Saturday, November 10, 2012

Moneyness 2: Money is Credit


"Gold is the only money the world has ever known"
Sounds like a simple thought, but it isn't.
To understand the following you must rethink your basic
knowledge of money and investments. Get your aspirin ready.
–ANOTHER

What will change is how we view money and wealth
Everything else in Freegold flows from that!

My purpose in writing this post is to state my personal view of the concepts of money and wealth as clearly as possible. I think that my view is useful in both understanding our unfolding present landscape as well as profiting from that early understanding. There are other views of money and wealth which are much more widely accepted, and I hope to explain why I think their biggest flaws are found in their useless conclusions and the destructive prescriptions to which they logically lead.

Anyone who chooses to read this post is free, of course, to take it or leave it, because all I care is that you see and consider it. If there's one thing I know, it's that I cannot claim credibility for myself, that judgment is up to you. So think of this post as a "stack of rocks" marking this spot on the trail. And since I can't say it any better than FOA did a decade ago, here's what I'm trying to say:

FOA: "I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."

There is no authority for the money concept

The first thing that is important to understand is that money (and later banking) was never designed, patented, invented and then rolled out such that we can pull up the original plans and put centuries-old debates to rest. It simply emerged over thousands of years. There is no original set of rules and definitions. There is only reality, a menu of different perspectives from which you can choose to view reality and the conclusions that are logically drawn from each perspective, and then how useful those conclusions end up being in hindsight.

Economists and philosophers, from John Locke to Adam Smith and Jean-Baptiste Say, to Marx and Menger, Mises and Keynes, Friedman and Hayek, to Minsky and Rothbard, have, for centuries, been adding their perspectives to the debate and collective understanding of the emergent concepts of money and banking. This has led to several formal schools of thought on the subject which I argue can be generally divided into two camps—the easy money camp and the hard money camp.

I'll tell you right up front that I think my perspective is far more useful, especially right now, than those offered by either camp. But one of the revelations that I found most vexing while walking this trail was that, in terms of describing money, the easy money camp has always been closer to reality than the hard money camp. Even so, the usefulness of the (macro and micro) conclusions (and prescriptions) coming out of both camps has run the gamut over the last few centuries due to what I think is a fundamentally flawed view of the big picture—a flaw which, in and of itself, has set the two camps perpetually and unnecessarily at odds with each other.

I make no prescriptions here, only observations. Even the personal action I endorse for savers—buying physical gold bullion coins and bars—is not recommended beyond what you understand. In other words, I don't even need to recommend it. If you understand, you will do. But if you do without understanding, your results may vary.* So I'm only sharing my perspective and, if it makes sense to you, you'll know what to do with it.

The goal of this post is to present a lens through which you can see the true role of money and wealth/savings in your daily life today and in the Freegold future. Only time reveals all things, including the full extent of any reward for understanding changes ahead of time and then acting with the full force of that understanding. But I can tell you, from personal experience, that there is an immediate reward from understanding something and then acting upon that understanding. And that reward is peace of mind.

In as few words as possible

Since I'm writing at length here, I thought I'd start out with a kind of abstract for those who can't stand long posts. Blondie once asked me how I would describe money in as few words as possible. My answer was: "Money is credit." I followed that up with a little more detail: "More specifically, it is the recording of current balances of credit. It can be recorded in your head, represented on an institutional ledger, or carried in your pocket as pieces of paper or metal with numbers recorded on them. But notice that it's the recorded numbers and not the paper/metal in your pocket that constitutes the money."

But you can't possibly understand the pure money concept without also understanding the wealth concept. The pure concept of wealth is really simple. Its only attribute is possession (or at least unambiguous ownership of something tangible, if it's not in your immediate possession). Your wealth includes all of your owned possessions, from the air you breathe down to your comfy, worn-out slippers. Value is subjective—it's in the eye of the beholder. Value comes from utility (usefulness) to the user. If something in your possession has no use to you, no value, then it is likely that you won't go to the hassle and expense of continuing to possess it. You'll probably just throw it away. So possession is the distinguishing characteristic of wealth, which also puts wealth squarely in the physical plane.

What sets your gold apart from your stinky slippers and other items you possess is that it is the most tradable—tradable wealth! Imagine that! It is tradable because someone else values it too, unlike your slippers. But not only does someone else value it, but almost anyone anywhere in the world values it nearly equally, even the Giants! How many of your other possessions would measure up to the quality standards of a Giant? None, I imagine. This is what FOA meant by "equal footing".

That's basically it in a nutshell. Those who have been following the comments know that Blondie prefers the term "credibility" more than "credit". It's a fine line, and I could go either way. In this post I'll use both words almost interchangeably, but I think I'll stick with "credit" as the closest proxy for the pure concept of money.

Okay, I guess a few more words are needed

Think of it like this. Value is subjective—it's in the eye of the beholder. You value your slippers, but no one else does. Gold is the one item in the world that comes closest to having a relatively objective value because your knowledge that others value it for the same reasons you do is the very reason you value it in the first place. It's the reason behind gold's utility as a store of value or, phrased another way, a wealth reserve. Salience is a good descriptor.

Credibility, like value, is also subjective. But unlike value it's not something you can claim for yourself. Only someone else can judge you credible. Ergo, credibility must be earned. It is subject to the judgment of others. Credit is like spendable credibility. Money is the fungible exercise of credit (accepted everywhere, even by those who don't understand why you're so darn credible even when you're wearing such ugly slippers). A bank doesn't really give you credit. You earn it before you ever walk into the bank.

If you want to buy a house, you don't need to have saved the full price of the house. All you need to have is earned credit/credibility. You walk into the bank, the bank checks your credit and, if it is not found wanting, facilitates the fungible exercise of your credit/credibility. And then, because it's now fungible, it circulates!

The real world operates on massive amounts of credit. And by real world, I mean the businesses that make everything in your life. Credit is not just about consumer credit cards, evil speculators maxing out their margin and housing bubbles. And the hard money view of "money" as something we all want to hoard is just as pedestrian a view as thinking credit (or debt) is something intrinsically bad. Money has always—ALWAYS—been credit/debt. That's not bad at all. Debt is simply credit (or credibility) fungibly facilitated and then exercised!

Short post fans can stop reading here

FOA wrote so much good stuff on this subject of which I excerpted some and extrapolated more and carried on into MMT and hyperinflation in my first Moneyness post that I implore any new readers to stop here and go read the first one first. I'm not going to rehash anything from that post, so if you haven't read it, it's like you're starting in the middle of a book.

Useless conclusions

I want to start by detailing how a faulty premise can logically lead to useless conclusions and worse—occasionally to destructive prescriptions. The faulty premise I want to discuss is one that is almost universally accepted in today's hard money camp. It is just one example among so many that I can't count them all, but it will also set us up to discuss why money is, and always has been, credit.

This premise was posted here in the comments a few days ago by a reader named Herb. So I'll just cut and paste it here from Herb's comment:

The reason gold is money is because it has the premier attributes of money. You know, the good old textbook qualities of fungibility, divisibility, portability, etc, etc. You can no more deny gold is money than you can deny that a dog is canine or a cat is feline. It simply is what it is.

Indeed, those are great attributes, along with durability, easy recognition and a relatively stable supply! But are those truly the attributes of the original money concept, or are they more befitting the concept of a salient tradable wealth reserve? Is there a difference between money and a tradable wealth reserve? And if so, why is it important to understand this difference? The answer is that not understanding the difference leads to useless conclusions about money and banking and terrible prescriptions for remedies whenever problems arise.

Obviously I am simply describing two different perspectives here. And hopefully we can all agree that common sense says Herb's list of "textbook qualities" at least applies to the very best tradable wealth reserve (or reserve asset). So then the main difference between perspectives is whether or not the concept of money is the same as the concept of a tradable wealth reserve/reserve asset. The hard money camp says yes; I say no. And to judge this distinction I think we need to look at the conclusions drawn from these two different premises.

FOA wrote that, in antiquity, gold was used as a tradable wealth reserve, not as money. From Moneyness:

FOA: Gold, that wonderful metal that has all the unique qualities to function as our one and only wealth medium, and we just can't use it without altering its purpose. You know, the Lydians had it right, back around 430 BC. They didn't struggle with the concepts of money, like we do today. They just stamped whatever pieces of gold they found laying around and kept it for trade. There was no need to clarify for certain that their gold money needed properties of "utility", store of value, medium of exchange, etc. etc.. They didn't need to identify these qualities were in gold before they stopped questioning if it was safe to use gold as savings. Gold was owned and the knowledge that people owned it and carried it for trade was alone enough to make it "worth its weight as wealth".

You see, back in antiquity there existed another property that could override our need for modern definitions of tradable wealth. That property was found in the one identifying mark of wealth that transcended all ages; real possession!(smile) This factor and this one factor alone had the ability to activate all the other modern attributes of money properties, even when the knowledge of these attributes was unknown in the ancient era.




It was only when governments stamped official denominations and numbers onto pieces of gold that we can say the money concept was applied to gold. But as I said earlier, it was the number recorded on the metal, not the piece of metal itself, which constituted the use of the money concept. FOA mentioned this as well. Again, from Moneyness:

To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item. In proper vernacular; a 1930s style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature.

There is a key concept hidden in that paragraph. If we look at all of history we find a whole host of materials that have been used to record the money concept—electrum, gold, silver, copper, iron, nickel, zinc, paper, wooden tally sticks, Yap stones, even silicon microchips buried in secure computer servers for the last 40 years or so. But even from the very beginning this was a sub-optimal use of gold in particular, because it had naturally emerged as the leader of the pack of tradable wealth reserve items due to our list of "textbook qualities".



But let's say that you reject this notion that money is really only the credit notation and insist that it is, instead, the physical item itself. What is the harm in that? Well, I think it leads to some horribly wrong conclusions, especially about how banks work.

Banks facilitate the fungible exercise and circulation of credit. If I have plenty of credit, I can walk into any bank and get a loan. Then I can spend that loan and my credit (money) will begin to circulate throughout the economy as a medium of exchange. But if I am to accept that money is actually some tangible wealth reserve item, then I have to be skeptical about the source of that bank loan.

If, on careful examination, the bank has less of these physical wealth items in reserve than it has in outstanding liabilities, I might craft the common description of fractional reserve banking to explain what I found. This would lead me to the cynical notion that banks are somehow cheating by counterfeiting the real money that they have on deposit or in reserve. It would probably just remain my theory until some sort of crisis happened, and then it could mature into an outright accusation of fraud.

Reserves, of course, have always been vital to the business of banking. They are how banks settle up amongst themselves, and in the case that a bank customer decides to transact in a distant land outside of his local system of bank settlement (or locally in a black market), reserves are what the bank gives the customer to take with him. But this idea that the reserves are the real money and the credit is some sort of counterfeit or fraudulent money leads to horribly wrong conclusions and destructive prescriptions whenever a banking crisis occurs.

There is a big hump to get over here if you are in the hard money camp. Simply, get over this idea that banks need to have something to lend. This is the faulty premise: that banks lend something to the borrower. They do not. The borrower already has the credibility, the credit, and the banks are simply facilitating the exercise of that credit so that it can be used in transactions, and so that the counterparty to those transactions doesn't need to understand the borrower's credibility. The bank has already verified it and now stands behind it. This is the very essence of money.

In fact, banks are not (and should not be) constrained by the amount of reserves or capital/equity they have. But that's not to say they are not constrained. They are, just not by reserves and capital as this faulty premise leads some to believe. Instead, they are profit constrained; they want to make a profit. And because of this, they are experts at verifying credit and managing their reserves.

I realize this is difficult to see given the current state of the modern banking and financial landscape, but worse, it is impossible to see without a proper perspective on money. Without a realistic view of money, a proper understanding of banking is impossible. And without that, if you happen to be one of the few with the drive to be heroic, you'll be spinning your wheels on "solutions" (prescriptions) that range from useless to disastrous.

I'm not describing the current state of banking. I am describing the timeless state of the emergent banking model. There is nothing wrong with it. You can hang bankers from lampposts and rage against "fraudulent thin air debt-based money" and "fractional reserve lending" all you want, but that will do nothing heroic. The solution to this crisis is already unfolding, and anything short of relaxing in your lawn chair and explaining the show to your neighbors while watching it unfold is the opposite of heroic.

The latest antihero movements I've seen have come from some who read this blog. Perhaps I isolate myself (I do), but that's why I'm writing this post right now—because of these "movements" which crossed my highly-filtered field of view. Freegold combined with full-reserve banking a la the Chicago Plan which completely misunderstands money was one, and Freegold combined with CB's tasked with centralized "control over the credit volume created by their commercial banks" was the other.

This is why I think it is very useful (at least in the peace of mind department), even for regulars of my blog who presumably understand gold, to also have a deep understanding of money. And this is why I am writing this difficult post. Don't spin your wheels unnecessarily. Embrace the view that money is credit, to the full extent possible! Freegold is all about enabling savers with a realistic understanding of money and wealth… everything else flows from that. Money is not wealth, no matter how stable it is.



Money is credit

Money is credit; it is quite literally "money of the mind." Money is one of those intangible things, very powerful, but not something to be saved for the unknown future.

I should state right up front that I have no problem with fractional reserve banking or fractional reserve lending, except when we do it with gold. I think that even using the term fractional reserve banking reveals someone who doesn't understand money very well. I went into some detail on it in my Honest Money post. It’s a long post, but here are the first couple of paragraphs setting the stage:

What is honest money?

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

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

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


That old story about how the banker lends out more paper receipts than the gold he has on deposit has done a great deal of damage to the collective understanding of money, in my opinion. I think this is why FOA spent so much time discussing the pure concept of money, what it is, how we use it, where it came from and how it has been corrupted over the years to fit a hard money agenda which led to a modern understanding of money in the hard money camp that’s not consistent with reality. His discussion begins in Gold Trail III – The Scenic Overview with "The Gold of Troy" and continues onto the next page. I included several excerpts from his discussion in Moneyness.

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

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

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

And this credit (money!) is not backed primarily by gold, property or any kind of collateral. It is backed first and foremost by the character of the borrower and the credibility of his promissory note. Additional backing (like collateral) can lower the risk of loss through default and can thereby lower the interest rate. But collateral backing is in no way a universal element of credit (the pure concept of money).

Here’s a great excerpt by Randy Strauss from my 2009 Gold is Money – Part 3 post that was especially revelatory to me in understanding that money is credit, not the reserves used for clearing and settling credit, and recognizing a flaw in the "fractional reserve banking is bad" meme – money is credit backed by character, not by reserves. Notice that it takes place in 1907, before the Federal Reserve even existed and while we were still on a gold coin standard, yet top bankers of the time like JP Morgan and George F. Baker had the same, deep understanding of money that I am describing in this post:

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

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

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

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


Panic of 1907

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

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

Samuel Untermyer

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


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

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

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

Baker declined, "I can not explain it."

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

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

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

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

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

John Pierpont Morgan

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

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

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

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

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

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

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

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

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

The inclusion of savings in the money creation process is the very root of the problem

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

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

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

It is not that securitization reduces the banks' risk and liabilities. It is an ongoing process which gradually increases the risk banks face while reducing the profitability of their primary business model—lending at interest—forcing them to rely too heavily on fees and speculation for income. They are selling their profitable loans first while adding new riskier ones for the next round of securitization. What securitization does over time is make the risk of default from poor quality loans systemic so that it must be socialized in the end.

There are only so many profitable loans that can be made at any given point in time. Eventually you run out of responsible people with good credit with whom to extend loans. With securitization, the banks started making more profits from the fees from selling securitized bonds to savers (mostly pension funds and foreign CBs) than from their normal business. So once you've run through all the good borrowers with credit, where do you go? You create new borrowers by lowering lending standards, especially if your profit is now coming more from sales commissions than from interest. This was demand-driven, not bankster-greed-driven. The banks met the demand and made a profit from the fees while being spurred on by ignorant politicians. The banks never wanted to carry sub-prime mortgages on their books to maturity, but once the collapse began they had no choice. Neither did the Fed.

Without securitization, banks would never get down to the sub-prime "bottom-of-the-barrel" borrowers (and purely speculative borrowers). There are plenty of good, credit-worthy (producing) borrowers to keep the banks in business, but not if the savers are hogging all the prime "income streams". Eventually, even the savers started buying up the sub-prime MBS garbage and then, when a few debtors started defaulting, it took down savers, banks, hedge funds and day-traders alike.

Take away the demand from savers and the banks will stick to the prime borrowers so that they can turn a profit from their primary business. This is also how we devolved into such a debt-driven consumption economy… because of the systemic demand for our debt.

Debt is not bad by nature. It is the natural essences of money, period! Money is debt. That's not a bad thing! But yes, because debt is the essence of money, bad debt leads to bad money.

And it's more than just securitized debt held by savers that brought us to this point. It is systemic in that our international trading partners like China stacked up our debt rather than settling trade imbalances by purchasing a tangible reserve asset on the open market with the left-over currency. It is the stacking of debt which allowed for the non-inflationary expansion of the US govt. (USG) consumption machine just like the stacking of MBS by savers allowed for the expansion of sub-prime and consumption-based debt. This led to a USG addicted to an artificially high rate of consumption which led to the necessity of QE once the budget deficit exceeded the trade deficit.

There is no need for bank deposits to be any more than the money we all earn and then spend within a normal period of a few months. That’s all of the money anyway. Think about it! And if no one is sitting on "money" (credit) for more than a few months, then mild inflation (like 2% p.a.) is not only inconsequential, but it becomes economically beneficial and desirable.

The inclusion of the savers' savings in this process only damages the savers disproportionately to everyone else. And it damages the savers more the more they save. Inflation "taxes" savers disproportionately. But not in Freegold. As I said above, Freegold is all about enabling savers with a realistic understanding of money and wealth… everything else flows from that. Money is not wealth, no matter how well it is managed.

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

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

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

Try to imagine the gold ounces at the banks in the 30s floating in value relative to paper dollars rather than being fixed in value. You might have a deposit of $X,XXX, but that number only references a fixed number of paper dollars, not a fixed number of gold ounces. In the case of a bank run, if everyone wanted to withdraw their deposits, perhaps preferring a withdrawal in gold, then the bank would do a self-evaluation and likely render over the requested deposits in dollars telling the customers to go and shop for the gold themselves. The price of gold would simply rise.

Back in July, Lee Quaintance asked me this: "If debtors seek to borrow in the medium which they plan to spend (fiat paper money) and lenders seek to lend (save) only in a medium which they believe will maintain its purchasing power (gold), does not the entire borrowing/lending platform simply break down? This seems to be a manifestation of Gresham’s Law, no? Can the spending and savings medium truly then be separated if no one is irrational enough to lend in paper money terms?"

Truly, it is supremely rational to lend (grant credit) only in terms of paper units. It is likewise irrational to forsake the sublime paper unit avenue and opt instead to put your tangible reserves out on loan where they will then be subject to both devaluation and risk of non-repayment. Remember, and this is a key point, banks only require nominal performance. If a promissory note held by a bank devalues in real terms, the bank's liabilities devalue equally. So there is no loss to the bank through currency devaluation.

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

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

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

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

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



What about bank reserve ratios and capital requirements?

What about them? Haterz gonna hate, loverz gonna love, and central plannerz gonna plan, right? But that still doesn't change the essence of money. Credit/credibility exists within the economy in amounts that are unconnected to the capital or reserves at the banks. It is the banks' business to enable the fungible exercise (and circulation) of that already-existent credit whenever it shows up wanting to be exercised. That’s how banks contribute to society.

A reader asked me a question about an article that someone posted in the comments. The title of the article is "The Myth of the Money Multiplier" but it could just as easily have been called "The Myth that Central Planners Actually Control the Size of the Money Supply through the Transmission of Monetary Policy".

Interestingly, the author of the article, Steve Keen, makes some of the same observations I am making here, like "In the real world, banks extend credit… and look for the reserves later" and "bank lending creates deposits… reserves are largely irrelevant." The term he likes for this is endogenous money, which is remarkably close to how I am describing that "money is credit" in this post. But even though he seems to understand money and banking very well, there's a vital ingredient missing from his money model which I think leads to faulty conclusions and prescriptions.

His point in the article is that Bernanke is now pushing on a string that is not going to translate into credit inflation or revive consumer demand. I agree. But his implied conclusion/prescription is apparently that, because "the textbook treatment of money in the transmission mechanism" (meaning how CBs purport to control commercial bank money creation) doesn't actually work the way other people say it does, we need to find a new way for central plannerz to constrain these banks gone wild and that we would have never gotten to the point of collapse if we hadn't let Capitalism run awry through an empirically unconstrained banking system.

So, while he understands "modern monetary theory" very well, he doesn't understand the wealth concept (unambiguous ownership of something tangible) and therefore he still equates money and wealth (along with most everyone else) which leads him to the conclusion that monetary reserves are the real money while "endogenous money" is just a problem of Capitalism that needs a new centralized regulation model. He sees "debt deflation" – a contraction in "endogenous money" which has been overextended due to the reasons I cited above – and concludes that the lack of an observable constraint on the banks (he doesn't see that banks are actually profit constrained in the absence of the systemic demand for debt securitization cited above) is responsible for booms and busts, including the catastrophic bust we are still heading into today.

What I'm trying to say is that, because he doesn't have a full understanding of money (remember at the top of the post I proposed that you cannot properly understand money without also understanding the pure wealth concept), he draws the conclusion that the banking model is to blame, and also that deflation will be the outcome. I, on the other hand, conclude that the systemic choice to use debt as savings and reserves is the primary cause, and that there's nothing fundamentally wrong with the banking system. I also conclude that USD hyperinflation will be the outcome. More on that in a moment.

Anyway, my reader's question was this, first quoting from the article:

"M2 averaged about $7.25 trillion in 2007 … bank loans for 2007 were about $6.25 trillion... if we consider the fact that reserve balances held at the Federal Reserve were about $15 billion and required reserves were about $43 billion, the tight link drawn in the textbook transmission mechanism from reserves to money and bank lending seems all the more tenuous."

If required reserves were $43 Billion and bank loans were $6.25 trillion does that mean the required reserve ratio was 0.69% (43/6,250), or to put it another way, that the money multiplier was 145 (6,250/43)? How can that be? Do banks have a capital cushion on top of reserves, which at 0.69% system-wide would be razor thin?

Is my thinking correct about the money multiplier being 145 in the example Keen cites. This would put the Reserve requirement ratio below 1%, effectively unconstrained. I am guessing this is possible because capital adequacy ratios are a better metric than the reserve requirement ratio?


I replied yes, you are basically correct, but I say "so what?" You are talking about the money multiplier, reserve ratios and capital adequacy requirements as if they are constraints. As I said, they are not. Banks are not lending deposits. They are not lending anything. They are simply facilitating the exercise of credit/credibility that already exists in the economy. You earn credit, and then in order to exercise it you go to the bank which facilitates your desire to exercise your credit (purchasing power).

The problem is that some people who didn't have credit were facilitated anyway (sub-prime, for example), because the system today demands debt well beyond what banks would normally facilitate given that they are naturally profit constrained and would otherwise have to carry the debt on their books.

Who cares about the reserve ratio? The CB can create commercial bank reserves with the click of a mouse today. They can swap a bank's assets (promissory notes) with reserves, temporarily or permanently, in any amount, at any time. Commercial bank reserves were more important back in 1933 when they included gold coins. But today they are not. Just look at the changes since Steve Keen's 2007 example.

Today, required reserves are $107B and reserves held at the Fed are $1.5T, for excess reserves of $1.4T with an M2 of $10.2T. So what's the big deal? If your money multiplier of 145 and reserve ratio of 0.69% mattered, then today the problem is fixed! Today's multiplier, using your same math from above, is 6.8, down from your 145 in 2007. And your 0.69% reserving is back up to a very comfortable 14.7% today. So problem solved, right?

Remember what I wrote in my first email?

"There is just what emerged (what is), the perspective from which you choose to view it, the conclusions you draw from that perspective, and how useful those conclusions end up being in the long run."

What conclusions were you drawing from that 2007 data and how useful did they turn out to be in 2012? If they were important, then the problem seems to be resolved, right? Or maybe the problem is something else. Maybe the problem isn't that the banks are unconstrained and don't know when to stop making loans.

Maybe the problem is that the insatiable systemic hunger for new debt as reserves/savings drove lending standards and interest rates down to the point of collapse. It's a little bit of a different perspective from Steve Keen's, don't you think?

Say what?

Since I'm already talking about Steve Keen, I want to take this opportunity to point out how the widespread misunderstanding of money and wealth leads to conflict, macroeconomic problems and flawed analysis. And the corollary to this point is that the emergent widespread understanding of these concepts that Freegold will naturally usher in will solve these same conflicts and problems.

In Nudge Nudge, Wink Wink, Say No More, Steve Keen, author of "Debunking Economics", debunked Say's law which, very roughly stated, says supply equals demand in the physical plane even with the inclusion of money. Or, perhaps, supply comes from demand while demand is supplied by supply which comes from demand created by supply. A circular logic no doubt, but profound nonetheless. From Wikipedia:

In Say's language, "products are paid for with products" (1803: p. 153) or "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another" (1803: p. 178-9). Explaining his point at length, he wrote that:

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J. B. Say, 1803: pp.138–9)

Keen correctly notes that Say's Law is widely disregarded in economics today, so I guess it was an easy target to debunk. A common criticism of Say's Law is that it only applies to a simple barter economy, and that he didn't really understand money since he was apparently describing an economy devoid of the capitalist drive to accumulate wealth. But it seems to me that Say might have understood money and wealth on a much deeper level than any of his critics.

I don't know, but let's take a closer look and you can decide for yourself. Here are a few excerpts I took from Steve Keen's paper debunking Say's Law. I tried to capture the essence of his argument here, but I'd still recommend reading the full article linked above.

Belief in Say’s Law is a minority position in economics today. Those who adhere to it appear to believe that it is a self-evident truth that is misunderstood by modern economists of all persuasions, and that properly understood it is not only true, but the foundation of an accurate appreciation of the functioning of a market economy and the phenomenon of the trade cycle.

I concur with the majority perspective that Say’s Law is fallacious, but not for reasons that make me a member of any defined majority in economics at large.

[…]

As Marx showed far better than did Keynes, the conditions under which Say’s Law is correct are not those of a capitalist economy.

[…]


Use-values must therefore never be looked upon as the real aim of the capitalist. Neither must the profit on any single transaction. The restless never-ending process of profit making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never ending augmentation of exchange value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation. (Marx 1867: 151)

Say’s ‘Law’ therefore, is not a recondite insight into the nature of a market economy, but evidence of a basic failure to comprehend capitalism.

[…]

While we ‘do not consume money’, people certainly do seek to ‘conceal’ (or accumulate) it. Though a capitalist will undoubtedly consume with part of the money he accumulates, it is not true that ‘he may be considered as already asking for the merchandise which he proposes to buy with this money’ since if he converts all his profit into consumables, he has failed to accumulate wealth – to be a capitalist.

As Marx puts it, capitalists are characterised not by an equality of their supplies and their demands, but by an inequality. This inequality is possible because … production produces a physical surplus that the capitalist hopes to turn into a monetary surplus:


The capitalist throws less value in the form of money into the circulation than he draws out of it . . . Since he functions . . . as an industrial capitalist, his supply of commodity-value is always greater than his demand for it. If his supply and demand in this respect covered each other it would mean that his capital had not produced any surplus-value . . . His aim is not to equalise his supply and demand, but to make the inequality between them . . . as great as possible. (Marx 1885: 120-121)

[I want to pause here to point out that the "net" portion of a term I use for savers—"net-producers"—represents the "inequality" between what is produced by a saver and what he consumes.]

Thus as Marx emphasises in the immediate term and Veblen in the long term, a capitalist’s supply, if he is successful, is greater than his demand.

[Also, a net-producer's production is greater than his consumption.]

There is an inherent inequality at the core of capitalist society, and the simple balance of Say’s Law collapses.

[…]

Marx also realised that… money has an essentially new role in addition to those of medium of exchange and measure of account: it is now also a measure of accumulation. Failure in accumulation can now result in money being withdrawn from circulation, which in turn can lead to deficiencies in aggregate demand:


money functions neither only as measure, nor only as medium of exchange, nor only as both; but has yet a third quality… It is very true that money, in so far as it serves only as an agent of circulation, constantly remains enclosed in its cycle. But it appears here, also, that it is still something more than this instrument of circulation, that it also has an independent existence outside circulation, and that in this new character it can be withdrawn from circulation just as the commodity must definitely be withdrawn. We must therefore observe money in its third quality. (Marx 1857: 202-03)

In this ‘third quality’, money is more than the mere lubricant for barter that Say perceived. It is also the form in which wealth is accumulated:

The third attribute of money, in its complete development, presupposes the first two [measure and medium of exchange] and constitutes their unity. Money, then, has an independent existence outside circulation . . . as money, it can be accumulated to form a treasure . . . This aspect already latently contains its quality as capital. (Marx 1857: 216)

[…]

Expanding debt also becomes an essential characteristic of a growing economy, as Minsky realised… in the aggregate there had to be an inequality between income and spending if the economy was to continue growing in the context of a constant or rising price level:


If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, . . . it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963 [1982]: 6)

[…]

All attempts to provide a formal expression of Say’s Law rest on the same fallacious proposition that there is neither the desire nor the possibility to accumulate wealth for its own sake in a capitalist economy.

[…]

Therefore Say’s Law – and Say’s Principle, and Walras’ Law, and all other concepts which portray the sum of all excess demands as zero – is thus a ‘law’ applicable only to a market economy without capitalists and the accumulation of wealth. We live in a market economy with capitalists and with the accumulation of wealth, and we will continue to live in such a society for the foreseeable future. Say’s Law is thus irrelevant to the world in which we live. Rather than discussing Say’s ‘Law’ any further, we should consign it to the dustbin of the history of economic thought.


Some interesting thoughts in there, huh? I think it's clear from this article that there's not much difference between money and wealth in his view. The "accumulation of wealth" which he says is capitalism means the accumulation of more and more money. And this, he says, leads to a supply glut and insufficient demand which leads to deflation and depression.

"if [a "capitalist"] converts all his profit into consumables, he has failed to accumulate wealth – to be a capitalist."

"production produces a physical surplus that the capitalist hopes to turn into a monetary surplus"

"If [a "capitalist's"] supply and demand in this respect covered each other it would mean that his capital had not produced any surplus-value"


Would a net-producer's demand equal supply if, in his "accumulation of wealth" he purchased Veblen goods and physical gold? Someone has to supply those hard assets and gold, right? Mr. Market and his price adjustments would, in this scenario, make "the sum of all excess demands equal zero" as all wealth accumulation would have to be matched by either new wealth production or wealth dishoarding by net-producers of the past.

"Therefore Say’s Law… is thus a ‘law’ applicable only to a market economy without capitalists and the accumulation of wealth."

Using my definition of wealth, which I propose is a necessary element in understanding the reality of money, this statement suddenly appears fallacious. I honestly wonder if Steve Keen would agree. Or does his disdain for (his Marxian idea of) Capitalism run too deep? I don't know. But enough about the wealth concept. Let's see if Say understood money.

Say wrote that "a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value."

He’s talking about the creation of credit, aka credibility, aka purchasing power. Imagine you’ve got a crazy inventor working for years on a contraption and everyone just laughs at him saying "that’ll never work. It’ll never fly." Then one day he finishes his project and it flies! It's going to change the world, and everyone applauds! He has instant credibility (purchasing power) that he didn’t have before. And the world is also a richer place for it.

He may not yet have actual product units to sell, but he can certainly afford to immediately improve his standard of living while also funding the production of units of his new invention for sale to the marketplace. In fact, depending on how earthshattering his invention is, he may have more credit than he needs for his standard of living and business overhead. This is surplus value, which he is unlikely to spend until after he starts selling units.

At the point that he sells units which the public values higher than his cost of production plus the cost of his standard of living, he will start to accumulate wealth from that surplus value. But, in fact, the purchasing power used to accumulate wealth – the surplus value – was present long before he actually exercised it. Sure, he could have bought gold on credit as soon as his invention's success revealed his credibility, but that's not usually the way it's done.

It seems clear, at least to me, that the widespread misconception—and thereby the misuse—of the money and wealth concepts goes back centuries at least. And that this simple misunderstanding has led to some longstanding conflicts, major macroeconomic failures and entire schools of flawed economic analysis, some of which are reflected in the above paper. (See also my post The Debtors and the Savers)

I think it can be stated as simply as this: When a single medium is used as both money and wealth, it leads to a conflict between those who choose to accumulate wealth and everyone else. This applies to both hard and easy money systems. It's like FOA said, applying the money concept to gold coins was "not the best way to use gold, considering our human nature."

The accumulation of wealth need not be a drain on anyone. When viewed properly, it is apparent that the "wealth circuit", supplied and demanded only by those who accumulate and dishoard wealth, is isolated from the "money circuit" through the magic of Mr. Market and his price adjustments. It's only when we call money wealth, and wealth money, that we join the circuits creating conflict and crashes.

And my main message here is simple. No one needs to understand this for a change to take place. Because, when the current system crashes, what will change is how we view money and wealth. Everything else I talk about flows from that one change.

Hyperinflation

Credit requires some unit of reference. You could borrow an egg from your neighbor and you might say, "thanks, I owe you." If you happen to take that debt seriously, your unit of reference might be one egg. Money is essentially our shared use of a common reference point which makes credit fungible and allows it to circulate. This is what I wrote in Moneyness:

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."

Money is not something you save. Wealth is what you save. Yet money still needs something to reference. When hyperinflation occurs, it occurs not in money itself, but in that reference unit. It is true that, when ounces (or any other unit) of gold is used as the sole reference item, hyperinflation per se is unlikely because gold has that property of a relatively stable supply. But again, that's not the best use of gold because of its intrinsic salience as the tradable wealth item par excellence.

But hyperinflation is not just about the supply of the reference unit, it is more about its perceived value relative to everything else. Hyperinflation begins when the perceived value of that common reference point goes into free fall. This could hypothetically happen with something like gold if, say, aliens arrived and explained to us that exposure to gold was somehow harmful, perhaps limiting our lifespans to only one century. Then you might see something like hyperinflation as humans quickly devalued their golden reference point against all else. But again, I'm only talking about the hypothetical here to make the point that hyperinflation begins with the perceived devaluation (currency collapse) of the monetary reference point.

Today we use the US dollar as the common monetary reference point unit. The US dollar gets its value from price tags that list dollar amounts rather than from the cost of making a dollar. I realize that this seems paradoxical, or some kind of circular logic, but it's actually quite sublime, and it works!

It is true, however, that we only get full-blown hyperinflation, like we saw in Weimar and Zimbabwe, with government "fiat money". Circulating real money (bank credit!) all but disappears when full-blown hyperinflation takes hold. So you see, hyperinflation is not really about money. It is about the loss of confidence in our shared reference point, which is usually because it has been abused by the government, and which often leads to a vicious feedback loop of further abuse by the government.

It's a shame that the most efficient form of money ever devised by mankind has this downside, but I think you'll find that the risk of abuse is worth the innumerable benefits, especially once there is a systematic and foolproof way to protect yourself from the worst of it! And this is why Wim Duisenberg so proudly stated that the euro "is the first currency that has not only severed its link to gold, but also its link to the nation-state."

Tribal Life & Government "Fiat Money"

With the potential for abuse and the risk of hyperinflation, why do we keep returning to government "fiat money"? Why do we, the productive economy, lend to our Tribal Chieftain and Tribal Council enough of our credibility to allow them to print currency for the good of the tribe and then use that currency as the reference point for money? Is it really forced upon us as some in the hard money camp proclaim? The answer is no, we demand it.

Since the beginning of time, man has been exploring and discovering the advantages of tribal life. Of course we must give up some measure of individual freedom to be part of a tribe, but in most cases the benefits have far outweighed the costs.

Given the current state of "tribal leadership" and "government money" in the US, I thought it quite timely to include a few posts from FOA which can be found here. They might even help us understand the outcome of this most recent election. Has the US really passed some disastrous tipping point of human desire for free stuff, or was this election just business as usual?

Trail Guide [FOA] (2/12/2000; 9:52:36MDT - Msg ID:25137)
Reality

Hello ORO,
Well, I knew that if I only asked, we would all receive! Boy did you deliver in ORO (Msg ID:25113).

Good stuff for everyone to read, my friend. You mentioned; """ The comments below - particularly those to Aristotle, are somewhat harsh. I hope this is taken in the spirit of friendly criticism."""

Sir, you can serve me (and probably everyone here) your "harsh" anytime. Waiter ,,,,,,,, I'll have a double order of that please! (smile)

OK, brace yourself ORO ,,,,,, a big plate of my "Trail" harsh coming up!

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

You write:
-------There are consequences to the existence of a fiat currency and for the use of debt money for trade settlement. FIAT HAS NEVER BEEN THE CHOICE OF THE PEOPLE ACTING IN COMMERCE OF THEIR OWN ACCORD. Even when wildly popular, fiat money has not had a single instance when it had not been established by force - by laws imposing its use.-----------

ORO,

On a larger scale there was always more to it than this. Human society has from the very beginnings formed tribes and picked sides against each other. When we are not battling nation against nation, we jockey for position within our own groups. Right down to "me and my neighbour against the three houses down the street. As a tribe ,,, as a nation ,,,,,, as a group ,,,,,, our war is really a human problem with each other and always has been. In better context; the problems are in the way we use our laws and governments to gain advantage over the next in line.

Whether through force (war) or democratic means, we subject ourselves to the order of governments. We rightly perceive that,,,,,, the order gained from this action ,,,,,,, the security of a group, overcomes the rights and property lost on an individual level that living in a tribe requires. It's been this way through the ages. It's a political process that has always had its in-house battles ,,,,, namely portions of society try to circumvent their percentage of lost rights and property by maneuvering the rules (laws) in their favor. Yes,,,,,if I can gain the advantages of tribe life and still keep my "lost portions",,,,, I'm gaining wealth to the disadvantage of the group. Truly, the most obvious action of not paying your taxes,,,,, and that's only a small item when viewing the world battle as a whole.

So, how does this apply to money?

When you and others say """ FIAT HAS NEVER BEEN THE CHOICE OF THE PEOPLE ACTING IN COMMERCE OF THEIR OWN ACCORD """ ,,,,, this is true.

This is true, but this was never the thrust of the argument. The use of money in any context, fiat, gold or seashells, has always entailed the use of borrowing and lending... And as long as economies function at a profit, debts are made and paid back without argument. However, when the eventual downturn arrives, some portions (perhaps a large portion) of the owed wealth (debt) cannot be returned.

It's here,,,, at this point in tribal life,,,,,,, that all of the context from above comes into play. The "reality" of life on this earth is this: ,,,,,,Some portion of society will use their influence or control of the leaders to make their debts easier to pay. In fact,,,,, it's times 2 for that number of government influencers ,,,, because even the ones that have debt owed to them will try to alleviate an impossible pay back situation to save the ones that owe them face.

You see,,,,, tribal life and the human nature that comes with it ,,,,,,,, will not allow any money system to "completely" destroy the wealth of a good portion of society. Even if everyone is plainly shown that they are going to lose something ,,,,,,they would still opt for the good of the overall tribe. This is why we return,,,, time and again to fiat monetary systems. In the few examples where a gold system brings the harsh reality of loses to bear on a nation,,,,,, usually war is the result. Not a good outcome.

Yes, we can break gold into many small parts,,,,, 'stamp it into coins and circulate gold certificates as money. We can borrow it, lend it and also circulate gold bonds as the economy grows. It is the perfect "weights and measures" monetary system. Exactly representing our productive efforts in every facet of human endeavour. But, when the losses mount, our tribal human tendencies will not allow us to support a government or banking system that forces these real losses on only a portion of the group. Never has,,,, and never will! Without this escape valve, we go to war ,,,,,, internally or on a world scale,,, so we all can share the loss,,, one way or another. As a human society of thousands of years,,, outside of war,,,,, we have learned to inflate our loses upon everyone as a whole,,,,, for the good of the keeping the whole from each others throats. Even to the point of a total loss of the current system,,,,, and all the destruction that entails for everyone.

Yes, indeed,,,,,,,we will transition to the next fiat system from the dollar, when the time comes. Believe it!

Further:

For myself and other observers ,,,,, we know about "peace on earth" and live our life in this context but,,,, as a member of the world tribe,,,,,, and following our best interest,,,,,, one must still arrange his affairs to shield their family from the "I'm going to get yours" times we live in. Should we get our leaders to help us? Well, the leaders of this world can only be but a reflection of us as a whole. Yes, many things are not right, but they can only strive to do what can be done, not what must be done.

Consider the dilemma:
If a small portion of society telegraphs thoughts that "if we cannot have our oil we will go to war",,,,,,,, how would you force them to not elect officials that ease their pain from a gold money system? What's right and what's wrong is not the issue,,,,,, it's what this present generation will live with that rules. If they will break the gold yoke, no matter what,,,, then why place gold on them? Is it not better to at least free the "knight" (gold) for the good of those that would stand with him?

During the period we are now entering,,,,,we can see all the ugly aspects of a fiat system that is failing its tribe. Look far and wide and witness the various groups ,,,, all jockeying for position as they use whatever influence they have to lessen their own private losses. If this had been a gold system, the outcome would be the same,,,,, as players force their leaders to lessen the gold debts that could not be paid. They would raise the price of gold and inflate their way out of it,,,,,, for better or worse ,,,, come hell or high water.

So, my friend (smile),,,,,,, as you can see,,,,, I completely agree with all of your post. Only, my trail is hiked with a different mind. "Another" mind set, if you will. We use the life experiences of man to dictate the best path to follow. As such,,,,,, Gold must not be part of any money system,,,,,, it must reside as a freely traded asset without debt or paper to resemble it. In this position ,,,,, its value can fully represent the ebb and flow of the affairs of man. And in doing so retain the wealth of man as a holding of things. Truly, the "Wealth of Nations" in the people's hands. We move forward by starting at the beginning of time.


We'll talk much about this and all the affairs of the world,,, including gold,,,, on the gold trail.

"We walk this new gold trail together, yes?" I hope to see everyone there when I return.

Trail Guide

Trail Guide (2/14/2000; 8:08:19MDT - Msg ID:25302)
Gold

ALSO: The point I was trying to make in #25137 (and the question I was asking) was this;
A full gold money system works during level and rising economic dynamics. It also works "VERY" well during a downturn. In fact it works "Perfectly" all the time! It's the lending of money that creates debt, be it gold debt or fiat debt ,,,, and the failure of that debt during a downturn is what causes the pain.

I ,,,,, we as gold bugs ,,,,,, most financial thinkers ,,,,, do not debate this point. The argument is that: If the pain dynamic (losses) of a financial downturn is not "Somewhat" shared by society as a whole ,,,,, the economic dislocation always intensifies until we go to conflict. (see my earlier post)

It's during the downturns that society in general will not tolerate a full gold system because it concentrates the losses upon their rightful owners. As such "these same" are usually "wiped completely out" and the fallout effects on the social and economic structure can be widespread and very destructive to tribal life.

Again, history has proven, time and time again that humans will not allow the full (natural) effects of gold money ,,,,, if it threatens to create factions. They accept gold during long periods until conflict (internally political or externally war) forces a break in the gold bond.

We, as nations, will break the "gold bond" by calling for the shared pain of inflation. Whether we (as countrymen) understand the reasoning behind it or not; currency inflation (not price inflation) in the modern world is carried out until its debt destroys the current system ,,, thereby sharing all the pain of the losses before it. We then move into the next fiat system.

The question:

Is it not better for all ,,,, if we remove gold from the official currency structure by forcing derivatives failure and creating a free physical only marketplace,,,,, so as to keep "us" ,,,,,, ourselves ,,,,,, from controlling it through our politicians?

Through "legal tender laws" currently in place ,,, let's force us (ourselves) to continue to create debts only in paper. As such, "they" ,, "we" can manipulate the fiat as needed for society.

Does this not place gold in its rightful position of being a "real currency asset" as it was chosen to be used from the beginning of time? A private money for trade and savings that's outside the 'contract / debt' system. Your thoughts?


Trail Guide

Robert Mundell:
--------I think that legal tender is a very old institution. It certainly goes back thousands of years and legal tender is an institution, whether we like it or not is going to stay. ----------

Robert Mundell :
------There's no institutional mechanism by which we could ever duplicate the kind of financial system we have under a system that relied almost entirely upon gold. Of course you could always have a system that used a lot of paper that was in some sense convertible into gold. You could always find a price of gold that you could convert that paper theoretically into gold. But I don't think anyone has thought in terms of the enormous price of gold that would be required in order to achieve that.-----------

Larry Parks:
---------George Soros says in his book Soros on Soros that the gold standard had to be given up because it did not make possible a lender of last resort. And says Soros, because financial markets are in his words "inherently unstable" you have to have a lender of last resort.-------

Trail Guide (2/14/2000; 18:20:51MDT - Msg ID:25335)
Freegold

Thanks for your reply, ORO.
My comments presume that readers have read our full posts.
Your major point, logic and comments that I got from your post (25310), followed by my comments:

ORO's POINT:
I pointed out that it is the existence of a "lender of last resort" that causes the debt boom

ORO's Logic:
It is obvious then, that had there not been a lender of last resort there would not have been a substantial credit crunch, because the lenders would not have taken the same risks they allowed themselves once a promise of bailout was given, and thus would have avoided the credit boom.

ORO's Comments:
The argument is false in that it is circular. (FOA note: I think he is referring to my logic?) The lender of last resort was there in the first place, the inevitable credit boom followed, the credit crunch followed - just as inevitable - and a further lender of last resort was needed. History shows that the credit policies of the BOE led to its bankruptcy before WWI and before the Fed was created. This was among the reasons for the argument for the Fed being pressed. All the previous lenders of last resort were tapped out and a new one was necessary. In 1929-1930 the Fed was tapped out and the gold standard obligation was abolished shortly after.

My (FOA's) Comments:
ORO, I cannot accept that a "lender of last resort" causes a debt boom. It presumes that a great portion of lending is done for reckless, uneconomic reasons. Yet, at the end of great expansions many projects that were considered "blue chip" in the beginning still go bad. Sometimes, the most necessary economic activity is curtailed because people's needs change during the course of life ,,, not to mention a recession. Thus changing business dynamics.

How many instances can we document where banks lent into real demand ,,,,,,, backed with the very best demographic patterns ,,,,, only to find the loan blow up from changing demand. Oil in the late seventies would be a convenient example for us (smile). People were breaking down the doors of the old "Texas Commerce Bank" in Houston ,,,,,,, all in an effort to finance hugely profitable petroleum projects. This was no flash in the pan, as the oil industry had a progressive expansion history of 15++ years before this. Truly, a lender of last resort was the very last thing on their minds. [FOFOA: Reserves were the last thing on their minds.] Later, even paper based on $10 producing reserves was trashed! Certainly there are many, many other examples,,,,,,,, most are of a more mundane, unglamorous nature, but fine examples.

Further:
Was this really circular thinking on our part? Did the Lender of last resort exist during the 'South Sea Bubble" or the "Tulip mania",,,,,, and did the "Black Plague" of Europe shut down a few sound financial systems then? I think gold was the norm in that period?

ORO, this portion of your thinking needs to include the other side of the lending aspect,,,,,, people want and demand loans for sound, economically justifiable, profitable projects,,,, and they get them on sound lending principles. [FOFOA: Real credit exists and then banks facilitate it] Still, some 90% of them can become only "at the margin" when demand changes. And typical of our human society, we all shift at once.

Truly, my friend, bank loans often fail because human events change the course of money dynamics ,,,,,, and it does so in a way that is beyond the vision of any lender. Be the lender you, me or a group of people such as a bank, large portions of deals go bad just as much from human affairs as from "over lending".

After all, the entire economic structure of the world is nothing more than a people dynamic ,,,,,,,,, in the long run it's just too risky to bet one's physical gold on (huge smile)! [FOFOA: from above – "Truly, it is supremely rational to lend (grant credit) only in terms of paper units. It is likewise irrational to forsake the sublime paper unit avenue and opt instead to put your tangible reserves out on loan where they will then be subject to both devaluation and risk of non-repayment." ]

Yes, our present financial system gives the impression of total insanity,,,, but we are looking at the very "end of the timeline",,,, not how it began. It all starts with the very first loan and progresses until everyone has borrowed "too much", but no one wants the music to stop. Last resort lenders then become the norm because society will lose "across the board" if everything is "marked to the market". It is not a circle (smile) as it starts and ends with the currency system (gold or fiat) everyone demands to borrow into. It all ends in the shared pain of debt collapse as the debt is discounted to zero from price inflation ,,,, even if it's based on gold ,,,,,, gold that cannot be returned. Not much different from our present gold loan structure. We will move on to the next money system when this one ends.

If it were gold we started with? The banker would lend his gold only to find the same metal returned to his bank as a new deposit. The "society at large" would remove his franchise if he did not re-lend that same gold during "good times", "booming times" no less! Round and round the gold goes.

Reserve lending hits its limit and society demands the limits be raised again ,,, and again ,,, and again! Lender of last resort ,,,,,, or not.

In our modern world we must remove gold from the official money system, place it in a free market and people will use it as wealth money, not borrowing money. Then the fiat can come and go as the wind! Yes?


You agree now! I'm so very glad!

Trail Guide

Trail Guide (2/14/2000; 21:11:17MDT - Msg ID:25350)
Freegold

Elwood,

I have read much of Mises and even a few others. Actually, I completely agree with them that the Gold money systems of the nineteenth century worked very well. As such we do not fall into any of the groups that argue against that concept. Our problem is with people (smile).

In a Money and Freedom speech at a Mises meeting Mr. Joseph T. Salerno made this point:
-------Unfortunately, the monetary freedom represented by the gold standard, along with many other freedoms of the classical liberal era, was brought to a calamitous end by World War One.----------

Further, he stated:
------Within weeks of the outbreak of World War One, all belligerent nations departed from the gold standard. Needless to say by the wars end the paper fiat currencies of all these nations were in the throes of inflation of varying degrees of severity, with the German hyperinflation that culminated in 1923 being the worst.--------

My point (as an extension of earlier posts):
No country, however rich in gold or resources, can continue to fight a war once their money runs out! Consider ,,,,,,, You and your family as a country, a nation ,,,,,, you are under attack and have spent the last of your gold ,,,,,You will print money and continue the effort, no matter the inflationary costs,,,, come what may!

Many nations utterly failed to return to the original gold standard simply because they were mostly tapped out from the war. At the best, the richer, surviving countries would have taken a major economic hit by going back into a full gold system. All the eventual gold deals and non-deals were little more than a part of the progression of events that led us here today. All in an effort to keep from fully marking to the market the cost of a shared loss in war, defence and other financial failures.

There is not one person among us that ,,,,,,,,, if their family was completely broken from the war experience ,,,,,,,,,, would have asked for a return to gold. In full a honest context, millions would have starved in the process. The world opted to share the loss and spread it out as far and as long as possible.

The war experience is but one example of why society has such a hard time with an official gold system during times of stress. Over and over again we have seen where gold is the very best holding and defence against private and public financial loss. Yet, when large scale national loss threatens society as a whole ,,,,,, it's always the money system that receives the brunt of the demands for change. Society demands that whatever money system is in place at the time of stress be shifted so as to spread the burden amongst all. Is it right?,,,,,, is it just?,,,, I do not think so. But it is what we do and have done for a long time!

Today, if gold can be forced out of the official money system, it will be to the benefit of everyone during times of stress in the future. In times of war people spend the legal tender in commerce. Yet they save the food, liquor and necessities. A common currency of the world would be just such a necessity to hold as part of your wealth.

Trail Guide

____________

Money versus Wealth

The essence of money is credit, which is a reflection of the amount of credibility in the economy currently being exercised and circulated. In reality, in fact, even if not in the textbooks, money is a reflection of ongoing and planned future production. Wealth, on the other hand, which is everything physical that is owned and possessed, is the embodiment of past production.

So here we have a very simple dichotomy. Money reflects present and future production while wealth is, in fact, production from the past. But there's more. Money is an extremely useful, vital, and very powerful tool used by the Superorganism. But it is also used by those central plannerz. Price signals are what the Superorganism gets from money, and price signals are also what central plannerz try to control. Strangely, it is what we demand from them.

It is the very nature of our humanity that makes money a poor substitute for wealth when saving for an unknown future. And it is the nature of money itself that makes not understanding this simple view so widely destructive in the long run.

The fallacious premise that money and wealth are—or should be—one and the same (or at least managed to attain parity) is the flaw I mentioned at the top of the post "which, in and of itself, has set the two camps perpetually and unnecessarily at odds with each other."

The de facto abandonment of this premise in both camps is what I see coming. There is no need for anyone to convince the camps that they will abandon this premise. As ANOTHER said, time will prove all things. You cannot convince them of this. Only the unfolding of time can.

What you can do is consider – with a measure of intellectual integrity – the effects that will flow from a more realistic widespread view of the concepts of money and wealth. And, most importantly, how that view applies to you and how you use money and wealth/savings in your daily life.

Today, money is widely used as wealth, or at least as a measure of one's wealth. If you believe that the current system is not sustainable, perhaps even at the end of its timeline, it would be incongruent not to consider the implications of this simple change in widespread perception. Here are a few things ANOTHER had to say about it. I present these now because I find them to have enhanced meaning in the context of this post:

When an investment in stocks, bonds, bank accounts, CASH, businesses etc. is priced in US$ currency you are really holding the "intentions of providing value" locked away in the thoughts of another mind.
_____

One day ( it has already started ) a type of nuclear chain reaction will occur in the currency markets as people start "unvalueing" the thoughts of others. Little by little all debts owed will be marked down.
_____

The "wealth of nations" are held as "thoughts of value" not real value! And even these thoughts are "in debt" as they are owed to other nations. As it has always been, time moves the minds of people to change, and with this, the thoughts of value also change. In this day, as not in the past, the loss of paper value as a concept will destroy the very foundation of wealth that this economic system is built on. This drama has started and is well underway!
_____

How can one know value in currency, when paper does not lie still? It moves at night, where no one can see, and this we hold to prove our worth? Real things know not this paper value, for they hold tight in the earth. In this time, we do stand firm with value and watch as "thoughts of others change in the wind"!


Thinking ahead

There has been some debate recently in the comments about the functions of gold (and other less-salient items of tradable wealth) and currency as it relates to savers after the transition. It has been suggested that, because gold will finally be functioning properly, currencies (money) will become relatively stable and will therefore function as savings for the masses.

Here's what I think.

What will change is how we view money and wealth. Everything else flows from that. But it is not our change in view that is causing the transition. It is the other way around. The transition will cause a widespread change in view. What is causing the transition is the de facto failure of the present system.

In the future, I think that if you are saving for something known, especially something with a known currency price like a down payment or a car, you'll save currency or "money". But if you're saving for the unknown future, you'll apply your newfound understanding of the difference between money and wealth and you'll probably choose gold, the most salient and liquid of the tradable wealth items.

This view even scales up from the individual to the national or regional level. I think that short-term trade imbalances—due to known factors that are expected to be short-lived—will be recorded in currency or even debt terms. But structural or long-term imbalances will be settled in gold through the open market, effectively eliminating structural or long-term imbalances.

Gold is real, tradable wealth. Money is not wealth, no matter how well it is managed. You will understand this distinction in the future and you will act upon that understanding.

Today I hold gold for the expected revaluation, because the weight of gold that I find I can still buy because the former system is still functioning is so vastly disproportionate to the relative shrimp I am. But even after the transition, I expect that I'll still feel the amount of gold I possess is vastly disproportionate to my "size". So I expect that I will, at that time, apply my new understanding of wealth and trade some of my gold for other tradable wealth items that are better suited for display and enjoyment in life than gold.

There's a reason I keep mentioning other "hard assets" like antiques, fine art, classic cars and high-end real estate when talking about Giants today. That's because those items are the closest thing we have to "Freegold-like savings" today. And yet they are only accessible to the Giants because of their nose-bleed prices. But they are still quite inferior to Freegold. They are not as portable, durable or liquid as gold, but most importantly, they are not divisible like gold which, as FOA said, puts us shrimps "on equal footing" with the Giants!

Another recent debate in the comments was whether our central plannerz of the future will target consumer price inflation, monetary inflation or the price of gold to achieve stability.

Here's what I think.

I think that this whole question is somewhat "old paradigm" thinking. In the "new paradigm" I think I'd say that the real economy will manage the money supply since, as I proposed above, "money is a reflection of the amount of credibility in the economy currently being exercised and circulated."

Of course the monetary base will still be subject to abuse by governments in places where, unlike the Eurozone, the government retains ultimate control of the central bank. But like I said above, I think you'll find that the risk of fiat currency abuse is worth the innumerable benefits, especially once there is a systematic and foolproof way to protect yourself from the worst of it!

And remember, this is why Wim Duisenberg so proudly stated that the euro "is the first currency that has not only severed its link to gold, but also its link to the nation-state." I don't really think the euro architects came up with this ground-breaking idea because they thought they were smarter central plannerz than the Superorganism! ;)

In Conclusion

FOA: In this light we should know that our real things in life will not change all that much. Your tools, chairs, clothes and cars will remain yours. Houses and land, TVs and boats, all will retain the exact same "value" they always had. What will change is our ability to use our currency and paper assets as a medium to measure the "real value" that's always so inherent in these items, yet so well hidden in our perception of today. Yes, the currency price of things will greatly change, even as their "use value" moves little. Such is the nature of dying paper money systems. Such is the ending of a currency timeline!

Trail Guide


ARI: So you see, learning how the world works is all about each man coming to the understanding about the real wealth we all require to best ensure our survival. Knowing that Gold is the master proxy for our life's day-to-day and year-to-year shifting requirements for food, clothing, shelter, and energy, it simply makes more sense to gather in Gold for later use than to gather in clothes (that we may outgrow,) food (that may spoil,) houses which are more than our needs, or energy (that we can't store.) You see, time bears witness to this undeniable fact: Gold can be called wealth because it is an enduring wealth proxy in exchange for our life's needs. Currency, on the other hand, serves a specific modern economic purpose--to be borrowed and inflated in placation of man's immediate desires. It is not wealth, it fails as a proxy for the Gold it tries to immitate. Do not confuse the two.

Understanding how the world works is easy as soon as you understand the Wealth Hierarchy. Like this: Earn money/currency, buy what you need, save Gold, enjoy what life has to offer.

Real wealth. Get you some. ---Aristotle


ANOTHER: Sir, Thank you for reading my thoughts, as I do read yours! As in all life, "events make truths", not the words of Another. "time will prove all things" Thank You

Sincerely,
FOFOA

*If you buy gold because of my blog without really understanding my view, I think it is possible that you will sell your gold "to lock in a profit" with the worst timing in the last 5,000 years. You don't want that on your headstone, now do you?

**For anyone who would like to read J.P. Morgan's full testimony before the House Bank and Currency Committee on Dec. 18 and 19, 1912, with cross-examination by Samuel Untermyer, for context, here is the full 55 page transcript of Morgan's testimony as archived by the Library of Congress:
http://memory.loc.gov/service/gdc/scd0001/2006/20060517001te/20060517001te.pdf

____________

We gold, we gold, we shine!



"Shine Your Light"
F-ff-f-fresshhhh music from Rita Ora (h/t DP!)

We gold, we gold, we shine
We gold, we gold, we shine
We gold, we gold, we shine
We gold, we gold, we shine

Hey there rock stars
Turn up your radio
I can hear you coming
Start up the video
You're still standing
They'll never knock you down
The beat never ending
Let me hear your heart pound

Eh, ah, eh, ah
Eh, oh, a shining star
Eh, ah, eh, ah
Don't matter where you are

Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)

We gold, we gold, we shine
We gold, we gold, we shine

We going solar
Push up your lights out
Faster and faster
I see the sun rising higher

Eh, ah, eh, ah
Eh, oh, a shining star
Eh, ah, eh, ah
Don't matter where you are

Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)

Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)

And we don't give up till we run out of desire
We see the finish and we never get tired
We are the winners cause we hold the world title
We started slow, but we beat you in the final

Eh, ah, eh, ah
Eh, oh, a shining star
Eh, ah, eh, ah
Don't matter where you are

Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)

Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)

We gold, we gold, we shine
We gold, we gold, we shine

We gold, we gold, we shine
We gold, we gold, we shine


319 comments:

1 – 200 of 319   Newer›   Newest»
Tyrone said...

Bring on the Moneyness of FreeGold!

Cheers!

victorthecleaner said...


FOFOA,

one of your most important articles! (rather short though ;-)

On the question of who is going to regulate the credit volume.

I am pretty sure I understand the technical aspect of how the banking system (CB plus commercial banks) is responsible for consumer price inflation. The ECB has also clearly communicated to the Asian CBs that they will keep the Euro stable relative to consumer prices (up to their just under 2% inflation target). Why are they so confident they will be able to deliver?

Perhaps nobody needs to regulate (as in centrally plan) the credit volume. Perhaps it is going to work as follows (hope Blondie likes it):

Why are commercial banks too big to fail? It is because all the 'savers' have their deposits there. Let a number of banks fail (they certainly deserve this), and millions of 'innocent' little savers get wiped out. Politically not acceptable.

Once the savers are in gold for the long run, at least with a good part of their savings, you can let individual banks fail.

In the beginning, you wrote that banks were profit constrained. That's desirable, I agree. But it will be true only if they are allowed to fail, and this will be possible only once the savers are largely out of debt instruments. It is the threat of failure that will make banks profit constrained again.

This is the case on a global and on a domestic scale. The US government and large US banks cannot fail (nominally) because China, Japan etc. have invested their 'savings' in their debt. Similarly, various pension plans have invested in their debt. In Europe, governments of Greece, Portugal, Ireland were bailed out because the German 'savers' own their debt.

(Note: The money of the depositors is not needed anyway, simply because reserves are not needed to extend credit. Rather, as the endogenous money camp [Keen, Werner] has shown, reserves are sought only after credit has been extended.)

Once the banks are profit constrained again, they have an incentive to regulate the credit volume, in particular a strong disincentive to extend consumer loans, simply because consumers in aggregate are a lot less creditworthy than businesses. It is consumer loans (and lending to governments) that affect consumer price inflation most. This might even mean that the interest rate policy of the CBs that you are mocking, might work again.

I have moved towards your point that a central control of credit volume is undesirable and AG hopefully unnecessary. Blondie might add "all this because gold is allowed to function."

Victor

victorthecleaner said...

Holly,

How/why would the value of the good money explode in real terms(not just exchange value).

Firstly, this is what we are observing:

http://pbs.twimg.com/media/A5WeCEPCUAAf9NE.gif:large

This is largely gold increasing in real terms and only a little bit the dollar going down in real terms.

Secondly, the gold price is political. Why was it so low during the 1990s? We know this. It is part of the story that Another explained to us. Why has gold been rising since 2001 in such a nice and regular upward trend at a rate of 19.54% per year (who is slightly missing their 20% target here???). This is still paper gold, I might add.

Victor

Holly said...

So Freegold is more of a process than an event? What is the order of events that you guys believe will occur as we approach a Freegold system? I thought HI had a place in the revaluation of gold, but with the currency detached from the metal, how do you see this playing out? HI would only affect the exchange ratio of gold, not necessarily the purchasing power. Why would HI cause the paper gold markets to collapse, with only physical left standing?

Holly said...

And if it has been happening for the last decade, why do you believe it has happened and why will it continue? Plays into my detached currency and gold question above.

Thanks!

Dante_Eu said...

I haven’t read it yet but Christmas is sure early this year. :-)

Motley Fool said...

This is the best statement of Say's law that I have seen.(Since I am now there in my reading, and just want to share before continuing)

"Say’s Law of Markets is the brainchild of J.B. Say, the 19th century French economist. It states that production is the cause of consumption, or that the people’s productivity determines their purchasing power. For example, if a man plants and harvests a ten acre field of corn, his purchasing power in the marketplace will then be whatever that corn is worth in trade to his fellowman. His production of corn has created the level of his demand for clothes, transportation, entertainment, etc."

TF

Motley Fool said...

A thoroughly enjoyable posting. Thanks FOFOA, it's been a while eh. :)

Phat Expat said...

@VtC
"Why are commercial banks too big to fail? It is because all the 'savers' have their deposits there. Let a number of banks fail (they certainly deserve this), and millions of 'innocent' little savers get wiped out. Politically not acceptable.

Once the savers are in gold for the long run, at least with a good part of their savings, you can let individual banks fail."

I'm not sure if you subscribe to the notion, as I believe FOFOA (et al) do, that the paper price of gold will at some point drop to extremely low levels. IF the intent is, as you describe above, that savers are being 'allowed' (or somehow herded) into gold, isn't it quite the cruel joke on them should the paper price actually reach the levels that FOFOA had discussed? Most of these savers are not FG adherents so they would likely relieve themselves of their 'savings' at the worst possible time (as per the * disclaimer provided by FOFOA above). I guess, how do you think these 'savers' will be moved into gold and then not commit hara-kiri as the price plummets (assuming it does). Hmmm...

Woland said...

As beautiful, in its' elegant simplicity, as Blondie's old avatar,
Vermeer's "Girl with a pearl earring". Bravo! If one ever needed
a reminder of why 'love' is not too strong a word for FOA, his
words on the human tribe, its nature, and how it always resolves
age old problems should provide sufficient evidence. Thanks!

Gunnar Stødle said...

FOFOA thanks for thoughts on why money is credit.

I think its important to carefully separate the use and essence of money.

Credit is the usefulness of money and debt is the basis. Credit is derived from credibility and applies to the function of money.

Debt is the basis of money and credit is utilization of said debt. Debt that cannot be utilized is useless money.

FOFOA says:

"Money is credit." I followed that up with a little more detail: "More specifically, it is the recording of current balances of credit. It can be recorded in your head, represented on an institutional ledger, or carried in your pocket as pieces of paper or metal with numbers recorded on them. But notice that it's the recorded numbers and not the paper/metal in your pocket that constitutes the money."

and:

"Debt is not bad by nature. It is the natural essences of money, period! Money is debt. That's not a bad thing! But yes, because debt is the essence of money, bad debt leads to bad money."

Woland said...

Good morning, Victor;

Responding to your query of the previous comment thread,
someone is clearly closely following the discussions here,
who also is an "Austrian". It surely wasn't me, or Henry K,
but as to who, I have not the faintest clue. By the way, for
my money, it is within the Treasury Dept. more so than the
Fed. that this ongoing institutionalized knowledge is kept
alive, currently by people such as Edwin "Ted" Truman, and
others, whatever they may profess to the contrary. My 2c.

duggo said...

As I didn't want to start a book in the middle I went back and read the first Moneyness post. I'm glad I did. The light of understanding now burns brighter.

"As an example, I'll give you a paper contract to pay you later for some oranges and you give me the basket of oranges. Better said, I just gave you modern man's actual concept of money.

Or I trade you a basket of apples "or gold" for those same oranges and the deal is finished, done! We have been taught to think that this is also the concept of money trade. "

The first uses what our currency system has evolved into, what is really money in our mind. Where the second uses no credit form at all and is more comparable to trading real wealth as the ancients traded using gold. "

The above, the Renoir example and the ancients idea of Gold gives me enough promptings to try to explain the concept to someone else.

Great stuff! Now I KNOW why I switched from Silver to Gold.

Edwardo said...

FOFOA wrote:

"What allowed it all to get so out of whack to the point that it is today is very simply the inclusion of savers' savings in the monetary process."

This idea would seem to shed a decent amount of light on the precise purpose of having the SS Trust fund privatized, i.e. a major can kicking exercise. Of course Wall Street would reap massive fees, and that can not be excluded as a rationale, but then the first and second purpose are by no means mutually exclusive.

More from FOFOA:

"You create new borrowers by lowering lending standards, especially if your profit is now coming more from sales commissions than from interest. This was demand-driven, not bankster-greed-driven.

This formulation is reductive, and, ultimately, counter-factual. What is not counter-factual and comports with human system dynamics is that both borrower and lender enabled one another just as the pusher and the junkie enable one another. And a crucial element in the enabling process is that the pusher initiates the dynamic by first providing the product. The Law, at least where drug peddling is concerned, understands this element very well which informs drug crime sentencing.

I do see your point about the hogging of the trough by savers, but that does not, by itself, exculpate the banks and their less than impeccable behavior. This may seem like a minor quibble to you, but I submit when you elide the role banks have played in this epic and lugubrious drama it works against the advancement of your position. Even if your argument is, in the main, valid, even robust, your credibility, there's that word again, is negatively impacted if certain portions of your narrative are distorted.

I have more comments to make, but they will have to wait. In the meantime thank you for another very thought provoking epistle on money.

duggo said...

Dear FOFOA,
In your final statement you mention a person who buys Gold because of the blog but does not understanding why. That was me. I now understand, so thanks.

One point I'd like to make is as a person gets older there is a conflict between saving wealth and spending it. Nobody wants to be the wealthiest person in the graveyard nor do they want to live their old age in abject poverty because they didn't save their "wealth" or only thought of saving it in "paper" money which becomes worthless.
So Gold is the perfect answer for retaining value but we mustn't get too fixated on counting our lovely Gold coins every night when we could be enjoying a luxurious meal or taking a high-end cruise or maybe buying that Ferrari you always wanted.
I am in the process of turning my fixed assets into Gold so that I can be ready for the "re-set". In the meantime I shall also use some of the Gold to enjoy life. I can see a danger that Gold could become an end in itself for someone. They could end up dying of old age and starvation whilst sitting on a pot of Gold. I suppose like everything in life it's a matter of timing.

peakpoke said...

Hi, I have read bits and pieces of you articles and I agree that physical gold is the only sane option for the future. But if credit will collapse won't the deflation bring the price of gold with it in the short term like nicole foss says? (sorry if you already explained this a million times)

spaul67 said...

FOFOA, spot on as always, except for you’re ‘understanding’ of the Chicago plan.

The closest representation of the Chicago plan in action today can be seen in North Dakota, basically a State level credit union. A good summary of the advantages of going back to a non-debt based sovereign and therefore Constitutional MoE is written below.

http://www.marketoracle.co.uk/Article37475.html

This in combination with a parallel money system that you have advocated so well primarily directed at the SoV would solve a number of problems. This was clearly the intent of the Constitution which specifically calls out three forms of money; Bills of Credit, Gold and Silver. Their primary error was to fix the exchange rate among all three. Their second error came later; it was to access capital gains relative to the MoE on gold and silver. Basically taxing their first error. In order return to the Constitution’s definition of money we must eliminate all capital gains on non-productive asset like Gold and Silver.

Regardless, the primary power of any sovereign is their ability, through violence however constrained, to compel compliance to its laws. A key element of that compliance is the power to tax, ie a wealth pump. There are a lot less obvious ways to tax people though than the ones the average person is aware off. Specifically, the expansion and contraction of the MoE or Credit/Money also creates a wealth pump, via the complementary forces of inflation and deflation. This ‘money power’ wealth pump is currently under the control of a private for profit Banking Cartel. There is legally no difference between the existing Banking Cartel and say an Oil Cartel. Long story short, first you expand the MoE through credit expansion inflating the price of physical assets and encouraging increasing levels of debt to be leveraged upon their inflated prices in terms of MoE. You then contract the MoE available to those encumber by those debts and create defaults thereby obtaining those physical assets at a fraction of their average value. Return to step 1. This is exactly how a flapper value pump works only with money. In fact if want a graph of its operation just look at the S&P500 chart.

http://finance.yahoo.com/echarts?s=%5Egspc+interactive#symbol=^gspc;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

We are currently in the third upstroke any guesses as to what is next?

Under the Chicago plan the money/credit supply (Bills of Credit) would be under Federal government control with all the profits and advantages accruing to the citizens by default. In effect if you ‘choose’ to go into debt you are choosing to pay a higher tax rate on your future net production to your fellow citizens. Think of it as the world’s largest credit union. In short you would be deemed to have enough surplus production in order to pay this higher tax in the form of interest. In fact one could envision an entirely ‘voluntary’ tax system ‘entirely’ based on the extension of credit alone. If for some reason you default on that debt then the securing assets would become the property of the citizens. To prevent abuse on the part of either party, debt/income, debt/assets ratios etc. would be used and adjusted periodically to achieve the primary objective of a default rate as set within the Constitutional amendment that fixes this whole mess.

In short while you have clearly begun to branch out into the other realm of money (i.e. MoE) fixing this problem isn’t as simple as just Freegold for (SoV) + letting the existing order operate the (MoE) unaltered. As long as the wealth pump is in operation most of us won’t have a lot of surplus production to protect, even if Gold is a superior SoV at all times and everywhere, which it is.

Nickelsaver said...

It never ceases to amaze me that folks can rebut FOFOA's arguments with the very points that have been debunked.

KindofBlue said...

FOFOA et al

A great post as evidenced by the cogency of thought and the quality of these initial comments. In a word: superb.

Holly said...

To simplify my question above and I know this has been addressed, so if you can link me to one of FOFOA's posts it would be appreciated. But what separates our system now vs a freegold system? Our currency is not attached to gold. Does the key to freegold rest in the physical gold being removed from the gold credit system that is currently happening? If so, why would physical gold holders make this move? I assume the coming HI plays into it play somehow.

I always held the simple belief that as interest rates rise, everyone will begin to default and the fed will print. This money would be added to the monetary base and massive inflation would follow as credit was extended off of this money. This would cause nations to stop wanting dollars, making things worse.

I am not sure if I am near FOFOA's view, but I don't see how this view unlocks golds true value in any way other than people fleeing to gold to get out of a HI currency. So what would cause the gold savers to cease their gold credit(if that is the issue).

spaul67 said...

Concerning the question I asked JR a few months back; namely what is it that keeps the two tier gold price market in place?; I figured it out after rereading both FOFOA and Another’s posts a couple months back.

Basically it’s a Nash Equilibrium alliance formed between the world’s leading Military/Technology power (USA) and the world’s leading net energy producer (Saudi Arabia). As such you can expect the two tier gold and oil price market to remain in place until this pivotal relationship breaks down. It could happen gradually as the West is depleted of gold and/or the net energy production of Saudi Arabia goes away; or abruptly from a hot war in the Middle East, either way, this relationship is key for the timing of a return to a freegold monetary system. A system which is actually the dominate monetary system as measured in years, the last hundred years not withstanding.

Note to casual readers of this blog; it takes time to fully absorb some of the profound stuff here. Though I wouldn’t go as far as JR and claiming everyone a heretic who dares to question, let alone challenge the almighty “Another or FOA”.

For example I think Another was dead wrong with his belief that the superior design of the Euro would replace the Petro-Dollar system. The Petro-Dollar system will eventually break down because the Nash Equilibrium supporting it will break down not because of the emergence of the Euro however designed or backed. Another was clearly a brilliant and well connected person but we have the benefit of 15 years of hindsight.

I think his biggest miss was the result of blind spots in two primary areas.

The first one is that he didn’t understand the value placed by Saudi Arabia on the US security umbrella. In short the US sells weapons everyone else sells targets. As such the security guarantee of a gaggle of EU nations (many of whom lost the last big war and can’t even deal with a small conflict in their own back yard without the help of the US) is a distance second to a single sovereign nation that has won more wars and spends more on its military than the next ten countries combined; and has been doing that for the last 70 years.

Saudi Arabia doesn’t need to settle for second best on anything let alone something as important as its own security. In fact you can see how the Petro-Dollar system, buy making energy cheap in US dollars, actually enables this asymmetry in military capability in the first place. It’s in Saudi Arabia’s direct security interest for the US to remain the strongest. Plus the US kicks back a few gold coins now and again. What’s not to love?

Second, while the Euro attempted to break its link with the nation state, the nation state clearly didn’t break its link with it. A fact we are witnessing first hand right now. In short unsecured debt that cannot be paid back won’t regardless of the MoE design. Your only choice is how default occurs; out right default or inflation, take your pick.

This is why I like the amicable divorce between the hard and soft money camps advocated by FOFOA. In order to do that though gold ‘must’ circulate ‘freely’ among individuals and nations in order to achieve its highest utility. Gold locked away within the vaults of central banks simple maintains a false sense of equivalence between the MoE and SoV and keeps the Soft and Hard money camps at each others throats.

In the end the Euro is just another variant of hard money.

Holly said...

@spaul

So you are saying hyperinflation has nothing to do with returning to a freegold system? Only whether the oil countries run out of oil or the US runs out of gold? How do we know the oil countries are buying gold with their dollars? Why do many believe the "reset" is overdue, since they still have plenty of oil and we(maybe) still have plenty of gold.?

Nickelsaver said...

"...what separates our system now vs a freegold system? Our currency is not attached to gold. Does the key to freegold rest in the physical gold being removed from the gold credit system that is currently happening? If so, why would physical gold holders make this move?

All above ground physical gold is held by someone, yes? So what would make you think that they would need to anything. The separation of paper gold from physical is not the result of the actions of those holding physical (strong hands), but of those holding paper, no?

As for the dollar currency being attached to gold, it is and it isn't. Why does the USG still value it at $42.22?

We don't have freegold, because it isn't free just yet.

But we are free, free to front run the systemic shift by opting out of debt based savings of all forms, into the physical wealth asset gold, before everyone else tries to and wishes they had.

When those that flee currency risk into paper gold, are met with the realization that the paper gold is NOT really a retreat, what will they try to do?

Holly said...

@Nickel

" The separation of paper gold from physical is not the result of the actions of those holding physical (strong hands), but of those holding paper, no?"

Well those who hold the physical, if it is being lent out, could end up losing their gold. Or are you saying if the gold is being lent out then they don't actually own the physical? I still don't understand the catalyst for why the paper gold holders would start to demand their physical gold.


"We don't have freegold, because it isn't free just yet."

But why isn't gold free? I can see the price being suppressed by the paper markets, but that would appear to be a manipulation charge against the COMEX or the bullion banks. Is this what FOFOA believes is happening?

Thanks

Motley Fool said...

spaul67

"this relationship is key for the timing of a return to a freegold monetary system."

There are many keys. This is one, but not one I see likely to be used to open the lock.

TF

Naughty Slumdog said...

VtC,
As usual, you are a real food for thoughts!

“Why are commercial banks too big to fail? It is because all the 'savers' have their deposits there. Let a number of banks fail (they certainly deserve this), and millions of 'innocent' little savers get wiped out. Politically not acceptable.”

Usually the government guarantees individual’s bank deposits up to a certain limit. The “Innocent little savers” ARE ALREADY UNDER GOVERNEMENTAL PROTECTION. The problems are the institutional debtors, but these guys are insured. AND they are knowledgeable, educated traders. If they have taken risks, they should pay. The investor in a poor performing bank should suffer. Well, THAT IS POLITICALLY NOT ACCEPTABLE!

Because all the finance people have stuck in the brains of people that banks are safe, and the returns are guaranteed and risk free. This is the global lie of International financial system, that he is risk free. The first bank insolvency will prove contrary, and people will start thinking about gold for risk free investment.

Let’s not get confused: government, thorough bail outs, save BANKS, NOT DEBTORS, as they should.

Nickelsaver said...

Or are you saying if the gold is being lent out then they don't actually own the physical?

Yes. Because no one will enforce such contract to be honored in physical terms, only monetary.

But why isn't gold free? I can see the price being suppressed by the paper markets, but that would appear to be a manipulation charge against the COMEX or the bullion banks. Is this what FOFOA believes is happening?

spaul67 said...

Concerning Gold vs. Silver; part 1 of 2

First I understand and can reconcile in my mind the arguments made by both the Gold and Silver camps as represented by FOFAO and Brother John respectively.

http://www.brotherjohnf.com/

First off let’s start with exhibit A for the Gold camp’s claim as a superior SoV namely the gold cube;

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/09-2/Cube%20of%20Gold_1.jpg

Gold is clearly unique in terms of human behavior with regards to ‘all’ other materials. The sixty year ‘supply’ overhanging clearly being a key defining and unique characteristic of gold. But let’s do a thought experiment for a minute. Say that thirty years from now the Silver cube and Gold cube begin to look a lot alike, both in terms of size, location, and stock to flow. Why wouldn’t Silver become inducted into the money SoV hall of fame at that point? Worse yet for Gold bugs, dare I say at a similar SoV per oz price in MoE as Gold? For us ‘younger’ SoV seekers this might not be a bad speculative bet to include within a ‘balanced’ SoV portfolio which includes gold by definition.

Those who would say that silver is too useful vs. gold I would say then why even at present gold prices does it have ‘only’ sixty year supply to consumption overhang? Sixty years isn’t a long time in the broader scheme of things. To put this in perspective, at present prices, silver has only a twenty year (above + below ground) supply overhang. Obviously as prices increase the available supply of Gold and Silver expands but at some point we will reach a nexus of supply/incremental cost/price/utility. Clear the depletion of ‘both’ gold and silver is going to need to slow way down and the price needs to go way up at some point.

Second, one the greatest advantage of gold at present, namely that it is creature of the central banks the world over, is also its greatest disadvantage relative to silver. It is highly probable that as the world seeks a new Nash Equilibrium in which to manage global trade, post Petro-Dollar collapse, that gold will be caught in the crosshairs.

Governments are notorious for doing a lot counter productive and stupid things ‘before’ falling into the right one. As such you can fully expect that gold held unambiguously by private hands will suddenly come under the ever watchful eye Sauron. A particular dangerous situation should the West’s physical gold supply already be depleted thanks to the Petro-Dollar system. Think FDR. While that will cause all us freeholders to have various forms of boating accidents it won’t change the fact that at the moment many us need to convert some of our SoV for MoE it could be illegal to do so. Might I suggest that silver, which must flow for industry at present, may be a superior form of bridge SoV during the period of time between the collapse of the Petro-Dollar system and the emergence of freegold? In addition the very worst time to sell gold in order to buy food or energy is just before freegold.


Nickelsaver said...

Systemic suppression and explicit manipulation are two different things.

spaul67 said...

Concerning Gold vs. Silver; part 2 of 2

Third, the government sure seems to have going concern at keeping ‘both’ the silver price and gold price suppressed via paper. When the paper gold/silver market collapses the government will have zero ability to affect the physical silver supply and yet have stock piles of gold to do the same. As such their could be a ‘brief’ period in which the existing order attempts to maintain control, post paper gold/silver collapse, by dumping physical gold even while physical silver price goes ballistic thereby compressing the physical gold/silver ratio temporarily. Think of what Nixon did in a failed attempt to defend the US dollar to the last ounce. Didn’t work out so well, but it did provide buying opportunities while it did.

Fourth, in a freegold world where gold is the king of SoV and silver is still ‘just’ a commodity; would enable us to say exchange 1 oz of physical gold for 500 oz of physical silver. Silver and other precious metals like Platinum (if you don’t have storage space) would be great ways to diversify your SoV portfolio with the added speculative bonus that at some point in the far future silver may start to behave like gold due to ongoing depletion rates. So ironically the best way in this scenario to own silver is to first own gold.

In short it foolish to put all your SoV eggs in one basket or within one system of exchange. Given the present instability, the very last place you want your SoV to be is within the system. During a system wide collapse you can full expect that we shrimps attempting to hold our SoV in any form within the system will be seekh kabab while the giants largely get off scott free, think MF Global. Gold at present is the most compact asset we shrimps can physically hold outside of the system and yet still engage in commerce within the system on or terms and time frame. This is also why you want some silver and other ‘lesser’ pre-freegold SoV as well though.

What kind of SoV do you accept here?

http://www.youtube.com/watch?v=cSZfUnCK5qk

Alex in Montana said...

Freegold vs. Gold Standard

I like freegold and the US may not go back on any type of gold standard, but what is preventing another country from doing so?

http://www.financialsense.com/financial-sense-newshour/guest-expert/2012/11/09/ross-hansen/german-likely-to-leave-euro-and-go-to-gold-backed-deutsche-mark

Woland said...

Spaul 67;

Unless you are wiser than Plato, Aristotle and Socrates, do as
they did; save in electrum. Put your mind to rest. Cheers.

Motley Fool said...

ART

Upholding the words of your evil banker masters again eh?

@spaul67

I wish you luck on the trail. A word of advice, keep testing and retesting your thoughts until at the end only truth remains.

TF

H. M. Socialist said...

@spaul67

I LOVE your silver comments pt. 1 and 2. You are really dropping some knowledge on these freegolders! Watch them respond, they'll just be like "OOOO Occam's Razor OOOO focal point **blah blah blah**"

I say forget Occam's Razor. Why look for simple answers when with just a little imagination we can concoct all kinds of future scenarios in which silver gains primacy over gold! It is the sheeple's choice! The sheeple, who produce nothing, shall cause it to rise like a phoenix above the ELITES' gold! Even through hyperinflation!

Governments are notorious for doing a lot counter productive and stupid things ‘before’ falling into the right one. As such you can fully expect that gold held unambiguously by private hands will suddenly come under the ever watchful eye Sauron.

Yes! Governments are all powerful, even in determining what we save (Hello - MIND CONTROL)! Also, I think FOFOA's analysis is a bit incomplete. For example, NOWHERE in FOFOA's analysis is there a mention of Area 51 or the Anunnaki - though we ALL KNOW that's where all the gold in Ft. Knox has gone - to the ALIENS. Yet FOFOA is silent about this... I leave the reader to draw their own conclusions about that one - heh.

Greetz,
HMS

spaul67 said...

Holly; “So you are saying hyperinflation has nothing to do with returning to a freegold system? Only whether the oil countries run out of oil or the US runs out of gold? How do we know the oil countries are buying gold with their dollars? Why do many believe the "reset" is overdue, since they still have plenty of oil and we(maybe) still have plenty of gold.?”

Hyperinflation will come to the US as a direct result of the breakdown in this key relationship; which is why this relationship will be defended to the bitter end by both parties. Foreign Dollar currency reserves are at present = Energy reserves. Saudi Arabia is maintaining this relationship for its own security and the ability to convert some of those excess dollars into physical deliverable gold. Gold being the ultimate generational SoV as correctly pointed out by Another. Wise move on their part. Gold that is priced within the system at a much higher price than we shrimp are exchanging at our local coin shops. The two tiered gold price is what Another wrote about extensively. When this two tier system breaks down, even an Oil depleted yet gold rich Saudi Arabia will still be able to buy outright the best security on the globe. Perhaps a hint at the next Nash Equilibrium, is it not? After all they are going to have a lot of gold that needs protection.

Notice how after the US went off the gold standard and onto the oil standard we have been able to run a forty year trade deficit ever since. As a result and at present half of the US currency supply circulates outside its borders. Its primary utility to the rest of the world is that Saudi Arabia will accept it for the delivery of Oil. Plus the US being the swing producer of food is not a bad either. Interestingly the US is the swing water exporter via food as well. Being the primary swing/net producer of Oil, SA sets the price ‘in dollars’. All other Oil nations must sell in order to get enough food and other commodities to survive; as such they will sell to anyone who will buy. Only Saudi Arabia is able to choose to sit on rather than sell their oil as the swing producer.

If this relationship breaks down somehow, those dollars will come home to roost in the US driving up prices in the US. Now the US could put in place capital controls but then we would need to instantaneously reduce or foreign energy consumption for transportation fuels by 40%. Further why would anyone continue to exchange paper for real stuff if its conversion to energy is ended?

As a result the US would no longer be able to run a trade deficit at a minimum and may even need to run a trade surplus in order to acquire stuff we don’t have but desperately need. So the choice for the US will be a painful balance between hyperinflation and economic shutdown. A very difficult proposition with our over extended supply and production chain dependent on cheap energy in terms of US dollars. In fact the world at large is highly interdependent on the current flow of goods and services. An abrupt alteration of this will cause wide spread misery.

Which is why out of desperation the world will eventually be force to bring forth freegold to maintain critical trade flows. As such any FDR confiscation attempt will be short lived as it will be counter productive to social cohesion enable by placing gold back into its former role of balancing payments.

Now, if we had a few decades to build Thorium coal feed reactors we could gradually wean ourselves off of cheap ‘in dollars’ energy. Though the normalcy bias at the national and global level though is something to behold. If the majority understood the clear and present danger we face everyday we would already have a Manhattan level effort underway to become energy independent for our transportation system ASAP.

Aquilus said...



This post is joining the top of my all-time favorite posts.

That's the way to explain where one stands on money, credit and wealth. Bravo, FOFOA!

All these topics had been covered individually in previous post, but it's a treat to have them combined into a coherent perspective.

Here are just two of the highlights as far as I'm concerned (my spacing for emphasis):


How are money and wealth different?


"Money reflects present and future production while wealth is, in fact, production from the past."

"it is the recording of current balances of credit and not the paper/metal in your pocket that constitutes the money."



What is the role of the banks?


"You are talking about the money multiplier, reserve ratios and capital adequacy requirements as if they are constraints.

As I said, they are not.

Banks are not lending deposits. They are not lending anything.

They are simply facilitating the exercise of credit/credibility that already exists in the economy.


You earn credit, and then in order to exercise it you go to the bank which facilitates your desire to exercise your credit (purchasing power). "


or, in other words


"Simply, get over this idea that banks need to have something to lend. This is the faulty premise: that banks lend something to the borrower.

They do not.

The borrower already has the credibility, the credit, and the banks are simply facilitating the exercise of that credit so that it can be used in transactions, and so that the counterparty to those transactions doesn't need to understand the borrower's credibility.

The bank has already verified it and now stands behind it. This is the very the essence of money."

Woland said...

H.M. Socialist;

It is said, "In the land of the F---tard, the R-tard is King."
A simple foil device and a Faraday box will defeat mind control.

Barton Lee said...

Recent "convert" so bare with me, If you have
$100,000 in the bank (dont know why anyone would do that!)and you use it to buy 50 oz of
gold, would that money be credit?

M said...

@ Barton lee

My bank (Bank of Montreal) photocopied my gold purchasing receipts and lent me money against it.

My plan is/was to sell my gold post freegold (to someone that needs it more then me)so that I could buy some industrial real estate.

But Im beginning to wonder if I even have to sell my gold in order to make a purchase. If I am fully reserved with gold,(fully credited if you will) then why can't the bank just credit me with 100% of the value of my gold on some kind of terms ?

Aquilus said...

@Barton Lee

The 100k is credit money. The 50 oz you buy is a (tradeable) asset, not money (and not credit anymore).

Bron Suchecki said...

Victor,

"On the question of who is going to regulate the credit volume" I'd suggest Free Banking. So Freegold combined with Free Banking.

The Dork of Cork said...

Yes , the chief exec. Bank of Ireland (not the Irish CB) was recently grilled in a Parliamentary Committee.
http://en.wikipedia.org/wiki/Richie_Boucher

He repeated that it was all about the CASH FLOW of the customers and not the value of the present assets and he was right in the present context of banking units of account mixed up with goverments units of money account.

But I disagree with you when you say all money is credit at least in a narrow sense.

You don't really deal with the divine right of kings to tax fiat of their choice.
Post 1648 this fiat became part of the banking system but it need not be like this.

You could have a system where the banks could have their Gold and their credit money but not control of goverment fiat.
This was the center of the battle between the French nation state and the various banking republics that the Venetians used as war proxies.

Luke said...

http://www.zerohedge.com/news/2012-11-11/chinese-gold-imports-surge-september-ytd-total-surpasses-official-indian-holdings

Can someone explain what will cause the paper holders of gold to all of a sudden want physical? Does it relate to the hyperinflation that is coming?

Edwardo said...

Now here's a fine bit of can kicking in Old Blighty.

http://blogs.telegraph.co.uk/finance/jeremywarner/100021222/the-bank-of-england-has-just-crossed-the-line-into-straight-government-financing/

Hat tip JSmineset.

Michael dV said...

Luke
'paper holders of gold' are really just betting on the price movement of gold. With the many recent examples of outright theft by banks (MFGlobal is the prime example) no one who is serious about owning gold holds that gold in paper form. We are talking about 2 entirely different groups. What you would be seeing if more physical ownership begins is a recognition of the value of gold ownership.
If you are not aware the ETFs only promise physical gold to those who own more than 100,000 shares.
Even if hyperinflation is delayed, in my opinion, physical gold is a good way to hold wealth. It has been rising in price for 12 years now. In hyperinflation gold is an outstanding way to hold wealth.
This blog is all about 2 things, hyperinflation and an emerging monetary/wealth holding system called freegold.
If I have not adequately answered your question there are literally thousands of articles and comments on this blog which look at those issues from every imaginable angle...good luck...

Michael dV said...

HMS
you ask troubling questions and raise disturbing issues. Why has not fofoa addressed the planetary issue?...he hides behind the '2 topic' wall and defers to A/FOA. This can't go on. I shall follow your lead....and large brain...we SHALL see where we are going! Break JPM!! Silver for the people (and debt for slaves!!) (if it is OK with you though I'll likely hang onto a few ounces (to buy when the GSR is right0

Michael dV said...

Alex in Montana
if any country tries to go on a 'gold standard they will find that the system the Euro is styled upon will cause them some problems. There have been a few great comments (see the previous piece by fofoa and comments) on just this topic. A classical gold standard requires defense of the chosen price of gold. If too high or too low it is a disaster (and it is always too high or too low). The Euro style allows the market to determine the value of the Euro by defining the value of gold. The ECB never has to part with an ounce...unless they choose to.
This was covered far better than I have just done and a quick search of the last blog (or perhaps a citation by another reader) will more than answer your question.

victorthecleaner said...

spaul67,

Basically it’s a Nash Equilibrium alliance formed between the world’s leading Military/Technology power (USA) and the world’s leading net energy producer (Saudi Arabia).

I'd like to modify this statement as follows. A Nash equilibrium would be to use gold as the international settlement currency rather than the dollar and enforce this function of gold both if you are an exporter and an importer as soon as your counterparty tries to sterilize gold (this is the strategy, if adopted by everyone, in which no single actor can improve his result).

But at present, there is a pair of actors (US and SA) who can jointly adopt a different strategy and who can come out with an advantage. This is 'thanks' to their special privileges: the US benefiting from the existing historical role of the dollar and the network effect (and to some degree from their military) and SA because they have the very special product to sell and a capacity that allows the to control the price.

Whether it is an advantage for the U.S. is open to question though. If you are a neo-Keynsian or even a hyper-Keynsian such as Mosler-Kelton, only demand matters to you, and net imports are an unchallenged benefit. If you are an Austrian or if you have some affiliation with the supply side, you might notice that after 40 years of distributing free candy to the U.S. economy, the structure of said economy has changed.

Now do you want to be China or Germany and scrap a car plant and instead open a few coffee shops, pet grooming salons and nail studios? Or do you prefer the position of the U.S. where the coffee shops and pet grooming outlets go bankrupt when the inflation starts, and where nobody has any clue about how to set up and run an industrial plant? You might be a couple of years in free fall where Krugman and Mosler-Kelton scratch their heads why the system is out of equilibrium.

For example I think Another was dead wrong with his belief that the superior design of the Euro would replace the Petro-Dollar system.

The petro dollar system would have eventually failed, probably with most of the industrial world in HI. What the Euro has done is that it has started the self-destruction sequence of the dollar system before this point is reached. How has it accomplished this? By giving the Europeans the freedom of choice, the choice of no longer actively supporting the dollar and letting the real price of gold rise. (They are not very actively undermining the dollar either, but that's a different question.)

...

victorthecleaner said...

...

The first one is that he didn’t understand the value placed by Saudi Arabia on the US security umbrella.

I am not sure this is the main point why SA still supports the dollar. For SA, there is quite a basic economic reasoning since they probably still receive quite a bit of gold on the cheap. Why stop while your cash register keeps ringing? Only a break out of the gold oil ratio beyond, say, 30-50 would force SA to rethink their strategy.

In fact you can see how the Petro-Dollar system, buy making energy cheap in US dollars, actually enables this asymmetry in military capability in the first place

Here, I disagree. The US have a huge interest in a high oil price in dollars (at least Brent, i.e. benchmark that sets the oil price at basically every harbour worldwide). This is simply because they need to stabilize the gold/oil ratio, and the Europeans have made sure that gold/US$ keeps rising. What can you do? You need to get Brent/dollars as high as you can while trying to limit the economic damage it does to your own country (for example by not giving planning permission to those pipelines that would allow the Canadians to ship their oil overseas and rather trap the Canadian oil inland).

On Europe:

Your only choice is how default occurs; out right default or inflation, take your pick.

Well, the ECB have made clear that their 2% inflation target stands and that they won't inflation tax their savers. So you will get some defaults I guess. The charm is that the Euro as a currency keeps functioning in spite of this. The dollar wouldn't. The main difference is that the Euro zone has always had a balanced trade account, and that there is no excessive amount of Euros held by foreign creditors. So defaulting on some debt just rearranges claims inside the Euro zone, but not necessarily affects any exchange rates.

In the end the Euro is just another variant of hard money.

It isn't. The ECB has (of course) already demonstrated that they will print money in order to prevent deflation. And it is the real price of gold that has been rising since 2001.

Victor

costata said...

FOFOA,

Interesting synthesis of your earlier work in this post. I agree with Aquilus. It's one of your best. It should provoke a lively discussion (but hopefully not too much more about the rapture awaiting silver holders).

Woland,

Classic:

"In the land of the F---tard, the R-tard is King.

Cheers

RJPadavona said...

Great epistle, FOFOA!

Made for a nice Sunday on the back porch. You're responsible for my wife calling me a lazy bastard a least 4 times today ;)



Money is credit. When the Fed's credibility runs out all they have left is the money. Then there's nothing left to do with it except dump it on your front lawn.

As we transition into the next monetary system, you'll eventually have to cash in your face again so you can get a little credibility in the world. Maybe a little gold in the hand (past production that weathered the storm) might speed this process up by making your face a little prettier, and helping to put you on more equal footing when the time comes.

RJP


spaul67 said...

Victor, some good points, as well as some that will take some time to think about.

costata said...

VtC,

Re: Your response to spaul67 above.

A Nash equilibrium would be to use gold as the international settlement currency rather than the dollar and enforce this function of gold both if you are an exporter and an importer as soon as your counterparty tries to sterilize gold (this is the strategy, if adopted by everyone, in which no single actor can improve his result).

Dead right Sir IMHO. There's no way to game this system once it's up and running.

..not giving planning permission to those pipelines that would allow the Canadians to ship their oil overseas and rather trap the Canadian oil inland

I'll bet the environmental lobby groups fighting this are well funded.

The main difference is that the Euro zone has always had a balanced trade account, and that there is no excessive amount of Euros held by foreign creditors.

And if you are an EU corporation or government no need to borrow in any other currency aside from the Euro (with all of the attendant risks).

I want to respond to another part of your comment separately because it touches on trade and I may be able to finally offer a simple explanation of my perspective on this issue. And this in turn touches on some comments I want to make about some of the material in this post.

costata said...

VtC et al,

Whether it is an advantage for the U.S. is open to question though. If you are a neo-Keynsian or even a hyper-Keynsian such as Mosler-Kelton, only demand matters to you, and net imports are an unchallenged benefit. If you are an Austrian or if you have some affiliation with the supply side, you might notice that after 40 years of distributing free candy to the U.S. economy, the structure of said economy has changed.

The problem of course is that it hasn't been "free candy to the U.S. economy". My assertion is that Washington has put in place a variety of actual and de facto trade barriers to ensure that the US dollar capital surplus from trade partners with whom the country runs deficits flows to Washington rather than the country.

Let me try to flesh this out with a few examples. In the report linked below from the American Society of Civil Engineers it's estimated that the shortfall in expenditure on US infrastructure is going to cost the US economy well in excess $2 trillion dollars.

http://www.asce.org/uploadedFiles/Infrastructure/Failure_to_Act/Failure%20To%20Act%20Ports%20Economic%20Report.pdf

Now infrastructure is only part of the investment shortfall that America has experienced. ZH have done a few good posts on how aged the capital goods and other assets in the US corporate sector have become.

Consider the difference it would have made if China's and Japan's trade surpluses had been permitted to flow into investment in America instead of US government debt over the years. I realize that many Americans first reaction to this kind of notion is that it would amount to selling off America to 'furriners'.

In reality it all depends on how you structure the deals. You can structure foreign direct investment in ways that ensure neither investor nor recipient is getting screwed.

By way of example Australia has been running trade deficits for most of the past 100 years. Admittedly the economic colony down under has been screwed in many ways but that is another matter. It didn't have to happen that way.

The argument can't be sustained that Australia didn't obtain huge benefits from the capital investment it received. The real argument is about whether Australia should have received more benefits than it actually obtained. What can't be disputed is that "foreign" capital literally built Australia's economy.

So my point is that if the capital from a trade surplus country is allowed to flow back to the trade deficit country it can be a win-win for both parties provided there aren't sovereigns (governments or monarchies) operating mercantilist trade policies.

Classical economists fought to discredit and dismantle mercantillism hundreds of years ago (some of these economists have been quoted in these very pages). And amazingly it came storming back after WW1 and gradually morphed into the $IMFS.

Now according to BOP national accounting this two-way flow has been precisely as I described the free trade flow. As Michael Pettis often points out "balance sheets must balance". For every dollar that went out a dollar flowed back into "America's national accounts". But obviously I think this is a distortion of reality unless America = DC.

So I don't perceive Americans as having received "free candy". I think they were gipped by their Federal government and its cronies. The good news is that under the Freegold-RPG regime it's going to be impossible (AFAICS) to use a currency to help to facilitate this kind of scheme.

Michael dV said...

Ari's comments about needing fiat to set gold free are made much clearer by this fofoa post. Definitely an important piece.

costata said...

FOFOA,

Since it looks like everyone has gone off to bed I'll assume I'm not hogging the comments and post some observations on Say's law. I second Motley Fool's comment at November 11, 2012 3:22 AM. I think you have provided a good investigation of the topic.

At first glance Production-Precedes-Supply looks like a tautology. As you point out it's in the flow of exchange/trade that the deeper meaning emerges i.e. Production-Enables-Demand. Keen and Marx before him make the same mistakes. For a start they don't have enough economic actors in mind when they discuss this concept.

If you imagine 10 economic actors producing different goods then Say's law starts to appear to be deeply insightful. Also in a series of exchanges between these actors of dissimilar goods at different points in time we see another essential ingredient in these exchanges emerge - credit/money. (From my perspective a circulating credit money which I see you touched on in the post.)

So Marx and Keen are wrong about Say's law being a description of barter and not applicable to a "capitalist" economy. They compound their error by imagining that money is an objective of exchange as opposed to being merely a (circulating) medium of exchange (and unit of account).

Now this may surprise you. (Aaron already had a copy of the final draft of that proof we've been working on before this post came out so he can vouch for me on this.) The matters discussed above are central to the presentation we've been developing for his economist colleagues.

I'm thinking back to Doug Noland's use of the term "moneyness" just before you posted the original moneyness post. As we both know you started developing that post a couple of weeks beforehand with that name as the working title from the outset. "Thoughts have wings" as my Grandmother used to say.

Cheers

Woland said...

Hi Costata;

It's 3:30 AM where I live, so this is just an initial reaction to
your comment. I think the U.S. never would have allowed
foreign investment or ownership of major U.S. assets, via
the recycled trade surpluses, because we had a strategy
which was a mirror image of that policy, which was a real
gem. It was outlined in "Confessions of an Economic Hit
Man", and it goes something like this:

IMF loans money to a smallish country for a big infrastructure
project, whose leader siphons off ten percent.
Big multinational contractor firm (USA based) gets the job, and
the money flows right back to the US
The debt has been incurred, the hook is set, and now, just sit
back and wait for when the interest rates rise and the debt
service fails
Oops, we can't allow that. Tell ya what, you've got some nice
natural resources we would like to develop, then you can pay
us back. It'll take a lot of capital, so well need a big stake. Your
share can help service the debt. Don't want to lose access to
credit, do ya?

I'm just guessing, but I don't think the guys who invented this
particular game of hardball would enjoy having it played on
their own home turf. Anyway, it's now 3:39 AM. Cheers


Robert said...

This is the best FOFOA post of the year IMO.

alfa-or-beta said...

--
M said...
My bank (Bank of Montreal) photocopied my gold purchasing receipts and lent me money against it.
--


Please, could you expand a bit on this topic?
Your gold purchasing receipts were performed only in price-date-oz volume-vendor name or also included your personal name/bank account info etc.? I'm asking in order to determine why would the bank trust such a record in the first place?

Or is it more about pumping a bit your already elevated credibility (as phys gold holder) on the market or dealings with the banks specifically? Thanks

alfa-or-beta said...

VTC> what can be realistically assumed about the post FG gold-oil ratio? Well, it can double or triple for sure, but it can't go like into 10-20x wild area. The same applies for the future valuation ratio against farmland, animal stock and crop prices. In other words, from this point ($1750/oz) on, one can't expect the value of their gold holdings to make 20-30x appreciation (perhaps only in HI currency plane) - it will "only" appreciate against the those reality based assets, say by the factor of 2-3x if we are lucky, perhaps a bit less.
Unfortunately, this blog and discussions rarely mention this point.. Thanks for any comments.

Motley Fool said...

@M

That seems to me to be singularly stupid, if I'm honest.

A unsecured loan, fine, that I can still grasp. But a secured loan on your gold?

When do you imagine they will hastily need such a loan repaid? I would guess during Robert Prechter's 15 minutes of fame. Then you will lose more than the gold you gambled for.

@alfa-or-beta

"Unfortunately, this blog and discussions rarely mention this point."

Actually we discuss this quite often. We mean 20-30x or more against other things in real terms. That includes land,oil etc.

TF

duggo said...

Does anyone know the comparison of turnover in precious metals between the LBMA and Comex? My understanding is the LBMA dwarfs the Comex.
I notice that spaul67 suffers from the same conspiracy disease that I used to:-
"the government sure seems to have going concern at keeping ‘both’ the silver price and gold price suppressed via paper"
I used to go along with all the dastardly suppression hype of the Silver blogosphere and how JPM and the Government were sitting together every night waiting to "smack-down Silver and Gold.
Could it be that what the "conspiracy" gang sees is just traders and hedgers using the system to make money?

alfa-or-beta said...

Motley Fool> thanks for prompt response. Let me refine my point, after FG 20-30x spike against real things (oil, farmlad, animal stock) is perhaps even possible, BUT in very brief period of months/few years less probable. And long term it's simply impossible, from historical comparisons these ratios fluctuated given the technologies and structure of said societies (slavery, feudal, early capitalist, ..) throughout centuries and milenia. However there was never a midterm/longterm situation, where you can purchase dozens of multiple oxens per single oz.. Especially, for us ants, let's play it as safe as possible and don't gamble on gigaspike fortunes. To the earth view is follows, real assets revaluation 2-3x, shortlived spike 5-10-30x times, in currency plane bordering on high inflation, doznes of times and inside HI, quad/tril times.

Motley Fool said...

alfa-or-beta

We are not suggesting simply a spike, but a spike and plateau at that level. You are correct that there is little historical precedent.

Many cattle for single oz, indefinitely. This is the prediction.

TF

Brotherjohnf said...

From Quality and Quantity: Quantity is Not Necessarily Quality:

"You only need one good example to express an idea. Too many words may just confuse or annoy the reader."

From the Bible:

33 For God is not the author of confusion...

1 Corinthians 14
King James Version

Let me take a stab. Money is credit, and credit is based on credibility. Gold is not money, gold is wealth. Credit is money.

I think that fairly sums up this latest ball of confusion. So what is the credibility based on? The ability to repay? With what, credit?

Nonsense. Confusion. Beelzebub.

Silver is money
Gold is money
credit is credit
The rest is confusion

6) Confuse issues.
http://laura-knight-jadczyk.blogspot.com/2006/01/how-to-spot-cointelpro-agents.html

16 And Abraham hearkened unto Ephron; and Abraham weighed to Ephron the silver, which he had named in the audience of the sons of Heth, four hundred shekels of silver, current money with the merchant.

Genesis 23
King James Version

Shekel

Early coins were money stamped with an official seal to certify their weight. Silver ingots, some with markings were issued. Later authorities decided who designed coins. (Detroit Institute of Arts, 1964) Herodotus states that the first coinage was issued by Croesus, King of Lydia, spreading to the golden Daric (worth 20 sigloi or shekel),[2] issued by the Persian Empire and the Silver Athenian obol and drachma

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

alfa-or-beta said...

ok, I'll rest my case here for now, simply given my family history and NUMEROUS instances during past century of forced wealth transfers - I'll opt for something like "early 2/3 out strategy" - from the hoarded nanopile, only about one third left sitting still and those 2/3 exchanged after FG as early as possible for hard productive assets.

If you ask why? It's the better option, how to be positioned (for optimistic future scenario) and still have enough precious time to sell assets (even at some discount) before others should the gov. embark on confiscation spree.

I've seen it and I've listened to these historical accounts by survivors too much perhaps, the leassons learned: just don't be stupid gready - in times of turmoil it's usually the fastlane to face lampost, prison-gulag, emmigration w/out penny etc.

matrixsentry said...

Duggo said:

So Gold is the perfect answer for retaining value but we mustn't get too fixated on counting our lovely Gold coins every night when we could be enjoying a luxurious meal or taking a high-end cruise or maybe buying that Ferrari you always wanted.

I am in the process of turning my fixed assets into Gold so that I can be ready for the "re-set". In the meantime I shall also use some of the Gold to enjoy life. I can see a danger that Gold could become an end in itself for someone. They could end up dying of old age and starvation whilst sitting on a pot of Gold. I suppose like everything in life it's a matter of timing.


I agree that we should not get fixated on admiring our stacks, however, only to the extent that the actual time involved interferes with other activity that brings richness and texture to our otherwise ordinary lives.

I too am adding "texture" as I contemplate my own inevitable mortality. I see the "big five oh" sign approaching on the trail and it reminds me of a few things. Nothing good lasts forever, better get busy living because we are busy dying, and unrealized potential is a real loss.

It would seem that I choose to finance my little foray into extravagance using a different approach. I do not go to my stack to buy my new mountain retreat. I instead tap my credibility at the bank of my choice. As it turns out, they are quite pleased to see me approach with the proposition. I bring to the table a long history of net production in excess of my personal demand, a solid potential to continue such production well into the future, and most importantly a spotless track record of making good on credits that I have taken on.

Credit is for buying, lending, and borrowing. I reckon that I am not done producing yet. Certainly I am not done being a net producer. Therefore I cannot part with a single gram of my gold. To do so would be to grossly mismanage my tool box. I have my past net production(gold) and my future net production(credit) as tools to accomplish my goals. One tool offers me extreme leverage. So much so that the bank is actually paying me to use it!

I am pleased of course with the banks attitude and willingness to pay me in exchange for my credibility. Considering the rarity of such terms I would go quite a bit further and say that I am tickled pink! The usual arrangement is that we have to pay the bank for their magical ability to convert credibility into money, with which we can then convert into real nice stuff. As it turns out I happen to be above ground and aware at a time when things are quite a bit backwards from the usual. Thanks FOFOA!

Credit is real cheap now. In my situation it is free in real terms. It is actually more than free, it is providing me a yield! I could take a 100 coins from my stack instead of using money(credit). What is my cost for such a transaction? $XX,XXX per coin! Another way of seeing this is to ask the following: how much is the bank paying me, per coin, to use their credits in exchange for my credibility? $XX,XXX!!!

Even considering the transaction within the current un-Freegold paradigm, the interest I pay for the bank's magic trick is less than the real inflation rate. The cost of the money is nearly free. The only cost is opportunity cost when I choose to convert credibility into credit rather than gold. But, my return on that cost is a richer life better filled with more pleasurable experiences. I endeavor to manage my actions and decisions in such a way as to generate a positive yield in that department as well!

Gold, get you some, and then keep it until you become a net consumer by necessity. Stay healthy, stay strong, and produce! That stack is going places and you need it intact.

Jeff said...

Brotherjohn,

Keep your thirty pieces of silver, and mind your step.

Matthew 15:14 "Let them alone; they are blind guides. And if the blind lead the blind, both will fall into a pit.”

Sir Tagio said...

Fofoa,

A real masterpiece, grand synthesis, culmination and extension of many of your preceding "epistles," as RJP calls them. Thank you, thank you, for such insight, clarity and precision.

I also appreciate your efforts in this essay to explain the actions of bankers and the banking system to us and to place blame where it squarely belongs - on savers' appetite for securitized loans. It is very freeing not to be consumed with useless anger and frustration.

However, and I know you did not imply that bankers have been blameless in the subprime crisis, the bankers' ability to generate the fees they did from these deals did depend on their violation of societal norms - as expressed in securities laws - requiring full and adequate disclosure. Their ability to offload the massive amounts of securitized debt depended on tagging the securities with dishonest if not fraudulent ratings from the ratings agencies. Not to mention the conflicts of interest where the investment banks putting these deals together started placing derivative bets against the securities they were offloading to pension funds, insurance companies and others when they knew that they had nothing left but "s**tty deals" and failed to disclose that they were doing this or the size of those bets.

As a commercial lawyer in NYC who was at the beginning of the commercial real estate securitization pipeline in the mid-90s, and who has done a lot of private offerings in my time, it is apparent - and saddening - to me, to see such a massive failure of law to rein in and prevent - not just irrational exuberance - but actual fraud and predatory behavior.

Nevertheless, I don't want to sidetrack discussion into a "blame the bankers" exercise or a discussion of, geez, what regulations can we put in effect to prevent this in the future? Instead, the lesson I take from the events of 2007 and 2008, along with Another's sage words on human nature, tribalism and the way that economic perspectives can change in an instant, is that it is too much to expect or believe that anything will really rein in people's conduct when they perceive that there is a quick and very large buck to be made. If you look back at the bubbles and manias over the past centuries, it seems hard to come to any other conclusion.

While somewhat disheartening, this realization is nevertheless a kind of wisdom that frees one from utopian thinking and expectations. It saves a lot of time and energy "raging against the machine," time that is better spent (assuming personal responsibility for) protecting oneself and enjoying life.

In this regard, I think your work in clarifying the distinction between saving and investing, revitalizing the concept of saving, and the difference between money and wealth, is a real service to humanity.

Motley Fool said...

Brotherjohnf

What you mean to say is that FOFOA has by means of logic and reason tricked us into buying gold?

Woe is me, that I have been so thoroughly deceived.

All hail our glorious overlords, if this is the depth of their scheming ability we are all fucked.

TF

A PIIG said...

"Let me take a stab. Money is credit, and credit is based on credibility. Gold is not money, gold is wealth. Credit is money."

Nice summary sir.

"I think that fairly sums up this latest ball of confusion. So what is the credibility based on? The ability to repay? With what, credit?"

The answer is fairly simple. The ability to pay back in currency/credit(wealth claims). If the currency is kept relatively stable they pay back claims of a similar real value. What's the problem?

burningfiat said...

FOFOA,

Thank you so much for this monster post! It is settling a lot the recent discussion in these pages and on the Intarwebs generally.

A PIIG,

The answer is fairly simple. The ability to pay back in currency/credit(wealth claims). If the currency is kept relatively stable they pay back claims of a similar real value. What's the problem?

Nicely put.

To back it up. FOFOA:
Remember, and this is a key point, banks only require nominal performance. If a promissory note held by a bank devalues in real terms, the bank's liabilities devalue equally. So there is no loss to the bank through currency devaluation.

/Burning

H. M. Socialist said...

@Motley Fool

What you mean to say is that FOFOA has by means of logic and reason tricked us into buying gold?

Yes, I am afraid it is true. These tools of the devil: logic and reason, are employed far too much in this blog. I have been watching you, Motley Fool, and I note that you yourself frequently make use of these tools! Repentance is due! You should sell an oz. of gold and buy 50 oz. silver!

@BrotherJohnF

Nonsense. Confusion. Beelzebub.

+∞! Quite incisive commentary indeed! I see you do not employ these tools of the devil like FOFOA and the Motley Fool!

I think we all need to take off our thinking caps and instead let our feelings be our primary guide, especially when it comes to analysis of the monetary system. BrotherJohnF, more incisive commentary & scripture please!

Greetz,
HMS

Robert said...

Here is my attempt to simplify the concepts. Does this sound right? I think the real problem with all this "confusion" is a problem with the English language. English simply is not precise enough, which is why we often use terms like currency, wealth and money interchangeably. For purposes of this thought exercise:

Gold is wealth
Gold is not currency (but it used to be)
Money is not currency
Money is not gold
Money is not wealth
Money is a number in your head
Money is credit



The banking system runs on credit. Banks do not need currency, gold or wealth to make loans (unless the regulators demand otherwise). The bank's vault can be virtually empty in a perfectly functioning and solvent banking system, provided that the bank is not suffering losses from defaulted loans. The reserves are they just as a cushion against losses. Under our modern system, the banks can sell their bad debt to the FRB if their reserves prove insufficient to cover losses.

We got into the current mess because the banks started suffering losses when they could not securitize all the new sketchy loans fast enough -- that is, before the new loans went into default. The securitization market dried up suddenly, and the banks became the bagholders of their own crappy loans because the music stopped before they could pass them off on unsophisticated institutional investors. With no dumb bagholders around to pass the sketchy debt to, the banks have stopped making loans. As their existing loans have gone bad, they have passed these off on the FRB. They will not start making loans again until there is a real demand from credible and trustworthy borrowers.


The Dork of Cork said...

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



This divine right of the King has been replaced by the banks divine right to speak gobbledygook to the masses......the entire 1648 thingy has turned in on itself.

Its a absurdity


http://www.youtube.com/watch?v=k3YkCWJIMXE



Riche B. is correct within this current monetary framework

"this is not a pawnbroking business"



They are messing up the FIAT money supply to preserve their credit Kingdoms.

"Of course the monetary base will still be subject to abuse by governments in places where, unlike the Eurozone, the government retains ultimate control of the central bank. But like I said above, I think you'll find that the risk of fiat currency abuse is worth the innumerable benefits, especially once there is a systematic and foolproof way to protect yourself from the worst of it!

And remember, this is why Wim Duisenberg so proudly stated that the euro "is the first currency that has not only severed its link to gold, but also its link to the nation-state." I don't really think the euro architects came up with this ground-breaking idea because they thought they were smarter central plannerz than the Superorganism!"

But you have merely replaced one divine right for another.....ultimate power corrupts don't you know.

The banks can create infinite credit that cannot be paid off as there is no King to counter the banks and produce Greenback like currency.
As the nation state system breaks down the bankers will win the game anyway as all wealth will flow to their Gold assets.

But they won't be able to spend it as there will be no tribal societies cohesive enough to sustain advanced life.
Their claims on life & wealth will no longer hold any meaning - this is why Gold was buried in the 400 -500 AD period , it could not be spent.

matrixsentry said...

All,

The 2012 FOFOA Compendium has now been updated to reflect the release of Moneyness 2: Money is Credit. For newbies, this compendium is a pdf file that contains all the posts from 2012. They are complete with hyperlinks that are fully functional with internet access. This file is perfect for iPad or any pdf reader, for reading either online or offline. Go to Ron M's Air-Friendly PDFs at the right in FOFOA's Links menu. Additionally, compendiums can be found for earlier years going back to the very first post.

Also, I would like to remind everyone that this blog exists because FOFOA puts a lot of time into it. He does this for free. Many here donate to ease his burden. I would ask everyone to consider a donation if they find this blog has value and enhances their lives in some manner.

I personally feel that a donation that reflects your eagerness to understand the concepts we explore here is a nice place to start. Then in a similar fashion as when FOFOA says that you should purchase as much gold as you understand, you should donate as much as your life is impacted by the understanding you achieve here.

FOFOA,

Very nice post. My new favorite! Thanks for articulating to all the logic and deep meaning that has allowed me to drop my baggage and anger along the trail.

I understand much thanks to this blog.

Donation inbound!

Sir Tagio said...

Brotherjohnf,

You say,

"Let me take a stab. Money is credit, and credit is based on credibility. Gold is not money, gold is wealth. Credit is money.

I think that fairly sums up this latest ball of confusion. So what is the credibility based on? The ability to repay? With what, credit?"

I think Fofoa answered your question pretty clearly. The credibility is based on the character of the borrower. Matrixsentry's post above also highlights this fact. People who have been successful net producers in the past and pay their debts are likely to continue to do so, so long as they remain able to do so. Though not without its limitations, a credit rating is a numerical representation of character-worthiness.


dieuwer said...

How would the Nash-Equilibrium change if the US becomes THE oil exports of the 21st century (if you believe some new stories suggesting the US will become the new Saudi Arabia).
Then, the US could in fact extend the dollar hegemony, because not only would the World need dollars to buy food from the US (largest swing producer), but now oil as well!

Woland said...

Hello Victor;

Just a thank you to let you know how much I enjoyed your
vision of the"green" all service economy as expressed in
9:54 PM. All pet grooming salons, nail parlors and exercise
studios, with the occasional coffee chop. I do think there is
room for improvement, though. How about if everybody
stood in a big circle giving each other neck massages? After
10 minutes, just pass a 10 dollar bill to the person directly
behind you. Each time this happens it adds to GDP. One
guy's still got to drive the farm tractor that helps feed all
these others, though. I still haven't figured out how to get
rid of him! That's my next big project. Cheers.

dieuwer said...

On the War of Words between the Silver bulls and Gold bulls:

Sure, silver could like gold as a SoV when all attributes are the same. See e.g. the "cube" argument by spaul67. And for that you need the same Flow/Stock ratios. Problem is, you gonna wait A VERY LONG TIME for that to happen to silver, if at all.
First you have the problem of "substitution". It goes simply like this: Why silver? Why not platinum or palladium? Thus, "STOCK" will drop.
Then you have the problem of "recycling". If the price of silver goes high enough, people will find means to recover it and sell it back to the market, thereby INCREASING the FLOW.

dieuwer said...

Here you go: "U.S. set to overtake Saudi in oil output: IEA"

http://www.marketwatch.com/story/us-set-to-overtake-saudi-in-oil-output-iea-2012-11-12?dist=lcountdown

KindofBlue said...

FOFOA

"There are only so many profitable loans that can be made at any given point in time. Eventually you run out of responsible people with good credit with whom to extend loans. With securitization, the banks started making more profits from the fees from selling securitized bonds to savers (mostly pension funds and foreign CBs) than from their normal business. So once you've run through all the good borrowers with credit, where do you go? You create new borrowers by lowering lending standards, especially if your profit is now coming more from sales commissions than from interest. This was demand-driven, not bankster-greed-driven. The banks met the demand and made a profit from the fees while being spurred on by ignorant politicians.? The banks never wanted to carry sub-prime mortgages on their books to maturity, but once the collapse began they had no choice. Neither did the Fed."

Whether your intent or not, this seems to let the clearly fraudulent practices of the bankers 'off the hook'. A while ago a Chinese business man was arrested (executed, I think) for selling baby formula tainted with talcum powder. Would his defense be that he was just meeting the demand for baby formula?

A small but important point in an otherwise stellar post.

Edwardo said...

More secessionist talk. Quelle Surprise!, it's from Texas. Maggots rejoice.

http://www.huffingtonpost.com/2012/11/09/peter-morrison-texas-divorce_n_2100165.html

KindofBlue said...

The Dork of Cork

Your post at 7:12 AM brings to mind the quote from Austin Powers:

"You just don't get it, do you Scott?"

Human nature is what it is and does not change. Or, that it changes on a time line so long as to beg a difference.

I don't say this to be rude. There is no perfect system till we have perfect people.

duggo said...

@ BrotherJohnF

When religion enters logic exits.

Barry Michaelmore said...

When religion enters logic exits.

Amen, brother duggo!

Jeff said...

Diewur,

The idea that the US will become an oil exporter, let alone energy independent, is pure propaganda and fantasy by the Wall Street Journal.

Here is what they really said:

'The United States, which currently imports around 20% of its total energy needs, becomes all but self‐sufficient in net terms by 2035 thanks to rising production of oil, shale gas and bioenergy, and improved fuel efficiency in transport."

http://www.worldenergyoutlook.org/media/weowebsite/2012/factsheets.pdf

which is still complete nonsense, but different nonsense from what the Wall Street Journal is selling.

If you believe the US is suddenly going to start pumping 11.1 million bpd I have some dry holes in Texas and Oklahoma to sell you. Don't believe the hype.

A dry hole is a dry hole; is oil production increasing in Cantarell, Texas, the North Sea, Alaska? Are new major fields being discovered? No, this is sleight of hand with statistics, and the fact that they lump various kinds of gas into 'liquid fuels' to distort the true picture.

If you want the truth about US oil, use the eia.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus1&f=a

alfa-or-beta said...

The Dork of Cork said...

But they won't be able to spend it as there will be no tribal societies cohesive enough to sustain advanced life.
Their claims on life & wealth will no longer hold any meaning - this is why Gold was buried in the 400 -500 AD period , it could not be spent.

---

Very true with respect to the implosion of the west roman empire in the core, as well for the periphery. And one can not discount the possibility of ww3 or such upheavel in the current world either, that will render stash of in quite different light than peacefull musings about after FG situation. That's why even gold revaluation favoring global actors are doing it so gently as to not rock the boat too much.


Michael dV said...

an aside
if the entity that is 'missing' it's 20% 'target' for rise in the price of gold decides to get it right this yea,r then gold will close just above 1860.

Totara said...

h/t to Blondie for suggesting David Graeber's book, Debt: The First 5,000 Years several threads ago. Although I am only part-way through the book, the ideas which it contains so far align very well with the theme of this post. Graeber writes from a historical and anthropological perspective. He debunks the notion that early societies were based on barter, which Adam Smith promulgated, as a complete myth.

Motley Fool said...

brotherjohnf

Here is something, which I find sad, to ponder.

At some point you will wake up to the fact that you are an unwitting pawn of the bankers you proclaim to hate so much, and were advancing their agenda.

I hope the realization does not shatter your mind.

TF

Nickelsaver said...

brotherJohnF,

In Hebrews 9 we can see the concept of credit clearly demonstrated within the Jewish Old Testament rite of animal sacrifice. In fact, as Christians we know that it was God's plan (from before the foundations of the earth) to redeem (purchase) mankind from his fallen state by the sacrifice of His own Son (Jesus). And that the animal sacrifices were just acts of (credit) towards the actual (payment in full) of Christ's blood being shed on the Cross.

The interesting thing is that the Jewish religious leaders of Jesus day(Pharisees and Sadducees) couldn't see it. It was hidden from them. They believed that they were justified (redeemed) through the Law and Sacrifices. But it was only credit; credit based on faith in the ONLY real redemptive sacrifice, the blood of Jesus.

Jesus understood their hypocrisy.

Jesus went into the
temple of God and drove
out all those who bought and sold in the temple, and
overturned the tables of the money changers and the seats of those who sold doves.
13 And He said to them, "It is written, ‘My house shall be called a house of prayer,’ but you have made it a ‘den of thieves.’"


Doves, lambs, goats, etc. were like money used to gain forgiveness. And that money was exploited by those leaders, held over the heads of the unknowing.

We can see a similar phenomenon today. Dollars, which are really claims on REAL things of value, are treated as if they are payment in full, but they are not. For they are merely (as you say) a promise of payment (credit/debt).

To be 'paid in full' is to be rid of a counterparty. In terms of salvation, the counterparty of the priests was eliminated by direct access to God through His Son.

In terms of currency, payment in full occurs when you exchange it to hold a thing of value (physical possession). And you can hold many things. But once you hold a thing of value, that has no counterparty, that thing is not money, but the genuine article itself.

Interesting observation from Hebrews 9, there is no mention of silver ever being used in the Temple of God, only gold. My personal belief, God demanded only the finest, most perfect to be used.

Now silver is a physical item. It has value. And you can take silver as payment in full. But does it have a counterparty? Yes, in fact it does. Silver is an industrial metal. It has a utility now, that it did not once have. And that utility as an industrial good, with a counterparty of industry, makes it a very poor store of value. Because it's value is derived from it's industrial utility, not it's use as a wealth reserve. For it cannot be both.

Also, silver is no longer money. It is to say, this Oxen is more valuable to be at the head of a plow, than to be sacrificed on the alter of God. Particularly since Jesus has already made the payment in full.

Now let's talk about confusion. You know Jesus often taught in parables. Why? Was he an author of confusion? Certainly not. But in fact, God has choosen to hide many things from the hearts and minds of men, until such due time as they would be revealed.

So much so, that I would dare say that no man sees the entire picture. But, He did give a roadmap, His Word, as that which to measure all truth against. And since I, being born of the Spirit, do testify concerning, both the truth of the Gospel, as well as the truth of Freegold (which I understand as being in perfect harmony with my understanding of Scripture), who are you then to accuse me of being confused, since you lack the understanding that I have.

I will thank you to please reserve your supposed biblically based and hypocritical judgements, for you are in fact the one presenting the metaphorical animal sacrifices. And those that follow your truth, they are but sheep led to financial slaughter should the day of dollar reckoning come to pass and they hold silver, not gold.

Tetelestai

brotherNickS

Nickelsaver said...

Sorry, quoted verse is Matthew 21:12,13

Jesus went into the temple of God and drove
out all those who bought and sold in the temple, and overturned the tables of the money changers and the seats of those who sold doves.
And He said to them, "It is written, ‘My house shall be called a house of prayer,’ but you have made it a ‘den of thieves.’"

Tony said...

Freegold being discussed at length over at Turd's site in the comments section, in case anyone is interested:
http://www.tfmetalsreport.com/blog/4312/outside-reversal-week

Pat said...

Deep concepts that require a lot of historical context don't play well at most other blogs, Mr. Ferguson's included.

Pat said...

I think the problem starts here.
"Everyone knows where we have been. Let's see where we are going!" -Another

Well, maybe "everyone" in Another's circle, plus some sheiks and Henry the K, but in actuality hardly anyone knows where we have been, and fewer still want to spend the time and effort to read up enough to get to the end of the Trail. Sans the regulars here of course.

Michael dV said...

from the prior thread
byiamBYoung: the St. Kitts comment was flippant and, yes I was considering a second passport but $250,000 was not in my budget.

VtC: the Kissinger post (form 1974) was interesting in that HK says he does not think the Arabs have much interest in gold....it was also interesting to hear HK deny much knowledge about gold. He certainly did not sound like a guy who was going to use gold to take over the world. He just seemed to have a typical interest for the time.

Victory said...

...Gold is Money, everything else is Credit

....Gold is Wealth, everything else is Credit

....Gold is Wealth, everything else is Money

Woland said...

Michael dV:

The funniest think Henry K said in that 1974 meeting with
Enders was when he suggested that we could "stick the arabs
with a lot of gold". Well Henry, we really stuck it to em! good
for you! (hell, I wish he'd a stuck it to me too!)

Alex in Montana said...

MichaeldV,

Gold Standard and Germany.

Thanks for response. My only point was that various nations with enough gold might attempt a gold standard regardless of its efficacy in the long run. Let's assume 5 years from now gold is at $7,500. Germany, China and the US and a few other countries with gold get together and said they were buyers of gold @ $7,500/oz and sellers at $7,600/oz beginning a central bank price discovery process. Within a few weeks/months the price settles at $8,000/oz for example. The price of gold would be discovered daily in the open market but the Central banks would only adjust their price weekly/monthly. Gold would not be too high or too low as the currencies are not fixed permanently at all.

I just don't trust the Central Banks and governments that set them up. They will only give up their power grudgingly so I see something like this as a possibility before we see freegold. They might fight freegold with all kinds of experiments whether they are efficacious or not.

M said...

Karl Denninger interview with Casey research.

This is an interesting interview because its a basically HM socialist vs a deflatinist.

Denninger is a smart guy but he is so utterly clueless on what hyperiflation really is.

http://www.youtube.com/watch?feature=player_embedded&v=vyUSvy4LUZk

Wil Martindale said...

FOFOA,
A good post, though I would probably substitute "circulating currencies" where the broader term "money" is used if only to avoid an uneccessary argument over semantics.

What perplexes me is the continuing allegiance to the validity of the Euro experiment.

Even Another would have gasped at the present state of affairs, having gone this far for this long. It is not for certain in my mind that the BIS does play the "big poker hand" for the hyperinflationary "value paradigm shift" you speak of will include many revelations about where the gold really is and of what purity.

In his day the CB's did protect "their good name" on paper, and yet in this day part of the paradigm shift will be a realization that no name, no number on any paper is truly "good". This I believe is the context of Blondies association, "credibility" as opposed to "credit worthiness".

Even when I place my good name on paper, there are certain logical assumptions which do not appear in nor are required (we thought) to be inked in the fine print.

A "shrimp" assumes that a lender, as counterparty, follows certain generally acceptable principles of good business that validate the contract.

We "assume" that the CEO and board of directors are not whoring crack fiends who would stab their own mothers in the neck for a piece of silver, within these "venerable" institutions.

Seeing that these assumptions are illusory, most financial contracts in this day and age are "null and void" by Another's standards. Soon we will ALL see this.

Much has been made of the ECB's line 1 asset item of "gold AND GOLD RECEIVABLES". Need I say more than the emphasis on receivables?

This revelation about where the value is will be harsh. It is one thing for a pile of paper to go from "immense wealth" to "zero". But when we see it go from "zero" to a "lifetime contract of indentured servitude" based on future production, we will come to understand the hypoerinflationary tax it represents ... and this I believe will include an understanding of where the gold really lies -a revelation more astounding than anything in officialdom ever contested by John Williams.

For the real question the CB's must ask is not so much "did we lend it out to the right people" as much as as in, "which socio-political ideology now holds it".

The Western banking community does feign capitalism, last I heard, though corporatism (or corporate fascism) does more acccurately represent what the IMF$ now represents.

Not ALL "old values" are GOOD values in their repackaging for our modern times.

We may have greater concerns ahead than the preservation of our purchasing power.

dieuwer said...

Some interesting news today:

The Chairman and President of the Shanghai Gold Exchange told the LBMA gathering that the Shanghai Gold Exchange will launch an interbank market early next month that will initially begin with spot contracts and will gradually offer forward contracts.

....

China's Agricultural Bank, plans to launch trading of precious metals overseas in the next year or two. China's Agricultural Bank competes with peers including Industrial and Commercial Bank and China, China Construction Bank, Bank of China and Bank of Communications, among others, in attracting retail investors.

The bank sells physical gold and silver, and offers a gold accumulation plan that allows investors to contribute a small amount of money each month and take physical delivery after a period of time.


http://seekingalpha.com/article/1000951-lbma-chairman-says-chinese-gold-allocation-to-rise-sge-to-launch-interbank-market

costata said...

Woland,

The funniest think Henry K said in that 1974 meeting with Enders was when he suggested that we could "stick the arabs with a lot of gold". Well Henry, we really stuck it to em! good for you! (hell, I wish he'd a stuck it to me too!)

LOL

I understand the strategy described by John Perkins. It's just another variation on a theme - mercantilism. When the USG began their foreign aid programs decades ago one of the conditions attached was that US corporations were to be given preferred contractor status in projects. Sounds reasonable does it not?

It naturally follows from this that debt has to be in US dollars. The countries receiving the dollars wanted them because the US dollar was/is the reserve currency. Unfortunately the aid came at a high price. All of this is self-reinforcing - a system.

I agree with Sir Tagio and other commenters who have advised everyone to put aside their emotions about the actions of the players in this drama. Better to attempt to see what is as opposed to what ought to be and accept human nature as an inescapable fact.

Michael H said...

Luke,

Regarding gold imports into China, see this post from Bron:

The hypothesis is that much gold is 'round-tripping' into and out of China, and is serving as a way to move Renminbi out of the country and bypass the capital controls.

As to the question of "Can someone explain what will cause the paper holders of gold to all of a sudden want physical?",

I think the answer must partly lie with the expression from ANOTHER, that the value of something is determined by the person you are trying to sell it to.

So it may not necessarily be the holders of paper gold, but the buyers of gold in general, who make the decision that paper gold is worth less than real gold.

And keep in mind that 'paper gold' here mostly refers to fractionally-reserved, unallocated gold accounts at bullion banks, not COMEX contracts.

costata said...

Now I see why Jim Sinclair seems so close to the position of many here (my emphasis):

Dear Yra,

Once you securitize gold you have created an acceptable form of a new currency that will compete with the present fiat system. Yes, a bond could act in the marketplace as a currency under present circumstances.

Is not gold itself today acting as the three criteria for the classical definition of a currency? Securitization of gold in one form or another will come, but only as crisis mode is approached.

When have financial leaders ever lead? They follow the flow, kicking and screaming, and this time towards gold.

This makes this market in gold much different from 1968 to 1980 March.

Regards,
Jim


Now we change a word or two:

Once you securitize gold you have created an acceptable form of a new currency that will compete with physical gold to reinforce the present fiat system.

We could replace the word "securitize gold" with fractionalize gold or create derivatives of gold and voila we're on the same page except that Jim is referring to the future and many here look on this development as a past event.

Why draw the line at 1980 Jim? How about viewing it as a continuum from 1968 to the present? Once the USG broke the link to gold every US dollar and debt denominated in dollars became a derivative of the physical plane. The connection is the redemption of dollars for commodities and assets. Break that connection in people's minds and you'll have your "currency induced cost push inflation" in a New York minute.

There's been crisis after crisis since 1980 but each one has been more intense. Why? You nailed it Jim, right here:

When have financial leaders ever lead? They follow the flow, kicking and screaming..

...and this time towards gold.

100 per cent agreement about gold from this anonymous blogger Jim.

Cheers

Michael H said...

Holly,

But what separates our system now vs a freegold system?

Not sure if your question was answered yet, but try:

How is that different from Freegold?

I always held the simple belief that as interest rates rise, everyone will begin to default and the fed will print. This money would be added to the monetary base and massive inflation would follow as credit was extended off of this money.

If you are interested, FOFOA has written several posts on hyperinflation.

One key is that we do not expect credit to be extended off of the new base money. Rather, the base money is being created to offset the defaulting credit. But, then the base money creation will just keep right on going!

DP had made a nice chart showing how it might play out.

As for unlocking gold's value, it is not only about fleeing a HI currency, but about a changing world-wide reserve asset. Currently, the worldwide reserve is debt, and USA debt chiefly. Once that proves to be an unreliable reserve, the world will require a new reserve asset.

And I don't think the world will allow a handful of bullion banks to issue fractionally-reserved credit of the world's reserve.

costata said...

Michael H,

The hypothesis is that much gold is 'round-tripping' into and out of China, and is serving as a way to move Renminbi out of the country and bypass the capital controls.

Plus capital flight through false invoicing for imports/exports. Did you note the comment earlier from one of the discussants about China's holdings of USG paper dropping? It's the only way they can supply the local demand for US dollars and other currencies.

Michael Pettis puts too much emphasis on exchange rates in his analysis. Of course that's an important factor but it's the structural issues that are driving this. Issues that the good professor is well aware of.

In a crisis the Japanese go home. In a crisis the Chinese flee their "homes" and go to any place they view as a safe haven even if they can only do so through proxies (their children for example).

Michael dV said...

Alex in Montana
what happens between here and some ultimate expression of freegold...who knows. I doubt anyone expects to wake some glorious morn and see that all is set right and fair. I do not believe that we will see any attempt to return to a 'gold standard' for the reasons given but also because I simply cannot believe that the world will ever say: "hey, now it's China's (or any one country turn to have the exorbitant privilege". Triffin saw that problem. I suspect we will see the fall of the dollar and the restatement of several currencies in the style of the Euro. The technical details are unclear to me but something in the way the Euro works now....periodic restatement of the balance sheet with a free market in physical gold.

costata said...

h/t MacroBusiness blog for the summary below. And I draw your attention to the quote from Sheik Yamani below.

Find below the executive summary of the International Energy Agency’s overnight release of its World Energy Outlook 2012. There are some quite incredible factoids in this document including:

> the US is set to overtake Saudi Arabia in 2020 as the world’s largest oil producer

> the US is set to become energy self-sufficient

> unconventional gas supplies are set to supply half of expanding global supplies

> global LNG markets are set to converge and pricing mechanisms will too

> Iraq is set to be the swing producer in oil markets

> water is set to become very valuable indeed

In short, energy is about to reshape the world. I thoroughly recommend you read it.


http://www.macrobusiness.com.au/2012/11/the-energy-revolution/

Extract from Page 33 "The Carbon War: Global Warming and the End of the Oil Era", by Jeremy K. Leggett.

The architect of OPEC's emergence as a power in the early 1970s was the then Saudi oil minister, Sheik Yamani. Yamani did not call his strategy nationalizationbut 'participation'. He sought, and got what he called 'an indissoluble marriage' with the oil majors.

The oil companies at first fought this tooth and nail, backed by bullying from parent governments. In 1973, US Secretary of Defense James Schlesinger actually threatened to invade Saudi Arabia.


Looks like the "indissoluble marriage" may be headed for the rocks:

Iraq is set to be the swing producer in oil markets

The "death" of oil (and fossil fuels in general) appears to have been greatly exaggerated. Note the posturing about an invasion while Kissinger was busily cutting deals with the Shah of Iran to drive up the price of oil. Geopolitics is all smoke and mirrors.

Wil Martindale said...

MDV,
You can mark it to market monthly, but how much gold is in the vaults vs. "receivable" on the ECB balance sheet?
We have already seen Germany receive coin melt as bullion grade as far back as 1968. The games people play (by IMF rules) seem to be all part and parcel to this concern:

"Does a CB have collateral to lend it's gold? Understand, they only lend their good name on paper, not the gold itself. The gold that is put on the market in these deals belongs to someone else! The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?".
Trust the commercials who broker these deals? Think MFG or Sentinel. I think not, they are the wrong people after all.

Wil Martindale said...

The "official gold holdings" as reported by the WGC or anyone else for that matter is the sack of lies.
When the truth comes out about where the bullion grade bars REALLY ARE, then we will have Freegold.
As for the odor of shit, that emanates from a f'Art full of hot stinky air which seems to be passed between every post.

tintin said...

Turkish prime minister said what?
http://english.sabah.com.tr/economy/2012/11/10/erdogan-suggests-shift-from-dollar-to-gold

Careful Erdog, you don't want to follow Sadam Hussein or Gaddafi, do you?

Unknown said...

FOFOA seem to think hyperinflation will happen in 2013 or 2014. Why is that? Timing hyperinflation can be very tricky, and many hyperinflationists dont think it'll happen until after 2015.

costata said...

tintin,

Thanks for that link to the Erdogan piece. Good find.

RJPadavona said...

As y'all can probably guess, I'm not much on religion. But growing up in the Bible Belt, you can't help but hear a few stories from the Good Book over the years. And hey, who doesn't love a good parable?

Anyway, there's a reason Judas betrayed Jesus for 30 pieces of silver instead of gold. It was to stress the importance that Judas sold Jesus out for a meager sum. If he'd done it for 30 pieces of gold, some might say "Well, who could blame him?"

But he didn't. Judas double-crossed Jesus for some measley silver coins. What kind of asshole does a thing like that? Sell the Messiah out for the POOR MAN'S gold?

You're right, Jeff. There is a song for every occasion ;)

Thirty Shekels Of Shame


FOFOA said...

For anyone who would like to read J.P. Morgan's full testimony before the House Bank and Currency Committee on Dec. 18 and 19, 1912, with cross-examination by Samuel Untermyer, for context, here is the full 55 page transcript of Morgan's testimony as archived by the Library of Congress:

http://memory.loc.gov/service/gdc/scd0001/2006/20060517001te/20060517001te.pdf

costata said...

FOFOA,

I'm not describing the current state of banking. I am describing the timeless state of the emergent banking model.

Understood and FWIW I agree.

I think you pinpointed the core of the problems in banking in our time in one sentence in this paragraph of the post (my emphasis).

The borrower already has the credibility, the credit, and the banks are simply facilitating the exercise of that credit so that it can be used in transactions, and so that the counterparty to those transactions doesn't need to understand the borrower's credibility. The bank has already verified it and now stands behind it. This is the very essence of money.

In my opinion the core problems are right there. Having invented some "innovative" systems for transferring risk the banks in many jurisdictions no longer stand behind the credit they issue or accept. Therefore they have no (or much less) skin in the game when it comes to verifying the creditworthiness of their customers.

As far as the basic operation of bank lending is concerned I think it's impossible to sustain the argument that banks supply credit into existence. Borrowers demand loans into existence. The banks may be very clever in the ways they encourage borrowers to over-borrow but they can't be accused of forcing people into doing so against their will.

There's no "duress" as the legal eagles might say. If there was the contract would be unenforceable, n'est-ce pas?

My observations lead me to the conclusion that the ECB isn't moving toward a system with centralized "control over the credit volume created by their commercial banks". I see them reaching for the tools to monitor the credit quality rather than volume or allocation of credit to specific sectors.

At the same time they are dealing with the cross-border problems. For example regulators taking the attitude that credit quality issues in loans outside their country on the books of banks domiciled in their jurisdiction aren't their problem. All in all it should ultimately be a much sounder system.

Anyway that's my 0.02 on those issues.

Michael dV said...

Will
I have no opinion as to how the big guys will play 'show me yours and I'll show you mine'. I suspect that the rest of us will definitely have to produce the goods.

Delusional Investing said...

Thank you for your post FOFOA.

Ahh semantics..

"Money is credit" vs "money is stuff I use to pay for stuff"

Reminds me of (monetary) inflation vs (price) inflation.

On one hand, you have a historical, thought inspiring and useful definition, and on the other hand, you have a modern, mind numbing, and unfortunately common definition..

Jesse McL said...

Hi, this is a 'turtles all the way down' question. Apologies as it probably seems really dumb:

The borrower already has the credibility, the credit, and the banks are simply facilitating the exercise of that credit so that it can be used in transactions, and so that the counterparty to those transactions doesn't need to understand the borrower's credibility. The bank has already verified it and now stands behind it. This is the very essence of money.

How does a (commercial) bank come into existence? Why don't I get my friend to become such a bank, evaluate my credibility, loan me $Million (with no collateral), which I then buy some real stuff. Profit...? Or not? Why or why not is my question.

Thanks in advance. Love this post by the way!!! Thanks FOFOA.

Tekin said...

This blog has discussed and stressed the importance of one-to-one correspondence between monetary and physical planes. The origin of the current monetary problems has been tracked to the breakdown of this relationship.

Now, I am surprised to see that, in the design of the future monetary system, the constraints applied on the monetary plane by the physical plane are loosened:

The borrower has credibility. All right. Banks create money to socialize this credibility? What about the physical plane? Are there sufficient loanable goods, physically? Banks check the borrowers credibility and there goes the loan, with total disregard of the physical plane.

What is the constraint the physical plane applies on the monetary plane? Invest-able funds, I believe. Now that the savings are channeled to gold, some funds would seek superior returns and search for investments, while taking the risks. Bank loans should be constrained by credibility and invest-able funds.

The argument that bank profitability would be sufficient to regulate bank loans is weak, due to the too-big-to-fail concept, as demonstrated in the recent years. When the shit hits the fan, the losses of the financial system will be nationalized. No doubts about that.

However, the signs I read here point out that, banks would be given license to expand credit. Ha! Why am I surprised? That is what we have seen in the history, since time immemorial.

So, what to expect? I do not think that banks would directly switch to insane credit expansion right after gold revaluation. Events would progress in phases.

In phase I, right after gold revaluation, banks would somewhat limit bank loans to invest-able funds, while waiting for the public to forget the recent monetary mayhem. After gold revaluation, any one with 10 to 20 years of horizon – this means most of the public – should stay away from gold. However, due to constant barrage of propaganda applied by the media, these people would buy gold at the most “inconvenient” phase.

In phase II, after the system gains people's confidence, some mild over-loaning should be expected.

In phase III, the people would discover that, they did not score any real gain after buying gold at the beginning of phase I. They would also believe that the monetary system is robust and perfectly designed. That is when the new tulip mania would start in earnest.

Pete T said...

Brilliant! Again. As always.

Börjesson said...

I'm only halfway through this excellent post as of yet. I'm taking it in smaller chunks, since it's too big a mouthful to swallow in one gulp. But one thing in the post, I actually find a bit annoying.

Much of the first part of it is devoted to explaining that there's a crucial difference between wealth and money, that gold is excellent as a storage of wealth but that money equals credit: in short, that gold isn't money. And yet, the whole post is started off with a quote from Another saying that "gold is the only money the world has ever known". This is not helpful!

I understand that money is just a word and depends on how we define it, but there's obviously a different definition used in the initial quote than in the rest of the text. Was this deliberate? If so, why? For me, it only leads to confusion.

Robert said...

@Börjesson

Yes, it seems that we need more words to separate the concepts. Just as Another said "gold is the only money the world has ever known" JP Morgan turns around and says "money is gold and nothing else" at the bottom of page 48 of the link that FOFOA posted in the comments.

Woland said...

Hi Jesse McL;

From your avatar, it appears you are going to make at
least one new friend here - Beer Holiday. As to your
question, and it's a good one, the answer is surprising
in its simplicity. In the business of judging the capacity
of a potential borrower, his "credit worthiness" if you will,
who should we turn to? The drunk beneath the lamp post,
or the man who, by his OWN success in having continually
produced surpluses, is by that very FACT, as shown in his
accumulation of REAL CAPITAL, best able to discern that
capacity in others. It is he, (or in the days before the Fed)
people like J.P. Morgan, who were the arbiters, (as in
arbitrary) of where credit should flow. Not very democratic,
but hell, it was HIS capital at risk. Today, when the top
guys at a bank make a loan to their prep or grad school
buddies, they have to cross the T's and dot the I's, but it's
not their capital at risk. It is the dilution of society's capital,
'cause that is who will take the loss if the loan blows up.
Cheers.

Wil Martindale said...

Currencies are credit, gold is wealth. I think we can get past the semantics of the broad term money by defining these more specifically, but what I spoke of regarding credibility was brought up in a way by Jesse.

To my mind, the "banks" have lost ALL credibility. This is a big step toward "their paper" losing all credibility. ALL of it.

AND ... they have completely eschewed the creditworthiness of borrowers, as well as their borrower-based debt instruments.

Look at the recent findings of fraud at the DTCC. Look at the "AAA" CDO's and related MBS's that facilitated the '08 meltdown.

So I think we are in fact in the midst of a paradigm shift whereby the "assumptions" I spoke of earlier are changing ... and this, to me ... is where the credibility (hat tip Blondie) of gold becomes ever more evident.

Except that ... they are adulterating the gold -a new wrinkle in an old story ... China openly producing counterfeit coins for 20 years we now see, tungsten bars showing up everywhere, coin melt passed off as bullion grade in interbank transactions, for years and years.

So the question of quality does linger ... and this is not lost on the detractors of gold, who would love to impair its credibility with stories of adulteration and fraud, as if fractionalized paper gold were not fraud enough.

There will be more huge financial losses in the coming years I think, with tungsten, iron and copper slag, fake coins and the rest. And these do affect the perception of credibility.

In this era of perception management, expect more of this, real or not.

Woland said...

Hi Will;

I beg to disagree. The profits which may accrue to the faking
of gold are but a speck of dust, in comparison to the giant
boulder of profit to be obtained by the faking of paper. And
by faking, I mean anything from a Groupon or similar IPO, by
which the insiders dump their shares upon the public to the
cheers of the underwriters and "analysts", to simple old North
Korean "super notes", the envy of counterfeiters worldwide.
Just my 2c, FWIW

Woland said...

I guess I'm in an overly chatty mood this AM. But a wave
just came over the transom that has me wondering. Greece
has just been given 2 more years, until 2022, rather than
2020, to reach a target of 120% debt to GDP ratio. Not much
on the surface, but it provoked an open row between Christine
Lagarde, head of the IMF, and a German counterpart. She was,
as the head of the organization, very much opposed to the
extension, but I view that as merely her expression of the
position of the "institution" itself. Now FOA or Another said
that, at the appropriate time, the EU would withdraw from the
IMF. What has me wondering is, if the EU takes a position so
contrary to the wishes of the US, the IMF's largest contributor,
during a time of "fiscal crisis", might they be trying to provoke
a veto of the troika decision, in order to give them a good
excuse to withdraw?

I would be interested to hear your thoughts on this matter.

dieuwer said...

When will Greece finally default and re-introduce the Drachma?? This "pretend-and-extend" game has gone on long enough.

Woland said...

"I must be cruel, only to be kind
thus bad begins, and worse remains behind". Hamlet

with a big hat tip to Satyajit Das at,..... of all places,
Marketwatch
(the home of usually feckless, F---tard commentary)

JoyOfLearning said...

Thank you very much FOFOA. A long awaited long article has finally arrived again. Yeayyyy!!! I must admit I didn't understand very well this article... I mean I liked every section, I just didn't get the big direction/thread... but maybe that will come in better on a second read.

Off topic: an interesting german article here: goldsilbershop.de/silber-mehrwertsteuer.html ... the way it explains that the previously semi special role of silver of just 7% VAT is going away in 2013 (apparently this was just in Germany, not also in Austria?)... it reminded me of the impression I often got in the comments here, how a lot of the older members with deeper understanding keep explaining to the newcommers that though they may be historical brothers one of these two metals is heading in a very veeery special and unique direction, where the other brother cannot follow.

... unless of course the EU loses it's direction too and this is just a first step in governments finding a new parasitic tax revenue source, and silver is simply the easier place to establish a first foothold... I still can't believe there used to be a time when a 1% income tax was new & shocking ... and of course, like all such measures introduced today, ... temporary :)))))

JoyOfLearning said...

about the link above, a correction: it seems I had stripped away http://www. to make it shorter but on check it seems to not work without that so the full link is actually http://www.goldsilbershop.de/silber-mehrwertsteuer.html

KnallGold said...

Turky prime minister says Gold should replace $ as reference, looks like Erdogan "gets it":

http://www.youtube.com/watch?v=eCk0lYB_8c0

Heard Greek got 4 billions in the credit market, will get Another 1 more in the open market, good news!? Surely looks like we are getting forward faster, finally!


Here's a chemistry lesson for the coming Meritokratie (don't do this at home...):

http://www.youtube.com/watch?v=8TPnns-5UxA&feature=related

Liked also the alkali chemistry, clearly antidepressive ;-)

http://www.youtube.com/watch?v=eCk0lYB_8c0

dieuwer said...

Soon, the credit and solvency of Germany will come into question as they cannot keep paying the bills for Greece forever.

KnallGold said...

Oh Tintin already posted it, really good news.

On the propaganda front, did you notice that the "global warming" becomes more and more "climate change"? Altough I find the latter a fine example of a pleonasmus.

Coal as energy source is also becoming more prominently, hey its just CO2 it produces which truther know to be a minor constituent in atmosphere ('bout 0.037%, used to be 0.03% before "$ inflation" hit us) and even more minor contributing to a "green house effect". (and then think first H2O!). Man made was agreed to be 2-4%, before the discussion got canceled by that stupid globalist Al Gore.

Ask yourself, is there really a layer of glass up there? So whats green house effect then if convection is intact. (Guess at least Felix Baumgartner would have reported the glass).

And then, CO2 is heavier than air, remember the dry ice demonstrations. So how can they think of a layer high up there? Plus, what comes through, as IR, will also go out. Crucial is the quotient.

If you look at the temperature cycles on a 100000 year scale, they are so beautiful, we're just at the high (thank God), but cycles are not dead and if your into fractals, before a big change, it usually goes first to the opposite is a ever repeating rhyme (ask a rally driver how you steer into a curve, likewise on a motorbike, could expand here...).

Surely a couple of tenth degrees temp. rise is meaningful if for example the medium is -0.3°C, if you look at ice. But those melting icebergs, always in fall season like leaves, gives me more confidence in cycles than anything else.

Michael dV said...

Börjesson
I think you are missing the point of the Another quote. He begins with that statement but then challenges us to consider something else...and 'we had better get out aspirin ready'...He is about to show why that statement,that gold is money,...is not quite correct.

Michael dV said...

dieuwer
the working hypothesis here seems to be that Greece will not leave the EU. It still benefits from the currency and the alternative drachma would hyperinflate rapidly anyway. FOA, if I recall, said the politics were a sideshow. Ultimately no country would leave. He apparently thought eventually reality would catch up to the grand socialist plan and after some pain a workable solution to the role of the state in the peoples lives would be found (actually I am guessing at his view here). This is the drama we see playing out right now. Soon we should know if the ECB will cave and do what the Fed is doing, or if it will behave as we expect and act like a currency without a nation making demands upon it. Duisenberg seemed to believe in that outcome too.
Every other analyst on the planet seems to think the Euro is just like the dollar, that someone will get on the phone to Draghi and say : 'get to work', print damn it... We here think Draghi will never take that call. He will do what he is supposed to do, keep inflation at less than 2%....that's all. Soon we will know, though FOA did allow for some inflation of the Euro as the dollar collapse made the inflation of the Euro look like it was standing still.

dieuwer said...

"If something cannot go on forever, it will stop"

burningfiat said...

JoyOflearning,

What an excellent way to tell the German public that silver is an industrial metal (Bad hoarder!) and Gold is not.
As Gold is still VAT-free, now there will be 19% more cold hard reasons for investing in gold compared to silver. Before there were only 7%.

I will not be surprised however to find the silverites spinning this as BULLISH!!!

Motley Fool said...

Having some fun over on TF metals.

Some background music if you care to read

Lemuel Habbakuk said...

I feel like reading the entries on this blog really takes one or two tries to fully grasp.

I have a few spur-of-the-moment questions I would love to throw out here:

So much of what you say resonates: Watch what the Giants are doing (buying gold in anticipation of a shift to gold being the new world reserve asset) but there is a part of me that just has a very hard time accepting that gold could be sustainably valued at 20x or 30x it's current value. The relative value of the 170 000 tons of gold out there would so overwhelm everything that I find it hard to believe such a price would be sustained. If I take 170 000 tons x 1000kgs per ton x 32.15 ounces per kilo x $30 000 per ounce I get about $160 trillion (assuming we are talking $30 000 per ounce in real terms). Wow.

I guess I just struggle with believing that this will suit the powers that be, and that they will accept it. I know some of you will say that the ECB and others are preparing for it, and I can't put my finger on it, but I feel that you are missing something. This is such a huge, gargantuan revaluation of gold relative to the rest of the world's assets, to the point where one feels you could buy the world over with a few thousand tonnes of gold...I struggle to believe this would be accepted.

Secondly: Victor (and anyone else who has an opinion on this): I have learned a lot from your articles. Thanks for the fantastic analogies and explanations. I have a hypothetical question though, if you are around for a quick answer: You believe we have a decade or two before peak oil possibly becomes an issue, I think we have much less time. I disagree, fair enough. I would like to ask, how would your perceptions of Freegold, maintaining the integrity of the Euro, anything else alter IF you had to change your views and believed that peak oil would start to seriously impact the world within, say, two years? For one thing, the Eurozone is very energy-insecure and in my estimation would be very, very hard hit (eg take a look at http://www.theoildrum.com/node/8998). Would it change your estimations of how things might play out with the Euro? Hypothetically speaking?

Cheers

Jeff said...

Lemuel,

Stop trying to value gold with currency.

ANOTHER: One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! 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"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds its worth, as in the exchange rate for another currency?

Many will "think long and hard on this", but will find little reason for this position. For it is in your history to know only "things valued in paper terms".

Your past holds little of knowing value outside of currencies, this does block the good view!

Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!"


FOFOA: ... is an American home on an eighth of a desert acre really worth 200 men's suits? Is an Ivy League education in Investment Banking really worth 2,000 barrels of crude oil? Who knows? We have been living in a fantasy of government-sponsored malinvestment and soft money financial engineering for more than six decades. How will we ever know what things are really worth before it all collapses?

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

So when the plug is pulled on the matrix and the pitcher of water disappears, how much water will be revealed in the physical plane beneath? I guess this is the $50,000 question, yes?

Jeff said...

And don't worry about the stock, Lemuel.

FOFOA: The true Giants of this world that hold large amounts of gold have a good idea what their gold is worth. And yet, when it finally gets there they will still not liquidate their "stocks". This is because gold as a store of purchasing power has an infinite time horizon. These Giants are not interested in "catching the top" like Western traders. They are interested in storing purchasing power well into the future.

I guarantee to you that the Noble families of Europe still possess some of the same exact pieces of gold that were in their families in the 16th, 17th and 18th centuries. And this is purchasing power stored (and increased) through several currency collapses!

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Dante_Eu said...

@Lemuel H.:

That value is already there. Lying still in physical gold. Just not (yet) publicly known. But those who know don’t need the public to know. So it is by this day. But that might change. Not because someone needs that change, but because the natural path will lead to that change.

And those who “could buy the world over with a few thousand tonnes of gold” have already done so. They don’t need to buy it all over again. :-)

So those who should buckle up and learn a thing or two about physical gold are us shrimps. No need to worry about Giants. They will be just fine, with or without, Freegold.

Just my 2c.

PS I still haven’t read the article. :-)

alfa-or-beta said...

Lemuel, you have touched upon very sensitive areas as to wheather is FG compatible with peakoil at all. Should there be fast onset of peakoil, i.e. hording by producers due to rapid depletion, the turmoil would likely amount to something like ww3, so no FG. In case of some deferred scenarios, e.g. peakoil hiting mild or hard sometime around 2025 or later, there is a plenty of time for optimistic and peacefull reshuffles in the economic, social, and political domain in the meantime. I'm bit sceptical about the latter, so I see something like "limited FG or aborted FG" with 3-5x revaluation ratios from current base of 2012.

dieuwer said...

Some half-baked article why silver "is guaranteed" to outperform gold....because "the mathematical model" says so.

LOL

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/9672895/Silver-price-to-increase-400pc-in-three-years.html

Naughty Slumdog said...

FOFOA,

fantastic! And you ridiculized those who bragged about lenghts of your posts: "Money is Credit"! The pinacle. A spartan statement!

JoyofLearning

Anglo saxons borrow and europeans tax. That's how they function. Europe has incredible ways of screwing the taxpayers, look what they've done with public pensions.

Euro is a fantastic case study: if euro will continue to be strong, not only periphery will crack, but the german exports will be too expensive/uncompetitive, and this will finaly hurt the savers,who are now on paper. So for the sake of the future they will continue to depreciate in a clever way the currency. And German and nordics should think how to protect their wealth without damaging the future. What's left ? Gold.

Jesse McL said...

Hi Woland,

Thanks for the answer. OK so there is a difference between 'then' and 'now', and the system has become 'sick' in the meantime. I get that point.

However I would still ask the question of the next turtle down, which is (regardless of whether the system is healthy or sick at any point), what's to stop the drunk starting a commercial bank and loaning me $Million? Let's say the sum total of his capital is the dirty clothes he's still wearing from last night's binge. Is this enough to found his bank on? If not, then how much does he need? If he needs less than $Million, then as soon as he lends me the $Million, and I default (after having spent it all on stuff), then between us we're up about a $Million vs the rest of society. And remember his bank is not TBTF, so the losses are not socialized. And yet, I've still just spent a $Million on hookers and blow. Nice work if you can get it. So my question is, would this work or not?

See the question is dumber than dumb, but after reading this latest of FOFOA's posts I still feel I need to ask it... doesn't the post say all you need is credibility, and reserves will be found if needed after the money is created? Well if credibility is ultimately subjective (I assume it is), then there must be a way to create spendable credit based on a drunk's subjective assessment of my credibility. And yet, I don't recall the last time this happened...? Not unless I spent it all on beer and I've got major memory loss (now that wouldn't be the first time... ;-)

Cheers!

Wil Martindale said...

The profit in counterfeiting gold is meager, but the impact on the perception of credibility is not quite as measurable.

Plannerz value confidence much much more than silly gold.

And of course it is the failure of confidence that marks every hyperinflation.

So their motive is based in fear, not profit.

Woland said...

jesse McL;

You need to spend a few hours learning about banking. The
first thing you need to study is "wildcat banking", where each
bank issued its own separate currency. Then you must move
on to the era of interconnected clearing of banks sharing a
common currency. Perhaps these are licensed by a state. At
each level, the barriers to entry, and stringency requirements
for bank ownership rise. If you care to do the work, you will
answer your own questions. If you don't, I doubt anyone here
will wish to spend the time. It ain't all that hard. Cheers.

Edwardo said...

Now that you've mentioned it, Jesse McL, regarding the idea that reserves will be found after a loan has been made, does anyone have some details regarding the process of first making a loan, and second, locating reserves afterwards.

ampmfix said...

Lemuel,

I also need real numbers. If as Anand explains above there is a 100,000/4,500 = 22 paper to phys flow (to be ascertained for exactitude), that is the Freegold starting point that I see feasible. Yes, x20-25 in real terms. The when is the really tricky part.

Jeff said...

budget deficit update:

http://www.zerohedge.com/news/2012-11-13/us-budget-deficit-soars-october-government-spends-over-300-billion-one-month

and some comedy from the wayback machine. Read it and laugh.

http://www.nytimes.com/1999/05/04/opinion/editorial-observer-who-needs-gold-when-we-have-greenspan.html

Woland said...

drizzle drazzle druzzle drone, time for zis one to come home.

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

For all the US bashing on this board, it seems the UK also has a huge budget -and current account deficit. In fact, the UK seems to be in worse shape than Japan.

Thus, I am awaiting the hyperinflation of the pound...

Edwardo said...

Yes, dueuwer, in time, The Pound will be pounded.

Phat Expat said...

Right about gold, wrong about banks (credit). Batting .500 ain't so bad. ;-)

Why the OCD about silver? Live and let live.

FOFOA said...

Hello KindofBlue,

You wrote: Whether your intent or not, this seems to let the clearly fraudulent practices of the bankers 'off the hook'.

I'm not letting anyone off the hook. Seems to me the bankers were let off the hook by the tribe long before I wrote this post. I'm simply observing the difference between symptoms and the disease. Your "clearly fraudulent practices of the bankers" is a symptom, not the disease. If the tribe wants to start throwing bankers in prison for clearly fraudulent acts, that's fine with me. But if we're talking about fixing a broken system, that's like a doctor treating a symptom while not even understanding the disease. And that's my point. Cure the disease and the symptoms will disappear. Investment bankers can only game the savers while the savers view money as wealth.

What will change is how we view money and wealth. Everything else flows from that!

Of course, many who came of age over the last 30+ years and decided to go into investment banking did disproportionately well. And yes, some got greedy because of it (and assumed they must be doing God's work because of the outsized rewards they received) and some, I'm sure, knowingly committed fraud to feed their greed. But this is a symptom of the system in which they found themselves. A kid who just incurred a $200K student debt to get an Ivy League degree in investment banking today will probably not be so "lucky".

I know that Joe Yasinski and Dan Flynn certainly received outsized rewards during their time as investment bankers. I had dinner with the two of them earlier this year and they told me just how much money they were previously making on Wall Street. They didn't mention any fraud though, and they didn't seem too greedy as they also told me how much of an outsized pay cut they took leaving their cushy Wall Street gig to join GBI, a new gold company. And they both credit my blog with giving them the confidence and foresight to make this move early, while there was still time. You can read more about Joe's story here.

So you can join "the 99%" and rage against the bankers, or you can think for yourself and consider the deeper issues I present here. Either way, it's your choice. As I said in the post, take it or leave it. ;)

Sincerely,
FOFOA

Phat Expat said...

Collusion between the Gov and Wall Street is what let the bankers off the hook; not the Tribe at large. When it came to TARP, QEX, etc... very few of the Tribe were in favor of these programs, irrespective of the consequences. And yet, forward they went.

And then you bring up education; another dubious beneficiary of the Gov/Banking (credit) establishment.

You might make light of the un"lucky" kid with outsized debt; but that kid, along with a legion of other un"lucky" kids just might come back to haunt you, the Gov, and the banking establishment. I'm hopeful.

And it's not about rage, it's about common decency, about making morally just decisions and considering the impact of ones actions prior to execution. If that is too much to ask of our Tribe, well, then we are all lost; FG or not.

/SleepingVillage/ said...

TARP and QE are symptoms as well. Common decency is never guaranteed when you're dealing with humans programmed to survive. Survival seems guaranteed when there's an easily exploitable system to harvest. The consequences depend on your perception.

Harvest of Earth


Perception is king.


costata said...

Edwardo,

Re: lending first and reserves coming second

That link to a Wikipedia page on endogenous money that FOFOA provided in the post is a good starting point:

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

You could also take a look at ciruit theory to help to flesh it out:

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

The ECB have published on this topic and confirmed that supplying reserves is a backward looking excercise. The commercial banks tell the ECB how much cash/reserves they need and supply the collateral to obtain it if they can't get what they want in the inter-bank market.

At the individual firm level banks borrow first and then lend. At the system level in aggregate banks lend first and then seek any reserves that they need. This is the source of the confusion about this subject. Aggregates matter.

The fact that banks lend deposits into existence is also provable at a system level but you can't prove it an individual firm level. You need at least two banks to show the book entries.

costata said...

FOFOA,

A couple more comments about the post.

It might be tempting after reading that to think that the banks, through their "fractional reserve banking", caused the Panic of 1907. But, again, that would be to misunderstand how the economy has used "money" since the beginning of time.

As Woland suggested a review of the wildcat banking period in the USA provides a good grounding in the events that culminated in the 1907 liquidity crisis. This ultimately led to the creation of the Federal Reserve system.

The term "lender of last resort" is in many ways misleading. IMO it should be read as "liquidity provider of last resort. The existence of the BOE was a core strength in the monetary regime of the British Empire. They figured out how to halt a liquidity crisis by creating a strong, independent and disciplined central bank to fall back on.

The key difference between the BOE in its heyday and the creature we have today is summed up in the Bagehot's dictum:

... in times of financial crisis banks should lend freely but only to solid firms and only against good collateral and at interest rates that are high enough to dissuade those borrowers that are not genuinely in need.

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

In recent times CBs have tended to treat solvency crises as liquidity crises. Obviously there are many reasons for this degeneracy but the results are in plain view.

Nickelsaver said...

Seems the folks at Maloney's Wealth Cycles blog had an idea to define what money is. The following appearing today.

https://wealthcycles.com/blog/2012/11/13/free-markets-explain-historical-account-of-money

An HMS masterpiece!

Unknown said...

Trying to save money? Ask for crisp new bills at the bank... http://phys.org/news/2012-11-money-crisp-bills-bank.html

victorthecleaner said...

Woland,

you might be interested in this:

Lawrence Summers in the Financial Times (early 2011): You cannot expect any country to run a primary surplus in the long run, just in order to service their external debt. (from memory).

What has me wondering is, if the EU takes a position so contrary to the wishes of the US, the IMF's largest contributor, during a time of "fiscal crisis", might they be trying to provoke a veto of the troika decision, in order to give them a good excuse to withdraw?

I don't think this is that big an issue. As far as I understand it, the German government got grumpy because they now have some taxpayer money on the line (from the first few bailouts), and when Greece defaults (as they eventually ought to IMO), the current German government will take a lot of flak domestically. Well, perhaps they do eventually learn the lesson and will no longer lend that irresponsibly.

dieuwer,

Soon, the credit and solvency of Germany will come into question as they cannot keep paying the bills for Greece forever.

I think this will not end with Germany bankrupt, but with Germany no longer lending to the south and the south defaulting. Just as it ought to.

MF,

Having some fun over on TF metals.

Now it's you who is stepping into this mine field? Unfortunately, I am too busy to reinforce you... but perhaps we should send H. M. Socialist? Will they be able to spot the irony?

Lemuel Habbakuk,

The relative value of the 170 000 tons of gold out there would so overwhelm everything that I find it hard to believe such a price would be sustained.

I have two comments. Firstly, what matters to the question of whether the price will be sustained is not the market value of the stock, but rather that of the flow, i.e. of that part of the gold stock that is cashed in by savers plus mine supply. Secondly, if the increase in the real price of gold were the only event, this would be inflationary. This raises an interesting question: If the ECB aims for a just-under-2% inflation target, and they anticipate the real price of gold to increase, how does this square? I guess that they will have to purchase a huge amount of bonds in order to flight deflation (expanding the monetary base), and eventually sell revalued gold to the former bond savers in order to reign in the bloated monetary base. The savers who used to hold debt would then be in gold while the former debt would have disappeared on the ECB's balance sheet. Black magic? No. Accounting for the reserve at a market price.

Revaluing gold need not affect the real plane. Although gold itself firmly belongs to the real plane, it has no direct connection to goods and services in the real plane. Its valuation is entirely a question of the monetary plane. Therefore, you can revalue gold without any immediate effect on the price level, provided that nobody feels any richer and starts spending like crazy. For this, I guess, a large amount of debt based savings needs to disappear, either by default or in the black hole of the ECB's balance sheet.

I guess I just struggle with believing that this will suit the powers that be, and that they will accept it.

Watch out that you don't get the teams wrong. The following is exaggerated in order to make the point: The 'elite' - that's all those who consistently produce a surplus. The 'elite' is not the politicians who are currently in office, nor the bankers. Bankers and politicians are just freeloaders in the old system. The Euro is living proof that it is the elite who is firmly in charge and who have arranged the initial configuration on the chess board in such a way that politicians and bankers will eventually be starved and reduced to their appropriate size.

...

victorthecleaner said...

Would it change your estimations of how things might play out with the Euro? Hypothetically speaking?

The Euro zone is an open economy. In aggregate, they export finished goods and import energy and resources, but both in such a way that their trade account is balanced. Once the U.S. and the UK have disappeared as consumers of the last resort, it will be a lot more difficult to achieve net exports of finished goods and services, yes, I agree. On the other hand, Europe is full of gold, and after the revaluation, they have a considerable buffer.

You believe we have a decade or two before peak oil possibly becomes an issue,

Yes, and make that three decades at full production with oil at E30/bbl in today's purchasing power. And after that, nobody will talk about Peak Oil any longer. Peak oil in a narrow sense is a property of a single oil field that's exploited only conventionally. Peak oil does not comment on capital investment, technological advances, nor on the aggregate of all oil fields used. Peak oil in a broader sense is a religion that's empirically not testable and therefore "not even wrong".

Always remember Yamani: The Stone Age did not come to an end because we had a lack of stones, and the oil age will not come to an end because we have a lack of oil.

alfa-or-beta,

Should there be fast onset of peakoil, i.e. hording by producers due to rapid depletion,

in this case, Europe would trigger freegold. This would instantly devalue oil in terms of gold and give them an advantage. In fact, the observation that Europe hasn't triggered freegold yet, is one more indication that they are not afraid of peak oil at all. In fact, none of the governments of the major powers seems to be.

but the german exports will be too expensive/uncompetitive,

it's funny to note that Greece, Portugal, Ireland and Spain now have current account surpluses. Nevertheless, Germany is still doing alright. How do they do this? Hint: Asia.

Jesse McL,

then there must be a way to create spendable credit based on a drunk's subjective assessment of my credibility.

This is how subprime mortgages worked, isn't it?

Victor

duggo said...

Don't forget chaps. Only about another month before the Annunuki arrive on Nibiru to take all of our Gold.

I must stop smoking this stuff.

costata said...

FOFOA,

I would also like to raise a couple of question marks over some of the conclusions you reach in this post. The first is in relation to your anticipation that savers will no longer hold their savings in deposit accounts with banks.

Assuming that the banking system will still be lending deposits into existence then for every loan there must be a deposit somewhere else in the system. Who will be the account holders for the deposits the banks are creating?

One of the possible post-transition scenarios could be something like Turkey in recent times. According to this article from 2011:

For every Turk who saved in a deposit account last year, three opted for gold or cash, a December MasterIndex survey showed. Those who deposit their lira at banks refuse to do so for more than a few months, according to the survey commissioned by MasterCard Worldwide.

The median age here is 29, and even people that young have already survived military rule, a succession of failed coalitions, an overnight currency devaluation, a banking crisis, a 1999 earthquake that killed 17,000 people and inflation that peaked at 130 percent in January 1995.

In 1987, 51 percent of deposits were less than a year in maturity, according to the Banks Association of Turkey. It was 90 percent by the end of 2010. A 2001 financial crisis drove 20 lenders into receivership and forced a bailout whose cost to the country ended up being $160 billion, Deputy Prime Minister Ali Babacan, who leads economic policy, said on Feb. 21.


http://www.bloomberg.com/news/2011-03-30/turkey-gold-beats-banks-as-erdogan-fights-saver-inflation-fears.html

Another scenario could be that we go back to an earlier treatment of deposits. Demand deposits (such as checking accounts) were at one time fully reserved (meaning the bank held the cash to back the deposit). Consequently these accounts didn't receive interest and in Australia you paid fees to the bank for the account.

All of the other "deposits" were explicitly recognized as loans to the bank by the bank. There were no deposit guarrantees on any accounts just first claim for depositors on the bank's assets in the event of bankruptcy. Thus deposits would be just another source of wholesale funding for banks.

Deposits that are in fact loans would be recognised as investments rather than a relatively risk-free gold reserve asset in which to store savings. This solves the problem of deposits continuing to exist in the system post-transition but retains the unique position of gold.

A third possibility I can see is that the ECB drains the deposits created in the system and only leaves enough cash in the system to meet the need/desire for cash by the citizens and demand deposits as in the checking account example above. In other words there's only one major deposit account holder long term - the ECB. Any other deposits in the system are strictly short term holdings.

Putting aside the scenarios I outlined above I keep coming back to this issue:

Assuming that the banking system will still be lending deposits into existence then for every loan there must be a deposit somewhere else in the system. Who will be the account holders for the deposits the banks are creating?

KnallGold said...

Peak oil? We still have lots of coal worldwide, also in Europe, particularly Germany, this will last 200-300 years. Of course mining is dirty, but so seems all energy sourcing. Not going to tell you that there's also about 200 years of Uranium (if it's recycled), nuclear age might end before that. Maybe because you can't control the technique.

But making predictions for decades is not easy, because it is about the future as Churchill used to say.

Rising Gold prices hurts none, neither do rising diamond prices. Nice piece here on auction, but don't tell your wife, if you have to, well, tell her that it's just carbon ;-)

http://www.dailymail.co.uk/femail/article-2216913/Archduke-Joseph-diamond-Historic-76-carat-diamond-set-make-15million-auction.html

FOFOA said...

Hello Costata,

Bank deposits constitute all of the money, except for those (relatively) few reserves which have been withdrawn for "on the road trade" (for cash use). How long people sit on money (hoard it rather than spend it) is only an issue of velocity, not one of volume. Even if all savers save in gold, hypothetically speaking, all the money is still in the banks (or "on the road" reserves).

"Who will be the account holders for the deposits the banks are creating?"

We can all get money in three ways—from past, present or future production. Past: We can sell something we own and possess that was produced in the past. Present: We can work (produce now) and get paid. Future: We can borrow against our credit (verifiable future production capacity). But each unit of money we get in any of these ways was borrowed into existence. You can theoretically trace each money unit back to its initial borrower. The money all represents present (ongoing) and future (planned) production. And the money is then canceled (destroyed) when the future becomes the past (the debt is repaid).

I know that you think the interest remains. So let's just go there. I think you're wrong, but please go ahead and make your case. No money is borrowed into existence to cover the interest portion. The borrower simply has to work an extra ~5% producing and the interest portion (gotten in the present through work ("produce now") and getting paid) goes to pay the bank employees and owners in real terms. But no extra "interest money" remains in the system once the loan is paid off. You disagree, amirite?

The only place where "real production" is siphoned away under the cover of darkness is when savers hold money and view it as wealth. This is the inflation tax. In the normal course of life we earn and spend money. It's only when we save it under the faulty premise that money is wealth that all this bad stuff starts unfolding.

I'm not saying that everyone is going to buy gold immediately with their paycheck after the transition. I'm saying that we will each understand the difference between money and wealth. We will "save" money for known expenses, including saving up for a near-term planned purchases and whatnot. But when it comes to anything in the unknown future that we want to save for, we will likely opt for tradable wealth instead.

I'm not concerned about bank "maturity transformation". That's the banks' business, and I don't think it needs to be regulated in Freegold. "Bank runs" are the biggest problem, and they are a thing of the past with this new post-33 fiat we have now. The only other problem is the devastation caused by the devaluation of people's savings during a bank run. But that, too, will be a thing of the past in Freegold.

In Freegold, savers will have both "savings in deposit accounts with banks" and wealth, depending on their personal near and long-term projections. So yeah, the banks will have some time deposits. But I don't pretend to know better than the banks or their depositors how to manage the differential. That's something for the central plannerz of the future to concoct. And I don't assume they won't (central plannerz gonna plan, right?)… I'm just not going to give my 2c because I'd rather forfeit my vote to the Superorganism. ;)

Sincerely,
FOFOA

PS. VtC: "perhaps we should send H. M. Socialist? Will they be able to spot the irony?" LOL! I doubt it.

duggo said...

Excuse me for joining in.

@FOFOA:- " It's only when we save it under the faulty premise that money is wealth that all this bad stuff starts unfolding. "

So the Central Banks are really doing us a favour by reducing interest rates to almost nothing and thereby discouraging people from saving.

Motley Fool said...

VtC

No worries. I am holding my own. Once it stops being fun I'll likely depart, but for not it's great fun.

For those that want to share in my entertaining foray, the fun starts here and continues on the next post. :P

TF

alfa-or-beta said...

VTC> so in your view (because of that bond-gold swap) there will be little spillover of "increased" gold wealth into the real asset domain during and after FG, i.e. little or no gain for the hoarders? While Jeff sais we should expect 20-30x revalutation in the hard assets, like cattle, farmland.. I'm saying modest 2-3x gains. So, which is it?

Now, adding all that cornocupian talk about no peakoil? Perhaps there is no overpopulation or environmental holocaust of this civilization on this sorry planet either?

Sorry, but this is mighty confusion at its best.

Lemuel Habbakuk said...

Thank you for the replies.

Perhaps I am focusing on stocks when I should be focusing on the flow. The article "It's the flow, stupid!" contains the issue that made me think about gold being a better choice than silver as a reserve asset, I.e. it's much higher stock to flow ratio, no matter what supply and demand prospects for silver vs gold look like.

Having that said, I want to bring up plain supply and demand for one more question. Eric Sprott seems to believe the work of Ted Butler, who I think has it wrong in that he looks only at Comex and ignores OTC market. So maybe he has this aspect wrong, but I think he (Sprott, not Butler) is not misinformed in his plain analysis of supply and demand over the years.

The question I want to ask is whether Central Banks that have been buying gold are actually going to be given the gold they think they are buying.

According to this analysis and recent Bloomberg appearances, Sprott makes a good case that there has been a massive change in physical supply and demand from 2000 to 2012. He lays out a simple case that the annual mine supply has not changed much since 2000 and yet in the Bloomberg interview I think they estimated that China will import 700 tons this year or maybe has already. I could have my figures slightly wrong, but the article below proves a massive shift.

I understand that the gold market, unlike industrial commodities, is unique because it has such a high stock-to-flow ratio and therefore one does not depend purely on annual mine supply to determine price, and that unallocated gold gets sold and is fractionalized through the creation of credit in gold etc, all leading to a completely different dynamic than exists in the copper market, for example.

But honestly, where is all this physical gold coming from? Is it coming mostly from new production, are "shrimps" being suckered into losing their physical, is there no way that central banks think they have physical on hand but merely have a paper receivable?

How is it possible that there has been a multiple increase in the tons demanded per year, which should be real physical flow (right?) and what accounts for where the supply is coming from? We can't be making up 2000 tons extra compared to 2000 based on recycling from Greeks and Portuguese who sold their jewelry. Seems to me somebody isn't getting what they think they are getting.

So, do the Fed and the ECB certainly have their gold? Do the Indians? What about the smaller, less relevant central banks?

http://www.sprott.com/markets-at-a-glance/do-western-central-banks-have-any-gold-left/

Wil Martindale said...

Thank you LH !!
Yes, shrimps have been shaken out of their physical to repay debt for decades, cubically since @2000 and exponentially since @2008.

Europe is "full of gold" or full of gold reciepts?

I do not trust ANY reports from officialdom concerning gold. I distrust most information that does not conform to "human nature" but when it comes to gold even the lies are lies.

I think our host has acheived a certain credibility because his thoughts are guided by the tendencies of the superorganism (human nature) and not the skids of disinformation flowing this way and that all about the propaganda stream.

As I said, "gold AND GOLD RECEIVABLES" is the line 1 asset item on the ECB balance sheet.

Unless someone here has physically inventoried and assayed every bar of bullion on the panet, I cannot trust any assumption of where the gold is geographically and under what domain (private vs. institutional).

And I for one believe that as we begin to discover that truth, if indeed it can ever truly be known, the revelation will be revolutionary.

Trust in human nature. It is the only truth we have in this day and age, that is self-evident.

Wil Martindale said...

That would be "planet" not "panet".

Wil Martindale said...

...and "receipts".

dieuwer said...

@Lemuel,

But honestly, where is all this physical gold coming from? Is it coming mostly from new production, are "shrimps" being suckered into losing their physical, is there no way that central banks think they have physical on hand but merely have a paper receivable?

It has already been proven beyond doubt that some central bank DO NOT HAVE good-delivery gold bars in their vaults.
Even worse, some central banks have metal-plated gold in their vaults. Remember the news item about Ethiopia?

http://news.bbc.co.uk/2/hi/7315137.stm

Wil Martindale said...

Since we East Coasters appear to have "the com" one last comment before I go back to rowing with the rest of the slaves.

Since about 95% of global derivatives are interest rate based, that is, based on the bad joke that LIBOR was not a CON, you have a quadrillion in notional here stacked against 160 trillion is unambiguos debt clearing wealth. A drop in the bucket.

Summers knows this. Control over interest rates is the true power of fiat. Gibson's paradox solved.

http://thevictoryreport.org/2012/09/08/rob-kirby-the-very-dire-outlook/

Happy Trails ;0)

DP said...

@Motley,

Great comment to all aboard HMS Turd! :-)

I couldn't have said it any better myself. I would have sprinkled it with far too many "LDO"'s, "BS"'s, "idiocy"'s & maybe even a "grow up you bunch of frickin cry-baby-know-nuthins". :)

I hope you're enjoying yourself as you fly the Freegold flag abroad... keep up the good work!

Michael H said...

Great post, FOFOA, definitely one to add to the ‘must read’ list.

I would like to wrap up some thoughts on the discussion from the previous thread about credit volume etc.:

1. Just to be clear, I wasn’t advocating for direct control over credit volume as that would be bad. Directly controlling the credit volume would lead to a situation where, if you know someone at the bank you get a loan, and if you don’t know someone at the bank you don’t get a loan – regardless of your creditworthiness. Not good. By ‘control over the credit volume’ I was more thinking of having the regulatory agency monitor the amount of credit creation and then pulling some indirect levers to affect that credit creation without constraining it directly.

2. The reason that a ‘the banks will self-regulate’ was not enough of an answer for me is that it sounds too much like the arguments for bank deregulation in the 90’s. Now, we might know why there was a push for deregulation (demand from savers for securitized debt) and we might know why that deregulation lead to a crisis, and those factors don’t apply to the ‘AG’ future. Fair enough. But what factors of the AG future will make it so that the bank self-regulate effectively, and long-term? (the ‘profit-constrained banking’ article that FOFOA linked goes a long way towards addressing this point)

3. It helps me a lot to not only think of how things will be ‘AG’, but also to think of a plausible way to get from ‘here’ to ‘there’. I think it is actually easier to think of how the transition would work in the USA, since USD hyperinflation will do much to discredit debt-as-wealth. But in Europe the transition is much foggier. Assuming the Euro does not inflate heavily, how would the debt-as-wealth tie be cut, short of massive (and destabilizing) defaults? I have thought of a potential way this transition could play out but don’t know how plausible it is. My thought is pretty similar to victor’s:

I guess that they (ECB) will have to purchase a huge amount of bonds in order to flight deflation (expanding the monetary base), and eventually sell revalued gold to the former bond savers in order to reign in the bloated monetary base. The savers who used to hold debt would then be in gold while the former debt would have disappeared on the ECB's balance sheet.

Basically, while in the USA it would be the hyperinflation forcing people to change their behavior, in Europe it would be the ECB leading the change. (Note that in this process, the ECB would likely put out a propaganda campaign to encourage people to hold gold – victor had commented in the past that he was surprised that this campaign hasn’t started yet, but its time would be after the revaluation, not before).

The reason I question the full plausibility of this scenario is its top-down approach, which makes it less robust and more fallible, in my opinion.

4. While victor thinks the Euro could be kept to near zero inflation, I don’t think the ECB would do that even if they were able to. First, inflation leads to capital gains, which leads to capital gains taxes. Second, inflation leads to seignorage income (granted in a credit-money economy I’m not sure how large of an effect this would be, but if base money is used as reserves instead of debt then it could be significant). Third, inflation allows for rebalancing of the economy without nominal cuts, which would negatively impact debt servicing and thus banking stability.

Michael H said...

So banks AG will be profit constrained (or, more precisely, will still be profit constrained, although the constraints on profits will be different). From the John Carney quote in the article FOFOA linked:

To put it differently, banks are not free to create money willy-nilly. They are subject to restraints imposed by both the markets and regulators. But under current procedures, these restraints do not arise from a hard limit on the amount of reserves in the system. They arise from the costs of lending, which is conditioned by (a) the interest rate targeted by the Fed, (b) regulatory and market capital requirements and the market price for bank capital, (c) by back-office administrative and hedging costs of lending, and (d) the credit-worthiness and credit-hungriness of borrowers.

Deposits factor in as a low-cost source of reserves. Scott Fullweiller, quoted in the same article:

So, Bank A, if it is not able to acquire deposits is not operationally constrained in making the loan, but it will find that this loan is less profitable than if it could acquire deposits to replace the borrowings….

And from the article’s author:

So we might say that banks are short run cash flow constrained and long run profit constrained.

Are these constraints enough for the banks to self-regulate? I still do not think so, mostly because I do not think the current state of corporate governance is robust enough.

Say bank A is slightly less profitable than expected this quarter, so the CEO goes down to the back office and asks the underwriters to relax standards ‘just this once’ to ‘make the quarter’. But then there’s more pressure next quarter and the one after that, so the lending standards are further reduced. The stock prices of banks B, C, and D are pummeled because they are seen as unprofitable, so they also relax their lending standards. CEO of bank A is hailed as a genius who revolutionized banking, leaves to start a hedge fund, and then the whole pile of bad loans goes belly-up. Or maybe bank A fails, and then the CEO starts his hedge fund.

Who pays? Not the CEO, and not depositors. Shareholders are wiped out, which is the public and pension funds, etc. So those in control of the risk-taking at the bank are still incentivized to take more risks than they should, because they are not exposed to the full downside risk (as they would be if the bank was a partnership).

A second factor that might work against bank self-regulation is condition (d) of lending above -- credit-worthiness and credit-hungriness of borrowers. If lending standards are relaxed across-the-board, this could lead to a credit-fueled economic boom that would create increased demand for loans, i.e. a positive feedback loop.

So if having the CB use levers (a) and (b) – interest rates and capital requirements, respectively – to control credit volume is not desirable, what will keep a credit boom from forming, and what will keep the banks controllers from acting in their own self interest at the expense of bank stockholders?

Two possibilities are (1) the behavior of depositors and (2) the behavior of gold. But as of yet I do not see how these two actors could constrain the banks in light of the above.

On a related note, perhaps someone can provide a bit of color on two episodes from history:

1. Did the S&L’s of the 1980s securitize their loans, or did they carry them on their books?

2. Would a credit boom like the 1920s in the USA still be possible AG? Why or why not?

alfa-or-beta said...

Michael H>
Basically, while in the USA it would be the hyperinflation forcing people to change their behavior, in Europe it would be the ECB leading the change. (Note that in this process, the ECB would likely put out a propaganda campaign to encourage people to hold gold – victor had commented in the past that he was surprised that this campaign hasn’t started yet, but its time would be after the revaluation, not before).
----

Yes, there should be more articles about the probable scenarios US vs. EU AG. I also subscribe to your notion, that in Europe the transition will be murkier than plain HI event expect for the former global hegemon, the US.

On the other hand, german and more so austrian banks have been openly promoting gold for years, they have got their corporate advertisement linked to that and most importantely each major bank branch for every regional city capital, has got special subclerk area devoted to hard metals. At the moment it's not super mainstream, but it's living there and creeping up.

Michael H said...

On peak oil:

The USA will experience peak oil. It might not be as a result of world oil production declining (what I will term 'peak geologic oil'), but it will be a result of the fall of the USD as the world's reserve currency (I will call this 'peak monetary oil').

Peak monetary oil is surely in the cards for the USA, but the severity of its effects will be impacted by the presence or absence of peak geologic oil.

Michael H said...

Luke,

Here is the chart I referenced from DP:

The shape of things to come

Woland said...

A minor point re: Does Tom, Dick or harry have the gold
he says he does, or only a gold receivable?:

1. Gold has not been "vaporized", unlike the money at MF Global
2. If those guys, (TDH) DON'T have it, someone else DOES.
3. Who are the "someone elses"?

Well, I know it isn't the average US saver. It isn't the poor 3rd
world resident just getting by at a near subsistence level. So did
it all go to "big oil"? You have to have a theory of where it went
to, not just a theory of where it disappeared from, yes?

Jeff said...

Peak oil has a simple definition. Peak oil is the point in time when the maximum rate of petroleum extraction is reached, after which the rate of production is expected to enter terminal decline. It isn't about technology

The US peaked in 1972.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus1&f=a

Where is the mushrooming production which will take us to 11 mbpd (an increase of 70%) if the US is the next Saudi Arabia.

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=57&aid=1&cid=US,&syid=1980&eyid=2011&unit=TBPD

texas?

http://www.rrc.state.tx.us/data/production/oilwellcounts.php

Maybe another state:

http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_a.htm

There is no technology or monetary arrangement that will enable a pumped out field to pump more oil.

not in the north sea:

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=57&aid=1&cid=UK,UKO,&syid=2005&eyid=2011&unit=TBPD

or mexico:

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=57&aid=1&cid=MX,&syid=2005&eyid=2011&unit=TBPD

Michael H said...

Jeff,

I agree with your assessment on peak oil. I was only trying to point out to the skeptics that, as far as the USA is concerned, oil consumption will have to be reduced whether world-wide oil production decreases or not.

Peak monetary oil (for the US) = "crashing our (USA's) lifestyle to the point where natural resources can be exported"

dieuwer said...

You all do know that the EIA is a POLITICAL organization run by the West as a counter-mouthpiece-weight to OPEC, right?
Take EVERYTHING that the EIA says with a containership full of salt.

Jeff said...

Victor, at least some parts of some governments are worried about peak oil.

http://www.fas.org/man/eprint/joe2010.pdf

from page 29:

"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015. the shortfall in output could reach nearly 10 MBD."

We watch this new oil market together, yes?

Edwardo said...

I'm glad someone, in this case, Jeff, took up the other side of PO argument. I've done it before, but it gets old. There were basically two scenarios post peak -which the ASPO argues is past- and, so far, the scenario the planet seems to be following is the bumpy descent down from the plateau of PO, as opposed to the rapid plunge off the aforesaid plateau.

Costata, thanks for the links.

Lemuel Habbakuk said...

Jeff,

Gee, that UK production profile is horrendous.
Some say that the North Sea more than anything else is what lifted Britain out of a slump in Thatcher's day. What economic advantage does Britain have left? A bloated financial sector and a bloated property sector. Without competitive industry and without gold in their reserves...well, I think that going forward the middle class lives of those in Britain might alter more dramatically than most other first world countries. Just my sense of their predicament. No foresight.

Here's a great analysis by Gail Tverberg on the
recent IEA oil forecast. It's worth noting their assumptions. http://ourfiniteworld.com/2012/11/13/iea-oil-forecast-unrealistically-high-misses-diminishing-returns/#more-37370

"I think this paragraph is relevant to discussions on oil prices projected forward: Bernstein Research recently published information showing that the marginal cost of oil production was $92 barrel in 2011 for non-OPEC, non Former Soviet Union oil producers at the 90th percentile of production. This cost is increasing at 14% per year (or about 12% a year in inflation adjusted terms). Even at the median marginal cost level, costs appear to be increasing at a compound annual growth rate of 9% (or about 7% in inflation adjusted terms). See also this FTAlphaville post.

If we take the $92 barrel cost in 2011 at the 90th percentile of production and increase it by 7% a year (arguably we should be using 12% per year), the real cost will be $169 barrel in 2020, and $467 a barrel in 2035."

I haven't read the full gold trail (it's very long but I read more here and there as I get time) but didn't Another or FOA state that he believed that Saudi had so much more oil than we realised? What if they were just plain wrong? Why should they have had accurate data? Even if they were high ranking BIS officials or who-knows-what, why should they have known the full truth of Saudi reserves(or Iraqi or any other country for that matter). I don't doubt that BIS (or the FED or ECB) might have the full answers to my question above regarding who has what gold, but why would they have had any better data regarding Saudi Oil reserves?

What if the Saudis have bought physical gold on the cheap, and so have the Chinese, but they don't have the long-term planning and foresight we think they have. What if they are human just like the rest of us and extrapolate the future based on their experience of the immediate past, and assume things will work themselves out, or cognitive dissonance prevented them from having managed their oil resources to the best interests of their future generations? I don't see why they should be any different from other human beings.

Tony said...

MF,

For being a fool, you sure made a valient effort. I often wonder if the resistance to the concept of freegold is largely a product of the action required to fully embrace a paradigm shift. Selling years of acquired silver to purchase gold is a lot of work.

Indenture said...

Fool: Nice work on the 'Furd'. When I was reading the one gentleman who was saying 'gold, silver, copper in their proper ratios without fiat' I realized just how much I have learned here at FOFOA and how necessary currency is to the system. Too bad you were shooed away.

Motley Fool said...

Tony

Never mind a lot of weight to lug around. One might even need to borrow a pickup truck. :P

TF

Motley Fool said...

Indenture

If a single person's interest was piqued enough to make the commitment to examine their hard held beliefs, it was worth the effort.

TF

Sir Tagio said...

Lemeul,
I am not sure where you are going with your questions. Are you trying to figure out what value gold will have if the effects of PO are much bigger and more sudden than generally believed? I don't know how anyone can know. So far it seems that the shale production techniques are enabling us to manage the fossil fuel decline and make it more gradual than an abrupt cliff, which gives us all time to transition our societies if we only use it wisely.

Re: gold, however, I think we all know that it has no intrinsic value, and that as Blondie has said, with gold, the counterparty is the whole of society. If the whole world goes dark, or if those who you would think should know (like the Saudis) don't and everyone is busy thinking hapy thoughts divorced from reality that leads to a sudden collapse, it's probably not going to have a lot of purchasing power. This is why fully-convinced collapsniks like Dimitry Orlov do not recommend saving gold and instead recommend converting your financial resources sooner rather than later into tangible assets (land, sailboat) and skills to survive and thrive in a post-collapse world.

In an essay earlier this year, "Fundraising in Exremis," (broken link at Orlov's blog but available in French here: http://www.orbite.info/traductions/dmitry_orlov/levee_de_fonds_in_extremis.html) he lamented the fact that very wealthy people were all still playing the same old money game, instead of taking action to preserve science, technology and culture for the future in a post-collapse world.

ampmfix said...

Good job Fool!

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