trade balances are settled by purchasing Gold on the open market. Later this gold will be sold to purchase local currency, again on the open market. If the US is no longer exporting inflation ($USD is no longer the world reserve currency) and countries presumably have more control over their own currency (internally isolated MoE) and trade balances oscillate around zero, why not simply hold local currency and cut out the middleman (Gold)?

Because gold isn't a middleman, its saving in gold (aka gold as reserve) that causes trade to balance. Gold has got to FLOW!

Spur and Brake

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

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

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

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


The Gold Must Flow

matrixsentry said...

Here is a list of questions that at least for me, have emerged as a result of reading through the volumes of posts and comments on this blog...

The nature of your questions suggests a few possibilities:

1. You haven't read the entire FOFOA blog.

2. You haven't read enough of the FOFOA blog.

3. Your reading comprehension leaves something to be desired.

4. You are burdened by previous baggage and find it difficult to let it go.

5. You are purposefully resisting the concept in order to pursue an agenda.

If I were to guess I would say it is 1,2 & 4 above that is impeding your understanding of the concepts discussed on this blog. If you haven't read all of Another (it's linked prominently on the blog) and have not read all of FOFOA's posts (in the the blog archive or prominently linked under Ron M's Air-Friendly PDFs) then you are simply trying to take a short cut by spending so much time in the comments section. This may work for some but will definitely not work for others. I have know way of knowing what you require, we are all different. As it turned out I needed to read it all.

In fact, I did not even start reading the comments section of the posts until a little over a year ago. I gained all of my understanding from the posts only. If I were you I would download the annual compendiums and I would start reading. Your questions have all been covered numerous times over the last 4 years in many different posts and in the comments. Some here will attempt to bring you along, but others will not bother when it is clear that you could be doing far more to help yourself.

You have a good bit of work ahead of you, but the reward is really worth the effort. Good luck and hopefully you will enjoy the journey of discovery.

athrone said...

JR,

Can you use your knowledge of those posts to answer the questions directly, or perhaps give your own opinion? As an example, the EMU post you linked to "answer" question #1 is over 2 years old. Mario Draghi wasn't even in office then. Don't you think maybe Obama (or the other world leaders) have also become more informed in the past 2 years about this crisis?

You can't answer everything with a link to a post, at least it doesn't do anything to help me as I've already read everything you have linked so far.

Are you just trying to bury discussion by spamming links after people raise questions?

-athrone

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