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.

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.


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)

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.-----------


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?


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!


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)

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)

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:

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.

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)


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


*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:


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
(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
(set the world on fire)

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

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


«Oldest   ‹Older   201 – 319 of 319
costata said...


I've caught up with most of the comments but it's early in the morning here and I have a busy day ahead. I'll get back to you this evening on your reply about deposits. It needs more time than I can give it right now but I think the work of Andrew Lainton et al holds the key - the answers are in the monetary circuits.

In the meantime I commend Michael H for his comments at November 14, 2012 7:02 AM and November 14, 2012 7:10 AM. IMO he's getting to the heart of the matter.

Collateral, such as RE, can expand in "value" (price) as well as gold. It's merely a question of valuation as to how much credit can be raised against it. So credit booms post-transition are possible everything else being equal. However, all things won't be equal - gold will be back in the system on an official basis. That's the wild card.


PS. Great discussion everyone. Gold, oil, banking, money and MF giving Turd Ferguson's crew the shits! Does it get any better?

Lemuel Habbakuk said...

Sir Tagio

Sorry if I haven't been too clear, I've had a long day with too much Spanish wine at the tail end of this evening.

To answer your question, "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?" Yep. Pretty much.

Thanks for the Dmitry Orlov link, will take a look, hopefully I can find an English version.

an ANT and Dec said...

Continuing on the oil discussion, whilst being more in the peak oil camp than not, one of the compelling arguments that Victor makes is the Saudi (SA) hotelling aspect, i.e. are they holding back and how much? This part makes sense in considering the trail and what we know.

SA thinking - oil is better in the ground than having dollars in the bank. However, gold in the vault is as good as oil in the ground.

So, we know SA has its deals and ways to get some gold for its oil/dollars. However, if you were SA why would you pump your wealth of generations at ever increasing production rates for ever decreasing,eventual worthless dollar tokens that can be exchanged for less and less gold over time. The logical thought to me is that you would not.

So, how much and for how long SA has held back is an interesting question. Under a FG system, they should be happy to open the spigots, sell their oil for Euros and get the gold as is their desire.

I think Victor thinks at least 60% of the current oil price is political, which is conflict on 80$ oil at the margin.

So, whilst I do not think this comments section should degenerate into a peak oil or not war, the part about SA as it relates to the trail is very interesting.

an ANT and Dec said...

ok, gold in the vault is probably better than oil in the ground :-)

DP said...


Freegold is a synthesis of the best that both the hard and easy money schools have to offer.

This is why the hard money people automatically hate it as soon as they hear there is still currency, and even worse, Fractional Reserve. And the MMT people hate it because ... well, you just don't understand - we're not going to go back to a gold standard.

Better to try to keep "gold" out of it completely. And "fiat". And "fractional reserve".

And "me and all my banker friends". Because, y'know, all of us Freegolders are filthy bankster scum. You can tell from the way we speak. Using logic and appeals to reason. Dastardly! :-\

Wil Martindale said...

I suspect much real (institutional) gold had gone to the BRICS, especially Russia and China Turkey, Brazil of course, some of the Stan's.

Where it lies in private hands, among generational banking dynasties ... I do not have access to that chess board, but it would be very interesting to see.

Gold surely does not vaporize (unless by Cowboys and Aliens) but if China means to back it's yuan so as to "globalize" it's currency, then surely they mean to establish the RMB as the global reserve asset in paper form, perhaps freely exchangeable at the going rate at any time.

This is freegold 101. Have enough gold to spur and brake as exchange rates bid, to keep the currency and the sovereign "honest".

I think a good question that needs to be considered is: "if 50% of all above ground gold was actually in the hands of one entity, or consortium of entities (however unlikely), when freegold comes that entity would be quite influential in world affairs.

Many assumptions are based on the relative distributions here:

Just like some public Wall Street for all to see. But if in reality the distribution is significantly different than what is generally accepted among the "pepetuators of confidence", then it is truly a game changer.

Do you not think that if it was true, and KNOWN, that the western central banks had only 3000 tonnes of gold between them, and that China has 12,000 tonnes, would events as they have lingered on for decades continue to linger as they do even today?

Again, no predictions or revelations, no claims at all, just a question of what could be, and what we do not know.

With gold, even the lies are lies.

burningfiat said...

Michael H,

Just trying to simplify regarding your questions of gold adoption in the Euro zone:
* After Freegold gold will prove itself sublime in comparison to all paper investments (Bonds, credit money, base money, stock certificates etc.)!
* If the ECB feel that is not enough, and people still hold on to bank deposits as SoV, what is to stop the ECB of setting a temporary inflation target of 10% (or 200%) until people get the message that Euro is for transacting, and gold is for storage. They have a printer you know!

Sometimes I feel there is too much religious adherence to the 2% inflation target. It is not the constitution. It can be changed if need be! And if you save in gold, you will not care, as inflation will be limp as eunuch!

From Costata on last page:

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?

I think you're right Costata, but all these deposits will have the prime characteristic of _circulating_, not _hoarding_ as now. This means that people needing short term liquidity will hold them. Subsequently these aggregated deposits will be much more sensitive to the need for circulating money. Now (BG) all current deposits (credit) can only be created in such amounts (purchasing power wise) because people unwisely hoard them for longer periods.

Nominally deposits may not decline, but the value of these deposits will drop, because the velocity of these deposits rise. Simply because people go from hoarding bank deposits to hoarding gold (and thus circulating the deposits).

FOFOA: I think that this whole question [BF: inflation and deposits in banking system] is somewhat "old paradigm" thinking.

FOFOA has settled this question for me. Thanks!

Shit won't matter AG! Peoples perception of value will have shifted. They won't care shit what the bank deposit number says. They won't care shit about the number on their paycheck. They will care about the purchasing power of: Their paycheck and their gold savings.


burningfiat said...

Another thing, regarding the theory that ECB will try to lower inflation rate from 2% to maybe 0.5% AG.

Why? It will just bring confusion to the role of the Euro as a MoE. There is no need to lower the inflation rate!!!
The participants of the economy will be much more primed and alert if they are not confused as to what constitutes savings medium and what constitutes transacting medium. A higher inflation rate AG will keep the system (and the public perception) closer to stability than a lower inflation rate.

Yes, this seems confusing, because here BG, the opposite situation is true!


burningfiat said...

So, a bit provocatively:

Who's with me in thinking that in the contest to become the world premier currency manager after Freegold transition, CB's who keep their inflation-target closer to 4% than 0.5% are better off?

They have less chance of inducing credibility inflation, no?


burningfiat said...

"It's a great price for a stone of this quality," Mr Molina said. "It's one of a kind, so it's like saying 'Are you pleased when you sell the Mona Lisa?' Or 'Are you pleased when you sell the Hope Diamond?'

Delusional Investing said...

Burning fiat,

If the Euro were the only currency, then it could possibly be heavy handed, and target 5% to reinforce the message, but if a competing currency was targeting 2% at the same time, the 2% currency would have an opportunity to grow it's usage.. So, why create the opportunity for competition in the first place?


burningfiat said...


Good question.
My premise is that _no one_ saves in fiat after the transition.
Regardless of 1% or 5% inflation, the major factor in determining a currency's success will be its use in trade (circulation). As the Euro would have 330 mill. people transacting in it, I don't think it would have a problem.

As for your concern that Euro-zone people would save in some other currency (new stable-Ron Paul-dollars (tm)): FAIL->people would save in gold which wouldn't decline in buying power by 2% a year (steady or rise I imagine)!!!

DP said...

Isn't it more a question of "for how long" people will save in the currency they are paid and pay their bills?

burningfiat said...


It is indeed!
All I'm saying is, that to keep the currency as effective as possible it is beneficial to keep the "period of time" that people choose to keep your currency at the shortest amount of time possible (to a reasonable extend). As a currency manager, you won't get any benefits by people holding your currency for years and years. It will only confuse the value judgement of your zones economic players, and in the end diminish your zones econnomic output.

When you're in a Freegold environment, you want to stay there...

DP said...

people holding your currency for years and years just presents a risk to you that they might suddenly push all that lovely 'leaked' currency back into circulation in your nice monetary system and really munge things for you, price-stability-wise.

burningfiat said...


LOL. exactly! Why go there in the first place???

Who said credibility?

burningfiat said...

Credibility is also:
"Don't pretend to be something you're not!"

dieuwer said...

people holding your currency for years and years just presents a risk to you that they might suddenly push all that lovely 'leaked' currency back into circulation in your nice monetary system.

Isn't that what will happen to the dollar? And how many dollars are there outside the US compared to inside the US? HI(%) = Outside/Inside?

Herb said...

It is quite the honor to see an earlier post from me quoted by FOFOA even if it was for the purpose of disagreeing with what I said. It means, at least, that what I said was coherent enough to be disagreed with. I loved his post and tend to agree with it. Very mind bending stuff, though. There are a lot of koan-like "one hand clapping" aspects to the concept of money.

burningfiat said...


Better to view this leakage (into almost full septic tank) the MTM talks about, as dollars that are saved (not circulating at the moment). So IMHO not a question of inside/outside US, it is a question of velocity.
Yes, what will happen when these dollars that are now lying still begins to circulate fiercely again? Lovely question!

burningfiat said...

Sorry butt-hurt, MMT, not MTM

Delusional Investing said...

Burning fiat,

To clarify, I meant competition for usage as MoE, not SoV.


burningfiat said...


To clarify, I meant competition for usage as MoE, not SoV.

Yeah, but what harm will some diff. of 3% in inflation do, when I only hold your MoE for 1 month max.?
Let's say I live in Argentina. I have just sold a lot of cattle (at market rate). Now I want to buy a Porsche and 3 Mercedes-benz (at market rate) and save the surplus (gold MTM). I probably got payed for the cattle in peso, dollars or Euro's depending on where I sold the meat!
So I exchange my currency for Euro's (yeah yeah I know banks in between probably) and buy some cars... I then buy gold locally or wherever it is easiest/cheapest.
Point is: Time-limited exposure to large amount of currency. Within 30 days, I have definitely gotten rid of the currency in exchange for goods.

So why did I hold Euro's for a couple of days? Because I liked german cars (trade)!!!
If I fancied american cars I would have gotten dollars for a few day until I could get the chevy's or whatever (trade)...

If I really want something from Europe I will not care about 5% (per year) inflation for a couple of days...

Anecdote: I went for a holiday trip to turkey in the '90's for 14 days. At the time they had 100% inflation rate per year. I survived, because: a) I'd only exchange small amounts for lira at a time, b) a 100% inflation per year amount to (ba-dum-tish): ~4% in 14 days


Delusional Investing said...

Burning fiat,

Yes, for 1 month it makes little difference, but the longer the period the more relevant it becomes. Eg for 6 months, the (hyperthetical) 2% currency beats both the 5% Euro and Gold (2% transaction costs at both ends).

I'd also question the impact of the ECB failing to meet it's sole mandate.


dieuwer said...

I think it is a pipe dream to expect to whole of Europe to embrace gold as the sole SoV. Don't forget that almost all European countries have a compulsory pension system by law where you save for your retirement in euros at a pension fund.
In fact, not too long ago a Dutch pension fund actually had more than 10% of its investments in bullion. When the Dutch central bank found out, it forced the pension fund to dispose of the bullion as it was deemed "too risky".

So much for saving in bullion...

A PIIG said...

The hard money way just seems unrealistic to me now.

Under a free banking gold standard we are told bank runs will keep inflation in check.Both customer on bank runs, and bank on bank runs. Who wants to withdraw gold periodically, only to deposit again quickly if everything is fine, or deposit again eventually once a banking crisis works itself out. That particular cycle has already been played out and we are not going back.

As for bank on bank runs, we are told banks have an incentive to run on each other bankrupting competitor's to gain a larger market share. But to this without being hurt themselves they have to be fully reserved which isn't very exciting profit wise. So banks actually have an incentive to co-operate and co-ordinate preventing runs on each other to protect the profitable enterprise of fractional reserve lending.

A PIIG(previously a HMS)

Anonymous said...


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?

I think you need to distinguish between long term savings and the amount of MoE that circulates in the business world. What has been remarkable during the past few decades is that many people were able to 'save' some 10+% of their salaries. Most of this is just intended as a claim on future output to be used during retirement, and people do not intend to spend it any time soon. If these deposits or bond holdings are absent from the banking system, this will not make any material difference. (Reserves are not required in order to create credit.)

On the other hand you have the situation you are describing. A company taking out a bank loan in order to finance some of their investments. In this case, the bank can create the required credit money, but the company immediately spends it. This part of the credit money circulates quickly, and it will continue to do so AG.

Finally, we have Blondie's comment which is, I think, confirmed by Noyer, that the ECB will keep the Euro stable up to an inflation rate of just under 2% per year. This means that the Euro will play the role of a store of value to quite an extent.

Michael H,

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.

Two comments:

1) Why would the ECB care about capital gains taxes? They are not a government agency. Every government is free to tax income (salaries, interest, dividends), spending (VAT, alcohol/tobacco), real capital gains and whatever the politsters can think of. Why would you, on top of this, want to artificially increase the nominal value of capital gains? Even if you were that corrupt, you might take a look at the actual figures and notice that capital gains tax is only a very small part of total tax revenue. This one misses the point on both counts IMO. Members of the ECB directorate have repeatedly announced that they do not intend to inflation-tax people. I wonder who is reading/listening?

b) The ECB is currently imposing huge nominal cuts on the indebted countries in the south. Why wouldn't they do it again? This is how you clear malinvestment from your economy.


Anonymous said...


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?

Well, I guess you are hoping that it is only the net gain that comes out close to zero, but that this outcome is distributed somewhat unevenly: some bond holders being defaulted on while some holders of gold receive a windfall profit.

Now, adding all that cornocupian talk about no peakoil?

I kept pushing it because a lot of the Peak Oil talk is part of the propaganda that justifies the high dollar price of oil to the public. That's what's rubbish.


The US peaked in 1972.

Well, you may want to watch this chart closely over the next 5-10 years. We will see it peak again - of course, I cannot predict whether it will peak below 10mbpd or even above. What does this tell us about the logic that was used to justify the first peak in the first place? (If you consider the entire North American continent including Canada, the graph already looks ridiculous as of today).

You see, this is why I wrote it is "not even wrong". If it peaks in the early 1970s, they later tell you "our theory explains it perfectly well". Then you watch life go on and you see another peak some 30+ years later. Then they tell you "At that time it was conventional oil, but now it is unconventional oil. But this time the peak is the final one." - Huh? If this doesn't have any predictive power, it belongs into the trash can!

There is no technology or monetary arrangement that will enable a pumped out field to pump more oil.

I think that's plainly wrong. None of the oil fields that had a decline in the 1970s, was "pumped out". They were only pumped out given the technology available at that time. Same is true for exploration. Both do depend on technology and on capital investment.

This is another reason why I am saying "it is not even wrong". Yes, it is true that the total weight of hydrocarbons in the universe is bounded as of today, and that new stuff is only formed rather slowly by decaying organic matter. True. But this is not the foundation of the Peak Oil story as it is presented to us. They look at the conventional production from an isolated oil field, see it peak, and then claim the same holds irrespectively of technology, capital investment, and in aggregate over all oil field presently known and to be discovered in the future. This is what I am calling BS on.

Victor, at least some parts of some governments are worried about peak oil.

Look, if they were worried, perhaps they would make sure Iraq is secured and stabilized , and these damned oil majors get their a*ses out of the armchair and start exploring subito and develope the country's resources. But ,hey, what they are actually doing is to create chaos, destroy the political structures and to make sure the Iraqi oil does not see the light of the day any time soon.

This is another case of obvious contradictions:

1) "The U.S. is going into Iraq in order to secure cheap oil for the West. Peak oil is imminent. They fear a lack of oil supplies. Now the war for limited resources is getting hot."

2) "These stupid military leaders. They are too incompetent to get that country secured and to get the oil to the market."

If the observed contradictions get too weird, perhaps we ought to reconsider the premises.


Anonymous said...


Lemuel Habbakuk,

Eric Sprott seems to believe the work of Ted Butler

I am rather sure he doesn't believe it. Sprott is very clever. He is a savvy businessman, and if there is an opportunity to buy silver at spot and sell it to the Hard Money Socialists at a 20% premium, Sprott would never let such an opportunity go unexploited, just to do some good and enlighten the uninformed.

Wil Martindale,

As I said, "gold AND GOLD RECEIVABLES" is the line 1 asset item on the ECB balance sheet.

Some suggested reading that's rather popular on this blog:

What's funny about the perception of the ECB is that they are rather frank about their goals, yet nobody listens. Everybody tries to tell us that the ECB are rather aiming for something else, but eventually they are taken by surprise when the ECB actually does what they announced. Anyway, it seems that those who are able (and willing) to read have a clear advantage.

A good example is the SMP and now the OMT. The ECB explains that in order to fulfil their mandate (VtC: inflation target), they purchased some government bonds. The next day, the financial press tells you "ECB tries to lower interest rates for indebted governments". Then, over the next couple of weeks you notice that interest rates actually keep creeping up. Then you read in the financial press "ECB too stupid to lower interest rates". Funny, isn't it.

if China means to back it's yuan so as to "globalize" it's currency, then surely they mean to establish the RMB as the global reserve asset in paper form, perhaps freely exchangeable at the going rate at any time.

Won't fly. China will neither back its currency by gold (no industrialized country is going to be that stupid), and even if they didn't know Triffin's dilemma, the paper CNY could not be a reserve currency for a ton of different reasons. Some of them are: (1) China does not run a perpetual trade deficit; (2) even if they would try to, the ECB would neutralize the trade flows by gold open market operations and stop them right away. The beauty of the Eurosystem is that it can enforce the international function of gold against any trade partner, be it a debtor such as the U.S. or a saver such as China.


costata said...

Comex Silver

This is a quick note to alert the readers that the following statement has been refuted:

The most important thing you need to know is that the longs cannot force delivery on the shorts, but the shorts can force delivery on the longs. Yes, most everybody has it bass ackwards!

It comes from a post by Tom Szabo that was referenced in the silver open forum last year with a challenge to show that it was incorrect. Many silverbugs visited the forum and no one offered a refutation of the post by Tom Szabo so I assumed it was correct.

I repeated it in a comment on a recent thread and Old Investor spotted the comment and contacted me via FOFOA to set the record straight. Mea culpa! In due course I will write a more detailed account of our discussion and the facts assembled (with links to the sources). You be the judge but I find Old Investor's refutation convincing.

The exchange can intervene to protect their members as they did in the Hunt brothers case. So the SLA's hopes of crushing JPM via the Comex is still a non-starter.

Thanks Old Investor.

Herb said...

Costata is absolutely right. There is no rule or law that can not and will not be suspended in the name of some sort of concocted "emergency." "Emergency" means, of course, that some powerful interest will be disadvantaged.

costata said...


Re: Your reply on page 1 of this thread at November 14, 2012 1:45 AM

For other readers any quotes from FOFOA are in italics. I haven't read all of the subsequent comments yet so this comment only addresses FOFOA's response to me.

Let me start with what I think is the most important issue to resolve:

No money is borrowed into existence to cover the interest portion.

This is the clincher. Since the interest is not borrowed then for a private sector borrower it must be paid from the existing stock of money. So this interest doesn't add to the money supply. In my terminology it is neither a temporary addition or persistent.

My error was to over-extend Andrew Lainton's insight on the interest component of government debt adding to the money supply. (And that insight may be conditional on the government borrowing to cover the interest bill.) To be clear - I think you are right on this issue and I was wrong.

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.

Okay, so we have deposits in the system post-transition and they are still loaned into existence by banks (Chicago Plan delusions notwithstanding). The populace decides whether they go Gold Turkey on bank deposits or they accept the risk for the revenue stream on offer.

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.

This is basically how I see it operating post-transition. With a sharp distinction drawn between savings and investments. I agree that maturity transformation is a non-issue if the loan is good quality. The CB can provide the cash so bank runs are also not an issue.

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 ........

No argument about these passages. I understand the physical plane perspective. I'm focusing on the process of money creation and destruction at present. So from that perspective I'm not concerned about where the money is coming from, to pay interest for example, except in so far as it adds to the money stock or reduces it.


costata said...


I agree that currency will be more mobile after the transition (and we will most likely need a lot less of it too). MoE + UoA + Short(ish) Term SoV is not something people will hold. Even if people are holding long term assets it has no impact on the velocity of the currency.

In regard to inflation differentials I suggest you read this:

Reverse of Gresham's Law (Thiers' Law)

The Nobel prize-winner Robert Mundell believes that Gresham's Law could be more accurately rendered, taking care of the reverse, if it were expressed as, "Bad money drives out good if they exchange for the same price."

The reverse of Gresham's Law, that good money drives out bad money whenever the bad money becomes nearly worthless, has been named "Thiers' Law" by economist Peter Bernholz, in honor of French politician and historian Adolphe Thiers.

"Thiers' Law will only operate later [in the inflation] when the increase of the new flexible exchange rate and of the rate of inflation lower the real demand for the inflating money."

Note also FOA's comments about using the Euro as a second money by Americans.


100 per cent agree on China's aspirations for the renminbi. Perhaps they want it to be the dominant regional trade currency but a global reserve replacement for the US dollar is a fantasy of the Westerners IMHO.

In relation to deposits I think I covered some of what you wrote in my reply to FOFOA and this comment to BF.

FOFOA said...

Hello Duggo,

I saw your question elsewhere. The answer is that metals pricing from dealers comes from their cost for hedging each sale and/or replacing the inventory from another dealer. There are two kinds of entities that buy and sell metals. Those who are placing a bet, and those who are making a living off of the buy/sell spread. Most dealers are working the buy/sell spread. But even the dealers who own the metals themselves don't like to be at the mercy of their clients. Think about it. When you're buying, you think the price is heading higher. Your dealer is taking the opposite side of that bet with a timing of your choosing. So he is not acting on behalf of his own judgment, he is simply facilitating your bet. So if he's smart, he's gonna sell to you at a price a little higher than he can buy replacement metal or at least paper-hedge his net-position on Comex through his broker.

The OTC market is opaque. That includes the LBMA (the big bullion banks) as well as your local dealer. They have a network of refiners and wholesale and retail dealers, and they also use the Comex to hedge on paper. It's all interconnected, and each actor is looking out for his own best interest. The big BBs may even be hedging their paper (unallocated) sales in ways that will not pan out during a systemic crisis. Best to avoid that BB paper gold. It may not pan out any better for you, the owner, than for them, your counterparty. ;)

The spot price you see on Kitco emerges from this system of many self-interested actors and precarious hedging practices. That's the best explanation I can give! Hope it suffices.


Anonymous said...

Thanks for the reply. I really didn't suspect it was so complex. Fascinating! I presumed, perhaps like many others, that the "price" just had a simple origin.
It looks to me as though many of pundits and the Ted Butlers of the World are barking up the wrong tree.

Barry Michaelmore said...

Ya think?

Michael H said...


Bron made some good comments at Chris Martenson's blog on the Harvey Organ interview page regarding OTC gold pricing. For example:

The whole comment thread is worth a read.

In his comments, Bron references this post, which is also relevant:

Michael H said...


While the ECB is not a government agency, at the end of the day it must serve the interests of all the Euro governments or else it would be dissolved. A few points:

- I don't disagree that the ECB will hold to its 2% target, I just don't think they would go much below that (to, say, 0.5%); there just doesn't seem to be enough reason to justify the risk of deflation.

- Fair point about capital gains taxes not making up much revenue. My rational for including this point was the discussion on inflation as a 'wealth tax' in either When Money Dies or The Dying of Money (don't know which one off the top of my head). But yes, as FOFOA has said, if people aren't holding the currency as savings there won't be much 'wealth' to tax, anyways.

- What about seignorage? Would that income be significant, especially if base money forms part of international reserves?

- Yes, they are forcing nominal cuts on the south. But if the inflation rate was held to 0.5%, do you think there would be a risk of being forced to make such cuts on a regular basis?

Michael H said...


Two points on peak oil:

First, one of the points to consider is energy return on energy invested (EROEI).

The concept being: sure, you can drill miles down and miles offshore with new technology, but how much energy are you expending on constructing that oil well, vs. how much energy will you get out of it?

Likewise, how much energy must be expended on shale to turn it into a useable fuel? How much energy must be expended to pump seawater into the oil well to keep its production levels up?

Second, on the apparent contradiction between fighting wars for oil supplies and not being able to get the oil to market:

The key for the US is not access to oil but control over oil. The USD gets its value from being the pricing mechanism for oil, but that doesn't mean that all oil must flow to the US.

Also, the objectives of the US government are different from the objectives of the oil corporations.

Anonymous said...

@ Michael H

Thanks. It's quite some rabbit-hole once you enter.

KnallGold said...

paperPOG always falls on Thursdays, and if you read Jan Pahl on the German news N-TV, you can be certain that he is the best contrarian pump and dump shill. You could make millions trading Gold futures with that "advice" (of course we don't do that and prefer the good sleep solid Gold provides).

As for the oil reserves , a couple of years back a friend of mine had the opportunity to talk to number 2 below the King in a gulf country (name of the country doesn't come to my mind now), and he stated that they have oil reserves for 200years. It fitted well with Anothers statement that there will still be oil for our grandchildren.

Not really a cliff ahead as ethanol is added in increasing amounts, much research is also done in this field, so that its food AND fuel.

One scientist on a recent chemistry symposium reported findings of metabolic pathways via genetically altered bacteria to produce alcohol- not only ethyl but also longer chains and branched ones. All depending on programming of the bacteria. Asked if it would also be possible to make tert. alcohols (part. t-butanol) as they are suitable for octane boosting/gasoline additives, he said "probably".

There's so much work to be done...

Woland said...

Speaking of rabbit holes. I always thought Sub Zero was a
refrigerator for rich people. Now it appears it is BOJ proposed
policy. So, as Ender put it, down the rabbit hole we go. If the
rest of the world decides to follow, this could get interesting.

Wil Martindale said...

I am familiar with the Washington agreement and it's subsequent renewals. My concern lies in the years prior to 1999, as well as the undisputed acceptance that central banks will do exactly as they say.

It is advantageous to read. It is disadvantageous to believe all that one reads.

With gold, even the lies are lies.

And in the final analysis, it does help to view currencies (and wealth) in the manner presented in this post. Currencies are part of an intricate, virtual tallying system which constantly inter-exchanges organically, like cells in a super-organism. Holding units of these cells as wealth is indeed unnatural to the design, though not the intent.

Currencies are backed by nothing more than debt, much of which is completely fraudulent, and the fraudulent part, as honored, inures to the benefit of the gaming class, whereas that which is not honored (defaults) inures to the further servitude of the debtor class members which honor the debt.

Debt is the essence of fiat. When it defaults, game over.

But most civilized people will honor ALL debt if they can, since to only honor the part which is "credible" is equivalent to honoring none of it, in the "legal parlance" of the creditor.

As we come to this point, I have a strategy to honor "part of the debt" in a rather, hopefully, clever way, and I hope others will as well, so that we can expedite the emergence of freegold.

BTW Victor, I do admire your in depth analyses on your own blog, and insightful comments here. I have no ego to bruise, so am not offended by incinuations that I do not read enough to understand such lofty ideas.

But the thoughts of another are quite simple, and I contend that the higher elevation view lies in the understanding of relatively simple ideas.

As long as the debt-classes honor the fiat (debt), the dollar will extend it's agonizingly slow "death by a thousand cuts" of: default by CIRCUMSTANCE, not by CHOICE.

We can all provide forensic and academic analyses of the patient, but it takes action to truly pull the plug on the resuscitator.

Not everyone will take the hit on their 401K and transfer 50% of their holdings to gold (and silver). I take comfort in knowing that if everyone of us in America at least did that, we would surely help to crash this system.

But frankly, to end the can kicking for good, we would ALL need to simply stop honoring debt. If every debtor in the world just stopped honoring their loans, what a beautiful wasteland of empty JPM and B of A skyscrapers we would finally have to rebuild from.

After all, all debts have already been printed away far into the future, and the above ground gold still exists ... to be revalued. Aliens have not yet sucked it up into another galaxy as far as I can tell.

When debt defaults by choice, bye bye fiat. Unfortunately, we wait for it default because no choice remains.

One must play the "stalling" game just as they do, when deciding to dishonor debt. Not all of them invite a visit from the local sheriff's or similar representative ... at least not for a while.

Timing ... what a thing!

Michael H said...

Further to Woland's comment on sub-zero interest rates, here in a post from Aziz on Zerohedge, Negative Nominal Interest Rates?

How would I react in the case of negative nominal interest rates? I’d convert into a liquid medium that was not subject to a negative rate of interest. That could be a nonmonetary asset, a foreign currency, a digital currency or a precious metal.

So, if I was a CB and I wanted to push people into gold, sub-zero interest rates would be one way to do it. Unfortunately I'd also expect some nasty side effects for the real economy.

Wil Martindale said...

I should probably add that in
"Currencies are backed by nothing more than debt, much of which is completely fraudulent, and the fraudulent part, as honored, inures to the benefit of the gaming class, whereas that which is not honored (defaults) inures to the further servitude of the debtor class members which honor the debt."

One of the insidious ways that the debtor class is stuck with "defaulting debt" is of course the inflation tax, but more visible taxes are coming as well.

Michael dV said...

In the Kitco forum this AM is the comment that as of Jan 2013 gold will be a tier 1 asset. We knew this was being considered but can anyone confirm that this status has been enshrined? It would seem that if this means phys only that it would be a significant event.

Phil Champagne said...

High gold prices push many Indians to silver for Diwali

milamber said...

Hey Joe Y:

Congrats on GBI making the Times!


Anonymous said...

Michael dV,

In the Kitco forum this AM is the comment that as of Jan 2013 gold will be a tier 1 asset.

Paper gold will also be a tier 1 asset - exactly the same as holding foreign currency. I think costata discussed it here. The new regulation seems to be a favour to the bullion banks (who are the major actors that have both assets and liabilities in paper gold).


Boner Parte said...

I brought you a delicious note:

32 However, at national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed
by bullion liabilities can be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the
process of collection can be risk-weighted at 20%.

Vote for allocated or in own vault physical!

dieuwer said...

@Boner Parte,

are you still asking this question, even after what happened with MF Global?? My, my...have we learned nothing.

Boner Parte said...

Main index equities (including convertible
bonds) and Gold

Don't vote for paper gold. Or gold that you don't at the same time owe to someone else, so you don't have zero nominal accounting risk.

Eat the food.

Kurt said...

I think I was the one who started the TF Metals discussion on Freegold. Someone posted an absurd parable about people happy with barter and then a banker introduces currency and "steals" his "evil interest" - it was just such simplistic nonsense I had to refute it, and then it moved into Freegold because the fringe HM crowd is obsessed with how evil banking is, in and of itself. My view is that they are no different from anyone else that joins the crony capitalist bandwagon - they CAN be evil, like a company that does that, but just like it is not inherently bad to be a company, the same applies to banking.

KindofBlue said...

"We watch this new oil market together, yes?"

Jeff, I'm still laughing, thanks.

costata said...


In regard to this issue of gold as Tier 1 capital initially I saw it as an important development in the here and now. Later I leaned toward the conclusion that it was not significant because paper gold was included in some fashion. I find the wording from the BIS ambiguous BTW. Perhaps deliberately so.

Viewed as a strategy, if you wanted to "sell" the deal to the bankers to put gold back into the Tiers of bank capital I think it would help to give them something they want e.g. paper gold on par with physical. Given the shortage of collateral in this system I think they would grab it for short term gain and ignore the long term implications.

On the other hand if you sought to make physical gold the only acceptable Tier 1 capital it would attract enormous opposition. Right now I suspect it would unite the banks in opposition with government, the IMF etcetera.

Down the track (Basel IV?) after, say, a breakdown in the paper gold market having "gold" in place would make it a lot easier to cut paper gold out of the loop and leave physical gold on its own in the capital hierarchy. It's exactly the kind of subtle, patient strategy I would expect from old, big money with time on its side.

So today I would say that this elevation to Tier 1 status isn't a game changer right now but it adds to the foundation for the new system. So today I think it is an important development and I'm unlikely to deviate from this conclusion. Others may stridently disagree of course but c'est la vie.


For some reason when you speak I tend to believe you despite not knowing anything about you.

As for the oil reserves , a couple of years back a friend of mine had the opportunity to talk to number 2 below the King in a gulf country (name of the country doesn't come to my mind now), and he stated that they have oil reserves for 200years. It fitted well with Anothers statement that there will still be oil for our grandchildren.


costata said...


Let's consider the implications of the fact that interest is paid from the stock of money in circulation. I think it let's the Minskyites et al back into the debate about inflation and deflation in so far as it offers a plausible way of modelling their debt deflation as a credit (availability) deflation rather than a monetary event.

This has no implications for a later hyper-inflation. As you have pointed out on many occasions deflation and hyper-inflation are not mutually exclusive. It's a question of timing, confidence etcetera for the latter.

When the banking system enters a solvency crisis money from debt repayments may not be relent. Meanwhile the interest costs, fees and charges continue to be demanded (as is their right under the contracts they have entered into). So the 99ers take their direction from this observation and make the assumption that this is an act of collective will from the "evil banksters".

The flow, the circulation, becomes constricted in some sectors and not in others. No shortage of money as Mervyn King of the BOE perceives the sitation. A disturbance in the required flow and direction. Easy money suddenly becomes very hard (to obtain) money in some sectors without undergoing any apparent change in itself - yin and yang.

So the flipside of the credit boom is a credit squeeze and deflation emanating from the banking system. I think we should take care to define this as not being an act of will (only individual people act from will). Rather it is a systemic effect. An effect that some economic actors try to use to their advantage of course.

So the onlookers see what they want to see. Conflicting perceptions of reality are all "correct" or "true" in looking at the effect in aggregate and "incorrect" or "false" when the economic actors are disaggregated. (We obtain a similar effect from the way we define the sectors in the economy.) So Ms. Coppola is "right". As individuals we are "evil hoarders" and collectively we are the guardians of the capital that will help to reset the system. We're the guys and gals in the white ten gallon hats as well.

So perhaps there is a pleasing symmetry in Nixon interrupting Bonanza to give everyone the good/bad news back in 1971. Your glass is half full and mine is half empty. (DP's of course is full to the brim with some Aussie rouge as he sits in his hollowed out mountain in Scotland gazing across his hoard of gold.)

costata said...

I'm posting a large slab of this repost of a Michael Pettis newsletter over at MacroBusiness blog because some folks may not want to register to read it.

He is discussing BOP national accounting distortions and provides some examples below.

This matters because the numbers can be significant, and so heavily distort the balance of payments numbers.

For those who are interested in this sort of thing (and I confess I most certainly am), transcripts of the Bretton Woods conference in 1944 have recently been discovered and are being published on Kindle. I think a paper book will come out in 2013.

I have just finished reading through a selection of the debates sent to me by Gao Ming, my former PKU student, now at Harvard, and one part of the debates that I found especially interesting was a debate on workers’ remittances.

The USSR had insisted during the meetings that workers remittances be included in the capital account, and so subject to capital controls. Several other countries, led by China, were opposed. The latter won the debate, and today, of course, workers’ remittances are included in the current account.

Among other things this shows just how wobbly some of the capital account/current account distinctions are. I think from a political point of view workers’ remittances should certainly not be subject to capital controls, but otherwise I think conceptually they really belong in the capital account, although because they tend to be countercyclical there certainly are good reasons for suggesting that they should be treated differently from other items in the capital account.

I would also argue that interest payments and dividends, which are today part of the current account, should be part of the capital account although again, because they are nominally fixed and not subject to changes in investor sentiment, perhaps they don’t fit wholly comfortably in the capital account.

Finally when it comes to defining the balance of payments components I don’t think all commodity imports should be treated equally. Commodities that are imported for use or for working inventory should certainly show up in the current account, as they do.

Commodities that are imported for speculative purposes or for stockpiles, however, should be included in the capital account, since they really are a form of external investment more than a form of domestic consumption.

This is how they would recorded, for example, if rather than import physical commodity for storage a local speculator purchased a commodity-linked note from abroad. There is no real economic distinction between the two transactions, but the former would be treated as a current account import while the latter would be treated, correctly, as a capital account export.

This matters because the numbers can be significant, and so heavily distort the balance of payments numbers.

Woland said...

Hello Michael H;

Probably too many margaritas tonight, but i would just like
to say how much I appreciated your transcription of my most
favorite "Texas story" by FOA a while back. I was gratified by
the fact that Matrixsentry enjoyed it too. With respect to the
current post by Fofoa, I see a lot of comments by FOA set in
"blue type", which refer to the way our human tribe has always
reacted when faced by the age old problem of, "When things
go wrong, who will suffer the losses", or better said, how will
they be shared within society? There are many sharper knives
in the cutlery drawer of this forum than mine, which is why I
keep following the commentary with such interest, because
there is still something new to be learned here every day, but
in the end it still comes down to this: Someone made, whether
out of greed or desperation, a promise which they could not
ultimately keep, and when that contract defaults, whether by
negligence or sheer bad luck, the losses must be apportioned.
That is, for me at least, the genius of FOA. He saw, from the
"commanding heights", how this drama always plays out.

Cheers. (since I don't speak Spanish/Mexican)

Edwardo said...

No disrespect intended to either costata or Knallgold, but what else would someone in such a position be expected to say? If anyone from some major producer suggested for one second that the production future was poor, let alone dire, well, for obvious reasons, they wouldn't. This is not to suggest that some higher up in the know would necessarily tell a whopper along the lines of, "We have ample supply for the next two hundred years", but, when such rosy forecasts go awry, there is always the excuse, oft proffered, that such was how things appeared at the time.

costata said...


Point taken.


costata said...

Default is back on the table for discussion thanks to the IMF.

A leaked draft of the report? (My emphasis)

...without a debt haircut, Greece still won't be able to meet the 120 percent target by 2022. According to the draft troika debt sustainability report, which has been seen by Reuters, without a partial default, Greek debt would comprise 144 percent of GDP in 2020 and 134 percent in 2022, assuming there are no further economic upheavals between now and then.....

.... The IMF believes that the only way Greece can reduce its sovereign debt to the target level of 120 percent of gross domestic product in the next decade is by way of another partial default. This time, however, it wouldn't just be private creditors who would lose out as they did in the debt haircut carried out this spring.

A second such cut of Greek debt would force international creditors, Germany included, to write down a portion of the billions they have loaned Athens. A 50 percent default would result in Germany losing €17.5 billion of the €35 billion it has loaned Athens thus far....

costata said...

I wonder if this could have been part of the deal with the USA that allowed Russia to finally be accepted into the WTO:

Putin told us over the 7-course dinner at his residence (which Reuters alludes to) that Russia has made its budget in such a way that it breaks even if oil sells at $92 per barrel. (The price hovers above $115 at the moment.)

From whence springs this confidence that oil prices will remain robust? And note BP's enthusiasm for their latest deal in Russia. (I linked an article about this in previous thread.)

By the way, the recent Rosneft-BP mega deal was announced when I was traveling in Russia. Ironically, Reuters bemoans the flight of capital from Russia but overlooks that BP thought that it got a terrific deal by acquiring 20% holding in Russia’s number one oil company.

Now, no one can persuade a Brit to part with a shilling unless he can be convinced that there is going to be handsome returns. The BP knows Kremlin is doing it a great favor by letting it acquire stakes in Russian oil industry.

Bhadrakhumar (a former Ambassador to Russia) also points out in this piece that Putin's government is quite far to the right compared to the average Russian citizen. Another reason to support Russia's economic development through WTO membership perhaps?

Fascinating essay on other matters as well. For example the upcoming visit to Russia by the Prime Minister of Japan.

Obviously, the investment climate in Russia is not that hopeless, as Reuters makes it out to be. Prime Minister Yoshihiko Noda’s visit to Moscow next month is widely anticipated as heralding a great leap forward in Russo-Japanese economic relations.

An LNG plant, a gas pipeline from Sakhalin to Tokyo, Japanese investment in infrastructure development in Siberia and the Russian Far East — big-ticket items are being talked about.

anand srivastava said...


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.

I am way behind my reading. But I have to comment on this.

It is true that there is 22x trading in paper over gold. But don't assume that all of that 22x paper trading is proxy to real gold. Much of it is really paper trading, and doesn't care about any existence of real gold.

So when paper gold disappears that part of the paper will not transform into revaluation of gold.

I think the revaluation due to the paper gold will be only 4-5X. The rest will come due to the change in perception of gold's value. There will be two things happening simultaneously. The paper world will be crashing around us, and the physical gold will disappear from the market. Because of Mines closing down. This will really take the stock to flow ratio to infinity.

But this does not result in a real world number. The real world number will probably start at somewhere around 10X and then go from there to reach 30X when it all stabilizes. There will be a discontinuity, because at the time paper gold collapses the price of gold will go down, and then it will revalue suddenly at a very high value, possibly 10X.

Later gold will gain further value as it slowly becomes the center of international trade, and its value grows in the minds of people. Very few countries at this time are ready to have gold as their reserve, rather than foreign currencies. This transition will happen slowly as countries realize the benefit of having it as the main reserve. Ultimately the 30X number looks very feasible.

At this time I am thinking the HI in Pounds may trigger the HI in USD. UK is in a very bad state indeed. They are printing money with no basis, not even for buying back debt. They are printing money as interest on the debt bought back in the last phase. They are really at the end of their timeline. I wouldn't expect them to last another year, before hitting high inflation.

DP said...

@Costata: (DP's of course is full to the brim with some Aussie rouge as he sits in his hollowed out mountain in Scotland gazing across his hoard of gold.)

If only I had a hollowed-out mountainful of your wine!

ampmfix said...

Hi Anand,

Thanks for your explanations, but, if I may ask further:

1) Why: 4-5x?
2) Why: "will probably start at somewhere around 10X and then go from there to reach 30X when it all stabilizes"?
3) You are talking in $ or also in €?

As i read on the older trail docs, and seems totally logical, if 1 oz of gold is sold 10 times, then the value of that ounce to the seller is 10 times the spot price.
Another factor, I do not think ALL paper representations of phys will burn, see this one for example, the prospectus seems very sturdy, and is protected by Swiss law, and prohibits explicitly all forms of leasing, swapping, etc..., apparently the phys is in the vault:

Thanks for your ideas.

Michael H said...


You're welcome, but I do protest that 'transcription' is much too strong a word for ctrl-f, ctrl-c, ctrl-v (a.k.a. find -- copy -- paste).

costata said...


Let us not discount the benefits of the revaluation of gold versus wine for afionados of the grape. The holders of hollowed mountains filled with gold will find Aussie winemakers ready to fill their needs.

DP said...

But what about the Argentines? #MalbecFTW!

dieuwer said...


Russia was allowed into the WTO as a bribe from the US to refrain from pricing Russian oil in euros.

DP said...

Kinda quiet today. Not a bad thing, but...

FOFOA(in this post):

Is there a difference between money and a tradable wealth reserve? And if so, why is it important to understand this difference?

IMO, even well-managed currency (money), with a stable real exchange value, will not be a suitable long term tradable wealth reserve asset.

Discuss! %<]:o)

And have a great weekend everyone...

Marvin Sparkledust said...
This comment has been removed by the author.
The Dork of Cork said...

Wepollock talks about that post Roman world of putting those coins in the ground.

I talked about this a above.......

Perhaps many of yee guys are living in the US and are living far from the true center.
The deflation in the eurozone it Titanic and destroying the very fabric of society.

I see not reflation from my backyard.
Just a catastrophic post 1987 euro bank credit inflation which burned through the core capital base of countries , followed by a collapse as there is no Strong Fiat King to counter the banks credit monopoly in the eurozone.

costata said...


I think the summary you wrote is very good. Part of the problem is that money has been treated as an asset in recent times. The waters have also been muddied by a logical inconsistency. People deposit cash into a bank and think they still have the equvalent of cash in their pocket when, in fact, they have exchanged the cash for an explicit debt instrument.

Obviously the cash is debt as well (a circulating credit in my terms) but most people don't view it in this way.

After the transition I anticipate that most wealth will be stored in an investment of some kind or other. IMHO gold (after the revaluation) will be relatively stable and act as portfolio insurance in most developed countries. Ms. Coppola is worrying needlessly about hoarding gold. It will have plenty of competition in a vibrant, post-transition economy.


Interesting thought about the WTO deal but I wonder if the currency swaps make this irrelevant. It places trade into a multi-currency framework in which there is no absolute need for a single reserve currency. Provided of course that the exchange value of a currency can be discovered accurately.

For convenience and self-protection it's not hard to envisage more currency blocs emerging over time based on the EU model (an independent issuer).

costata said...

This excellent China analyst (Also Sprach Analyst) has been tying himself up in knots in some recent posts trying to explain the behaviour of the Renminbi/Yuan in terms of currency manipulation against a background of capital flight (demand for FX as opposed to local currency). My emphasis.

People’s Bank of China has published the detailed tables for monetary statistics, which contain (as usual) the numbers for working out a rough estimate for capital flow.

To my surprise, the latest numbers suggest that money outflow continued in October, and it is almost back to the rate we saw in summer despite improvement in September. In other words, the reduction of outflow for September turns out to be a blip.

The position in forex purchases increased by RMB22 billion in October. The trade surplus for October was about US$32 billion, which translates into about RMB200 billion. As a result, the money outflow is estimated to be at RMB178.86 billion. Since October last year, money outflow is recorded by this measure for 11 out of 13 months:

IMHO here's why he's having this problem (my emphasis):

This comes as a surprise in some ways, while somewhat expected in another way, and this comes down to how one interprets the recent strength of Chinese yuan. I once speculated that the strength of yuan may reflect inflow returning to China. The improvement for September’s data seems to point in such direction.

I think he has the scent of his quarry here:

From another angle, however, we have also seen that the flow pattern seems to have undergone some change which might be structural or relatively permanent.

And then he veers off the trail again:

If this is true, it is probably very unlikely to see any improvements in money flow (and thus liquidity), and the recent strength of yuan, whatever the true reason is, will not last long.

If this strength in yuan is due to network effects and the gradual move to full convertibility then its strength may be far more persistent that many people expect (despite the capital flight - which will continue IMHO).

Woland said...

Hi Costata;

Something you just wrote rang a small bell; About a year or
more ago, there was some talk about how "fiat currency
enables wars", (as if here had never been wars under the gold
standard!) The idea that a particular currency system, be it
fiat or a gold standard, either enables or prevents wars is truly
nonsense. I think it was Mish who first propagated this idea,
which Fofoa refuted. However, when a large "group of countries"
enter into a common currency system, such as the Euro, it
DOES restrict the capacity of any single member from engaging
in war, either within the zone or with a state outside the zone,
because the power to print no longer belongs to that state
alone, but to the consensus of the ECB governing council.
FOA made clear the obvious, that when you country is under
attack, and you run out of money, you won't stop defending
yourself by virtue of that fact. On the other hand, STARTING
a war, when you are a member of a large currency union,
becomes much more difficult, particularly if your partners
are opposed. A beneficial collateral benefit? I think so.
Any thoughts?

burningfiat said...

Woland, Excellent thoughts on war restriction in a currency zone!

Herb said...

Re Woland's comment:

"Starting a war" and "defending yourself" are made to sound like very different things, but I don't think history bears that out. World War I, for example, seemed to come along when the European countries involved found an excuse to have a war. They hadn't had one in a while and, critically, hadn't learned from the US Civil War that future ground wars would be mechanized slaughterhouses. They all thought they would win quickly and decisively and, when that didn't happen, scrapped any pretense of a gold standard and started printing what they needed to keep it going.

I do agree that the anatomy of the Euro makes a difference when it comes to money printing. I don't think, though, that the "aggressor" versus "victim" dichotomy is a key factor.

The Dork of Cork said...

OK ........A country has a Fiat King.

He produces Greenbacks , he states he will produce 2 % extra a year not unlike when Imperial UK produced & increased much of the worlds gold reserves which Sterling used as a measurement of credibility until 1914.

Remember when a country produces greenbacks it does not devalue into the banking systems assets unlike when normal nation states print money with respect to other banking fiefdoms

The one disadvantage of this system is that a King could always print more to pay his soldiers or his whores but at least I know how much greenbacks is available at any given time.

We really don't know how much Gold is out there as all of it is not on the various goverments books.

dieuwer said...


It doesn't matter how much Gold "is out there". It doesn't matter if the gold cube is the size of a basketball or a football. What matters is the flow.

costata said...


I think you have presented an interesting idea. The inability to print currency doesn't seem to have inhibited NATO from waging war. How much of this was due to America's influence as opposed to Europe?

Defence/war budgets are being cut in many countries right due to pressure on government budgets. I think fiscal restraints will be more important going forward. If Christian Noyer is correct and the EU is moving toward balanced budgets we may see a great constraint on warfare come into place.

I suspect that European gold holdings are their ace in the hole in the unlikely event that war breaks out within Europe or between NATO and some other country.

Anyway that's my 0.02

The Dork of Cork said...


I think I get what you mean but if the money tokens are chasing a large football field as high as it is long then it will effec the price I imagine.

To be honest I am much more worried about physical breakdown of complex but very vital life support systems then the price of Gold.

The post 1987 euro credit inflation and now Money deflation is deadly stuff.

It is about to seriously effect the production of real goods that is needed to sustain complex life.
Freegolders touching faith in those black and white faces is disturbing.
I would much prefer a Rollicking & whoring king that was a bit easy with his Greenback production rather then those hidden gold bastards.

costata said...

BTW M. K. Bhadrakumar reports that both Israel and the USA have been in back channel negotiations to reach a settlement with Iran. Apparently a brokered peace deal is in the offing for Syria as well. Geopolitics is all smoke and mirrors IMHO.

He writes about President Obama's recent commments about these countries in this piece.

costata said...

VtC et al,

Interesting paper on the EU banking union (my emphasis).

... The German Council of Economic Experts warns against the introduction of European-wide deposit insurance. A necessary pre-condition for European deposit insurance is the prior establishment of an effective and powerful European resolution authority....

....At the same time, individual countries need to reform their deposit insurance systems by introducing risk-based insurance premia.

So a scheme that is self-funded by the banks rather than taxpayers. And here is the part that the banks will hate:

A banking union requires stricter regulation of banks. Better capitalised banks have higher buffers against losses, which reduces the costs of banking failures for the taxpayer. Currently, discussions take place against the background of the existing financial reform process in the EU.

In order to enhance the resilience of banks, two amendments to this process are necessary. First, in contrast to current capital adequacy regulation based on risk weighted assets, banks should, in the medium- to long-run, be required to maintain also a leverage ratio of at least 5%, which specifies capital requirements relative to banks’ total on- and off-balance sheet activities.

They want to bring back a de facto reserve ratio alongside the risk weighted capital adequacy regime. And finally the part that the politicians will hate:

Second, existing privileges for investments into government bonds should be abolished. This pertains in particular to zero risk weights that apply to government bonds of EU countries as well as to the exemption of government bonds from large exposure rules.

Also, liquidity requirements for banks should be specified without building in incentives to invest into government bonds.

Obviously this will take several years to work its way through the bureaucracy and political wrangling.

dieuwer said...


We have heard about deal-making before, between Iran and the West. It goes like this:
1) The West finds out Iran is working on its nuke program and threatens with sanctions.
2) Iran backtracks a bit and agrees to talks.
3) The West is pleased and starts to negotiate a no nuke-work peace-deal.
4) Iran drags it feet and plays for time. It feigns to be cooperative and promise to be a nice guy, but in the mean time they continue their work on the nuclear stuff.
5) Back to #1.

It seems Iranians are excellent chess players, as the game has been played for years now without the West being able to checkmate Iran ;)

costata said...


Perhaps this will come to naught as well but Bhadrakumar has a pretty good track record. Guess we'll have to wait and see.

JoyOfLearning said...

I just wanted to thank everybody for all the thought provoking conversation! It's brilliant.
If I may ask, could you please direct me towards some good books on trade & state/monetary history? All the ones I seem to find tend to be about some conqueror or focusing on people/heroes but I'd be much more interested in ones focusing on big pictures, on governmental debts, on non-military reasons as to why a country became wealthy and fell. How their laws changed/lead to that, about government spending a couple of years ago and the results. Stuff like that.

I ask because I can see there are a lot of wise people here with a good knowledge of this kind of deeper level of history. For example The Dork of Cork was talking about the proxy battles between the French and the Venetians... i know almost nothing about that period, and yet I think I would have so much to learn by finding out how in the past the transition was made from one more productive nation to another, what what lead to the fall of the old trading nation and the rise of the new one, and how that happened. I also recall somebody mentioning about the 4th & 5th centuries when Gold was burried, I'm curious what happened there. So, if there's any good history books that you can recommend I would be very happy. The best books that I could find with that kind of a bigger picture view on the subject were Sowel's Migrations and Cultures trilogy and another one A short history of nearly everything which in it's quick passing through the history elements gave me the feeling that unlike the standard history books' version of why a civilization rises and falls in fact there's a deeper layer, that it's not a certain general being super brave/smart, but there's some economic factors which lead to the wealth being around for that kind of a person to rise and for the troops to be payed, and that in fact that portion of the nation's history, the one admired by historians is usually just after a longer portion of accumulation of wealth that the history books usually don't mention.

Woland said...

Gentlemen, thanks for your comments. My first read of this
Saturday morning is Chris Martensen's interview with John
Michael Greer, of the Archdruid Report. I am enjoying it, and
perhaps you will too. A more nuanced view of "peak oil", as
well as some thoughts on "peak empire" are discussed. Cheers.

The Dork of Cork said...

@Joy of learning

The history of Scotland is a very good example with both the Templers and Venetians locked in mortal combat.
It was all about money control of the fiat of course.
I think even the city of London turned on the Hanavorian Cumberland in the end when they realized how much capital he destroyed up in the west of Scotland.

The late great Tommie Weir said it best but in my words they are destroying productivity for the many so as to increase the efficiency for the few.
Cattle transhumance was a labour intensive but productive business.

They cleared the land for sheep which destroyed the productivity of the place but increased the efficiency via the destruction of labour inputs.

Looks like history is repeating – maximization of profit for the few…….the Hanoverian few.
Its a early example of Marxs labour theory of value
Today Modern Nuclear build would impact on profits you see……………which is why they don't do it much like why Cattle farming was not a runner for the Hanavorians
The prefer to sweat out existing assets until all the wealth capital is gone.

And Tom in the Wild Bounds , Glen Pean is the wildest place in Scotland (my favourite place in the world) although the UK is not a very wild place…….still you don’t want to break your leg here.

Woland said...

Hi Herb;

I'm just reacting to your comment with a few thoughts, to
help clarify my initial idea. In principle, I would agree that
there is no theoretical difference between an offensive war
and defending oneself against attack. There are, in my
personal opinion, some practical qualitative differences. The
first is that self defense tends to be a "home game" rather than

an "away game", with many of the benefits such a dichotomy
usually provides the home team. In the case of war at home,
it is not unreasonable to count on a good deal of "unpaid
help", or volunteerism, in the event that the ability to pay in
a reliable store of value is no longer possible. (your WWI
scenario, paper mark vs gold mark). This is because of what
is at stake, (enslavement, domination), which is somewhat
different from the stakes on the typical "away game" (they've
got stuff we want", or "they're freakin' infidels ". You are more
likely to have to pay folks to prosecute such ventures, (think
Roman legions), than in the former case, and it's more costly
to conduct such exercises, because of the distances and the
logistics involved. I would conclude that a society which is a
member of a large currency zone CAN still pursue an aggressive
war, if it chooses to tax its' citizens, or pay them in private, local
scrip, but it can no longer use its' everyday currency for this
purpose, by creating new currency units, because those being
robbed of purchasing power are outside the local economy, and
won't allow it. Anyway, that's my present perspective.

The Dork of Cork said...

Try to imagine medieval Europe as place where 3 tectonic forces meet.

1.You had the first cross tribal border corporate entity or multinational , the Catholic church.
2.The Northern Italian banking republics who loaned money to Kings among other activities.

3. The Norse / Norman lords who created sov. taxable Jurisdictions and later the Knights Templar whose power was their scientific knowledge and their trusted cross border letters of credit (i.e. you did not have to carry Gold)

You can see how these cultural forces meet when you enter this church grounds. (2.50)

It is said the Templars fled with their Gold first to Limerick and latter to Scotland which had a very heavy concentration of legacy Norse / Gaelic people on the coast at that time.
(the seas were the highways)

They certainly had a outpost there just after this flight.

Irelands history is a history of 2 invasions - the Normans or old English we call them (they were not Saxon) who sometimes used Ireland as a base of operations for external wars and the Tudor and Cromwellian invasions which stripped the place to the bone and turned it into a ranch.

Biju said...

This guy Nadeem had a fairly good track record and he is predicting a reasonably good chance of US/Israel <=====>Iran/Hezbollah/Hamas war in few months.

Woland said...

Or, for another view, see: "A Pillar built on Sand" by John
Mearsheimer, LRB blog (as in London Review of Books)

Wil Martindale said...

I must say, it just kills me when I read article after article regarding how the "metals" are hammered and the "price" of "gold" is due for a big upswing breakout. It is truly bizarre that we call a thing "gold" which 199 parts paer and 1 part metal.

This is like calling people "magnesiums" for we truly are composed of about .05% magnesium. We would live in a world where we talk about the "magensium condition" in regard to society and "magnesium nature" in regard to huiman behavior.

For a while there I was calling it "paper gold" but I think now, in tribute to recent discussion here, I will cal it fiat gold. I think that confers a more appropriate meaning.

Yes it is the dollar which is truly traded, and the focus of all the incredulity, the tension, the drama, the thrills and agonoes of "gains and losses" ... but I like "fiat gold" as a more descriptive term.

I long for its total collapse and destruction. More from a moral standpoint, than any other.

Wil Martindale said...

And I long for being able to somehow write a complete and correctly spelled sentence on this fricking blog ... but hopefully my meaning is gotten.

Michael dV said...

Blogger and hardware forbid such a longing. I swear I proofread every entry yet still ind errors after I hit send.

Pierre Don Denirio said...

Censor on this blog, now exposed:

Pope FOFOA wants YOU to follow his believe in mysterious ANOTHER and FOA

costata said...


ART has been banned from the blog not censored. This ban was put in place after ART logged over 200 comments in the silver open forums last year. He is saying precisely the same things today as he was back then.

All of the comments he made prior to the ban were left in place in those threads. If you want to read them you are welcome to visit those threads and read his comments. Enjoy!

costata said...


If the reports of rocket fire from Egypt are true then Israel may have some things to worry about a little closer to home than Iran. The situation in Jordan is also quite fluid according to a report I read a few months back.

costata said...

This report from Kyle Bass' Hayman Capital provides a chilling description of Japan's position. A must read if you think that the collapse of their bond market and the Yen could have a flow on effect to other economies.

Some of their projections and indicators suggest that this could eventuate as early as 2013.

h/t ZeroHedge for the original link

dieuwer said...

The report from Kyle Bass doesn't say much what we already know. Also, he speaks a lot of money printing and the bond market, but fails to mention gold once.
I hate to say it, but I'm not surprised: Bass is a clever guy, but still part of the Wallstreet clique that stand to lose a lot when freegold arrives.

costata said...


I just came across a piece discussing too-big-to-fail institutions which contains this quote explaining FDIC's capability to act like a fire hose of cash into the creditors of a failed bank. (h/t to JSmineset for the original link)

Spencer Bacchus pointed out in a paper his office published last month, that despite the claims of Dodd Frank fans that it barred bailouts, he showed how there is still plenty of room for rescues:

Among other things, the “resolution authority” gives the FDIC the power to lend to a failing firm; purchase its assets; guarantee its obligations; and — most important — pay off its creditors. The “resolution authority” also gives the FDIC the authority to borrow money from the Treasury. Lots of it. How much?

The FDIC can borrow up to 10% of the book value of the failed firm’s total consolidated assets in the 30 days immediately following its appointment as receiver. After those 30 days, the FDIC can borrow up to 90% of the fair value of the failed firm’s total consolidated assets.

Who decides "fair value" and how is it decided under the current FASB rules?

Am I reading this right? In theory (albeit extremely unlikely) in the event of all deposit holding banks failing at the same tim the FDIC could inject that $10 trillion plus held in deposits into circulation in 31 days.


costata said...


I realize Kyle Bass overview of Japan doesn't present any new news for someone who has delved deeply into the situation. But it does provide a very concise overview for people who want to get up to speed on this subject. It also shows that Bass and his team have shortened the timeframe for their expected resolution.

Previously there were several analysts saying that Japan's current account surplus (aided by returns on foreign investments) would sustain them until 2015/16. Unless I'm misinterpreting the report his team thinks Japan may already be in an overall deficit in their current account and that it will persist.


Indenture said...

Instead of Banning someone from posting why not block them from viewing the site.
He says politely.

M said...

Kyle Bass is down 60% on his Japan shorts but he knew this was going to happen. He is just hoping to catch the crash in the next 2 to 3 years. Good luck Kyle.

Anyhow....The way the ECB and Europe is going about this crisis will indeed save credibility in in the currency itself but the problem is that it isn't doing anything to recover the economy. Greece has been rioting for 3 years now. Spain, Portugal and Italy are all rioting at the moment. The reason is because the bad debt is not being flushed out so the unemployment numbers keep going up.

How long can this go on before the Euro nations and the ECB have to use the nuclear option just to keep the peace in the streets ?

At some point soon, Europe has to pull the pin.

Motley Fool said...


I don't think FOFOA knew this was possible, I certainly didn't. You've been holding out on us. :P


jeb said...

Credibility is in the hands of the borrower, not the currency it self, with high unemployment, credibility diminishes, so I would think all currencies have credibility issues right now and gold is the path of least resistance to restoring credibility to the borrowers. Euro is setup best to benefit from this.

Woland said...

Kinda quiet today. Time for a joke.

You know the saying that, when you sit down at the poker table,
if you haven't figured out who the "mark" is after a number of
hands, it's probably you.
Well, if a nation's money is credit, then what's the collateral? If
you can't figure that one out, it's probably because it's you and
your countrymen. Greets.

Motley Fool said...

Something posted (over there) that is interesting enough for me to repost.


dieuwer said...

Interest article about Basel III and gold.

Winters said...

Nice find Indenture re: IP ban. The best solution IMHO would be a hellban where the banned user is allowed to comment but he is the only one that see's them. I did a search but it doesn't seem supported by blogspot. The gmail filter solution posted a while back is working great for me.

Ever since I finally grokked freegold (to some degree) I've been meaning to retrawl the FOFOA archives, which I've recently begun. 2009 FOFOA was clearly expecting an iminent (weeks to months) snap of the rubber band. In hindsight, Ender's observation that everything these things happen at a snail's pace appears to have been more accurate. Luckily Ender was right as I only started exchanging my bank credit hoard for metal from 2010 :)

So...I'm wondering what thoughts there are for the USD's resillience so far to a firey HI death. 2000-2008 we know it was China stacking paper. Surely 2008 presented a good crisis that could have brought in the transition. Maybe China still wants to stack more gold so they let the game run a little longer - but who is shipping them their stash in order that they may stack? If Central Banks are net buyers now, who is dishoarding their stash to feed these giants? Cash4Gold?
As it has been said, gold will function best when it is well distributed. Letting the giants hoover up and concentrate gold into fewer spots goes against this idea of letting the Central Banks bleed out Cash4Golders, no?
There has also been talk about how since the launch of the Euro the gold price has been walked up 20% per annum - it seems the last year has been fairly flat. I guess if the current price is still shaking metal out of weak hands and into strong hands, the price needn't walk up.
Anyway - just some thoughts I had. Don't worry, I'm not about to jump back into the paperbug camp. Maybe JR will come in and make me realise I still haven't 'got it' yet :)

Anonymous said...

€uro bullion has been bellow the magic line of 1400,00 for a couple of last days and no nothing on this blog or comment section. It's not just temp swings in the pricing it also bears some psychological aspects to it. Anyway, wondering how long is it going to last? On another note, John Williams of shadowstats in his latest media appearances briefly vindicated fofoans, that sooner or later the Euroarea would somewhat stabilize and the mighty wurlitzer of global speculative casino will turn against the US again with fatal consequences, HI no latest than 2014.

Motley Fool said...


We take the broader view here. Daily swings don't interest us much. I try not to look at the price of gold on a daily basis.

Let's see if it persists to the next euro quarter MTM. Then we would have something to discuss. Perhaps. ^^


Woland said...

Hi Winters;

Mining is said to be +.-, 2500 tons p.a. , but scrap is estimated
at 1700 tons, +,-, or 1% of above ground totals. That's a lot.
Does it fill the gap? I don't know.
On another subject; I like the following perspective:
Gold is that currency one uses to buy all other currencies, and
those currencies are what people use to but "things". Not too
short, but kinda sweet, no?

BTW, re-trawling is one of the best things you can do. Same
words with new eyes = new understanding. Enjoy, and Greets.

Winters said...

Woland - yes agree on the new understanding with retrawling that is why I'm doing it. It's a goddamn long list though! I just have to remind myself it takes a fraction of the time to read what it would have taken to create.

1700t of scrap is a fair chunk - a recent ZH article had China at importing ~500t this year so perhaps their import rate is not that large yet.

and a nice little quote too.

This is one long movie and my popcorn is getting cold. Time to go open a fresh batch.

jeb said...

Timing : No one wants to push the RPG button.
- China could help stabilise the Euro Zone if they wanted to. They don't seem that interested in doing so, which makes me think they're putting the heat on Europe to make their borrowers credible. I'd watch Germany and France.

M said...

@ Jeb

There is high unemployment in the Eurozone but it is the result of real cut backs and austerity. Spain has a current account surplus for the first time since entering the EZ.

The EZ has one mandate.Printing money to to extend current account deficits is not what I call building confidence.

jeb said...

@ M
I can confirm that I have no idea what I'm talking about.

Mircea said...

@Costata: " Great discussion everyone. Gold, oil, banking, money and MF giving Turd Ferguson's crew the shits! Does it get any better? "

Of course it can get better. Just watch the TED speech from this link and see how it fits in the picture:

And my personal touch to this great debate is one quote of Einstein: "Not everything that can be counted counts, and not everything that counts can be counted."

The Contrarian said...

Gold is money. Everything else is credit.
J. P. Morgan

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