Wendy would like you to… "tell us your story ;) where are you from, who do you know, how did you get here, what do you like and don't, do you have a life beyond this blog, whatta you do for fun?? And anything else one might want to add :D and most importantly, how long have you been visiting this blog.
i say most importantly because your answers will likely be different, depending on how long you've been reading, particularily the one about do you have a life beyong this blog :P.
I remember losing a couple of months of any real world contact when it learned about this blog and USAgold, and the trail. That was a few years ago. Also my ocasional hiatus to the basement to rummage through old boxes of FOA and Another from time to time.
There's alot of amazing stuff in this neighborhood!! RTFB ;)
The world didn't end in 2012 and it's not going to end in 2013, but that doesn't mean things won't change. The one constant—the only constant—is change.
"There are 31,530,000 seconds in a year. A thousand milliseconds in a second. A million microseconds. A billion nanoseconds. And the one constant, connecting nanoseconds to years, is change. The universe, from atom to galaxy, is in a perpetual state of flux. But we humans don't like change. We fight it; it scares us. So we create the illusion of stasis.
We want to believe in a world at rest—the world of right now. Yet our great paradox remains the same. The moment we grasp the now, that now is gone. We cling to snapshots, but life is moving pictures, each nanosecond different than the last. Time forces us to grow, to adapt, because every time we blink our eyes, the world shifts beneath our feet.
Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve." –Tim Kring
The number 13 is considered to be an unlucky number in some countries. The end of the Mayan calendar's 13th Baktun is superstitiously feared as a harbinger of the apocalyptic 2012 phenomenon. Fear of the number 13 has a specifically recognized phobia, Triskaidekaphobia, a word which was coined in 1911. The superstitious sufferers of triskaidekaphobia try to avoid bad luck by keeping away from anything numbered or labeled thirteen. As a result, companies and manufacturers use another way of numbering or labeling to avoid the number, with hotels and tall buildings being conspicuous examples (Thirteenth floor). It's also considered to be unlucky to have thirteen guests at a table (Last Supper). Friday the 13th has been considered the unluckiest day of the month.
The Number 13 is a Karmic Number. Number 13 is the number of upheaval, so that new ground can be broken. The number 13 has great power. If this power is used for selfish purposes, it will bring destruction of the self, and in turn, this will bring dis-ease and illnesses. Adapting to change gracefully will bring out the strength of the 13 vibration, and decrease any potential for the negative.
Based on an internal review of records, Dilip Rangnekar of Otis Elevators estimates that 85% of the buildings with elevators did not have a floor named the 13th floor. Future building designers, fearing a fire on the 13th floor, or fearing tenants' superstitions about the rumor, decided to omit having a 13th floor listed on their elevator numbering. This practice became commonplace, and eventually found its way into mainstream culture and building design.
Vehicle License plates in the Republic of Ireland are such that the first two digits represent the year of registration of the vehicle (i.e. 11 is a 2011 registered car, 12 is 2012 and so on). In late 2012 there were concerns among members of SIMI (Society of the Irish Motor Industry) that the prospect of having "13" registered vehicles may discourage motorists from buying new cars due to superstition surrounding the number thirteen and that car sales and the motor industry, (which is already ailing) would suffer as a result. This concern prompted SIMI to approach the Government of the State and request that 2013 registered vehicles have their license plates age identifier string modified to read "131" for vehicles registered in the first six months of 2013 and "132" for those registered in the latter six months of the year. As of August 2012 the government, bearing in mind the potential loss in VRT (Vehicle Registration Tax) revenue on new cars, are considering the proposal for implementation. When the proposal was released to the media on 25 August, it was met with mixed reception.
The American flag has 13 stripes in honor of the first 13 colonies.
Apollo 13 was a NASA Moon mission famous for being a "successful failure" in that while the crew were unable to land on the Moon as planned due to a technical malfunction, they were returned safely home.
Several successful sports figures have worn the number 13.
In Italy, 13 is also considered to be a lucky number, although in Campania the expression 'tredici' (meaning 13) is said when one considers their luck to have turned for the worse.
In ancient cultures, the number 13 represented femininity, because it corresponded to the number of lunar (menstrual) cycles in a year (13 x 28 = 364 days). The theory is that, as the solar calendar triumphed over the lunar, the number thirteen became anathema.
The number 13 in the Coperos religion (small culture in Brazil) is like a God number. All coperos must know that this number can save humankind.
I am not superstitious. But I do wonder what will be written about 2013 after the fact on these types of pages. Will it be remembered as a lucky year, or an unlucky one?
Last year was:
2012 Year of the Surprise
I have an idea for what to call 2013, but I'd like to hear your suggestions in the comments!
2013 Year of the _______
And finally, there's one thing that I'm watching for the next week and a half. It could be a signal of sorts, but I wouldn't put too much stock in it.
Last year this week, during the Asian trading hours the night before Snapshot day (Friday, Dec. 30, 2011), the euro price of gold mysteriously levitated a whopping €32.89 from the previous day's London PM fix of €1,184.16, which would have been a disappointing decline since the October, 2011 MTM Party which marked gold at €1,206.39. I made a comment about the timing of this unusual overnight levitation in this post. In it I noted that "evidence from Sept. '10 and April '11 seems to suggest that year-end and mid-year might be more important [MTM parties] than the other two quarters."
Then, last May, I posted two cryptic tweets:
Two new markers. Sorry no details. Freegold Puke Indicator & Goldhog day. If he sees his shadow, it's game on. If not 6 mo. of kick the can.
— FOFOA (@FOFOA999) May 16, 2012
FPI already fired. Goldhog day is June 29. ;)
— FOFOA (@FOFOA999) May 16, 2012
I will now explain those tweets. The following is almost verbatim from an email I sent Warren back in May explaining my tweets:
Jumbo Shrimp selling 95% of his gold was my Freegold Puke Indicator (or FPI) which fired.
At the time of my tweets, the euro price of gold was €1,211, already below the April and January MTM party numbers. And it was only about €5 above the October MTM party. So my Goldhog day prediction on May 16th was that if we had a June 29 snapshot of around €1,216 or less, it was game on for Freegold. The "window of opportunity" would be open! But if it would be €1,243 or higher it meant another 6 months of kick the can. There’s more to it than just that, but with Jumbo Shrimp’s prediction of the paper gold price collapsing, I thought this was a good opportunity to take the temperature of official support for paper gold.
The thing is, paper gold is so relatively valueless that it’s no wonder when the price falls. The real wonder is when it rises. It’s almost as if someone is supporting paper gold. Remember my old Timing is Everything post? The theory there is that the Eurosystem CBs are actually supporting the paper gold price somehow. That theory came straight from Ari, and it has held true so far. On Dec. 29th 2011, the euro POG magically levitated in the middle of the night from €1,184 to €1,216 so as to beat (in the eleventh hour no less) the October MTM party which recorded €1,206. In the April MTM party it was up again to €1,243.
I don’t necessarily think that there is some target rate of appreciation like 18% p.a. If the Eurosystem CBs are supporting the paper gold price at key times like MTM parties and GLD pukes, I think it would naturally show up as some sort of an emergent pattern. But that doesn’t mean there’s a specific target. It’s just the average of what whoever is doing it considers a reasonable amount: not too high/obvious and not too low/meaningless. Over time, the average would emerge as a steady long-term appreciation in the gold price.
So why would Eurosystem CBs be supporting the paper POG? I have some theories on that.
June 29, 2012 was mid-year Snapshot day and my Goldhog day. Gold was €1,211 on May 16th and I predicted that if it was €1,243 or higher on June 29th it would mean six more months of kick the can. If it was €1,216 or lower it would mean "the Freegold window of opportunity" was open. If it closed anywhere between €1,216 and €1,243 on June 29th it would be too ambiguous to be predictive one way or the other. Of course we got €1,246.62 on June 29th which meant six more months of kick the can.
Well, my FPI fired again last week and now we are a week and a half out from another Goldhog day and, as of this writing, euro gold is languishing at €1,255.94. That's a full €121.48, or almost 9% below October's MTM party, yet still €9.32 above July's. So I'll take another stab at the predictive powers of Goldhog day. But first, here are the results from the last six MTM parties:
July 2011 - EUR 1,043.38
October 2011 - EUR 1,206.39
January 2012 - EUR 1,216.86
April 2012 - EUR 1,243.45
July 2012 - EUR 1,246.62
October 2012 - EUR 1,377.42
This year, because New Year's Day falls on a Tuesday, Snapshot day is actually Friday, January 4th (it's usually in December) and the results will be released the following Wednesday, January 9th. So here's my "prediction" (and remember that I hate doing this stuff):
If the recorded price on Friday, January 4th, 2013 is EUR 1,246 or lower, it's game on for Freegold meaning that the window of opportunity is now open because official support for paper gold has apparently ended. In other words, there may be no system support the next time something breaks. But if the recorded price on January 4th is EUR 1,389 or higher, it's six more months of kick the can. And if it's anywhere between EUR 1,246 and EUR 1,389 (which it is today) then the €PoG will be too ambiguous to be predictive one way or the other.
This is not your typical TA-based prediction. I hope you can tell the difference. If I was interested in TA I would be looking at the $PoG and not the €PoG. This is simply a moment in time when we can apply a specific theory, one that Ari alerted me to two and a half years ago, and take a fresh reading. Like I said, it's just something I'm watching that could be a signal of sorts, but I wouldn't put too much stock in it. Here's a chart of euro gold that will update each time you reload the page:
My Christmas present to you this year is AFTER (THOUGHTS!). It is what I mentioned in thesethreecomments, and it is a complete chronological archive of all of ANOTHER's and FOA's comments that came after (hence the name) ANOTHER (THOUGHTS!). It is more complete than what I previously posted by at least 700 pages, and that's not counting the Gold Trail posts which are also intermixed with concurrent A/FOA comments that remained separated from birth until now.
In total, these five pages, which are also linked in the sidebar, contain 1,428 pages (in Word) of A/FOA comments in the same order and basic context as they were written, which is also the order that they were read by those who were following the Trail in real time between 9/20/98 and 12/16/01. To read them in this order was a challenge even when USAGOLD still had the Discussion Forum online, a chore which I never attempted, and impossible now that the regular forum is missing. Yet here it is, dropped in our lap like a present from Santa himself!
It's not as pretty as USAGOLD or Ron M's Air-Friendly PDFs, but it's all there (possibly TWICE as many A/FOA comments as we had available yesterday), and soon it will all be searchable on Google. The links to my copy of Martijn's archive are no longer in the sidebar, but they still exist and can be accessed at the bottom of that post because A) they are already searchable on Google, and B) they may contain a few comments by ORO (and others) that are not in AFTER (THOUGHTS!).
But this is not meant to be your only Christmas present this year. There's one more surprise that I hope to slip under the tree for you before Christmas! ;D
Sincerely,
UPDATE:
I just added pdfs to the links in the sidebar. The archive is divided into two pdfs which are beautifully formatted and even have live links just as they appeared on USAGOLD. The first one covers parts 1 and 2 and is 659 pages. That's basically all of the posts between the end of Thoughts and the beginning of Gold Trail. And the second pdf is parts 3, 4 and 5, 769 pages which starts two weeks before the Gold Trail.
Also, another reader just informed me that he has a copy of ALL of the USAGOLD comments from 1998-2006. He says it's such a large mass of files that it's difficult to reorganize, but that any individual day of comments is easy enough to pull up. So I'll take a look at what he has and see if one of our database or internet experts can figure out a way to make it all at least accessible to everyone.
UPDATE #2 (12/23/12):
I now have a copy of the entire discussion forum archive that is missing from USAGOLD! It is pretty large, containing 3,145 folders each of which contains a day of comments from late 1998 through early 2007, about 8 ½ years' worth of comments. The folder names are the dates.
Here's a sample. I picked one random day in 1998 and threw it up as a sample page.
If anyone else would like to download this archive file, it will be available at this link for the next five days, at which point the link will expire. The d/l is a zip file that is 92MB which expands to something like 280MB. It looks like, since this is a free file sharing site, there are only 100 downloads available. [Correction, only 20 free downloads! Check comments for new links if the limit has been reached.] So first come first served! :D
Update #3 (12/24/12):
So far at least 46 people have downloaded the archives from the transferbigfiles website. And here are two more links with unlimited downloads:
Let's take a poll. What is gold? Is it money, currency, an investment or wealth? For clarity, I'll give you my definitions of each with links to some of the posts in which I've used these terms.
Money is credit (i.e., it is the way the economy uses credit balances to lubricate the flow of tradable goods and services).
Currency is what denominates money. It is often issued or at least standardized by the sovereign or a representative of the collective. The private economy trades using mostly credit (money) denominated in these standardized currencies, credit that is issued and cleared by private institutions using the currency itself for clearing. Currency itself also doubles as the "in your hand," "on the run," "money to go" element of the money system, so that discrete (and discreet!) "amounts" of said money-system can be transferred among individuals conveniently while operating temporarily outside of the institutional monetary ledgers. And currency is also exchanged directly with other currencies through a network of currency exchanges, often with the clearing function provided by private institutions, to facilitate equitable trade between regions that use different currencies.
An investment is something that you buy expecting a gain or return. It is a way of putting your money at risk in the hopes of obtaining more money. When an investment reaches an expected "top" or some level of overvaluation based upon the calculations of the investor using common metrics like earnings, interest or the sum value of its components, the rational investor is likely to sell that investment and move the funds into something he deems undervalued at that time.
Wealth is simple. It is literally anything physical that you can possess or at least own unambiguously. Tradable wealth is that which many people value similarly, therefore it is tradable. Durability makes some forms of tradable wealth a better store of value than others which can decay and perish over time. Common forms of durable tradable wealth include fine art, antiques, classic cars and many other collectible hard assets.
My poll is over to the right in the sidebar, and it is open to anyone, even those who have no "gold". I even made it possible to vote for more than one choice, in case you think that gold is two, three or all of the choices.
I cast the first vote on behalf of A/FOA. How did I know their vote? They made it crystal clear in one of their earliest comments:
"Gold is not money, not currency, not an investment, it is wealth."
I think this is the essence of all of this, of Freegold, of (THOUGHTS!), of The Gold Trail, of my blog, the key, if you will, to unlocking the view. But from the last thread of arguments against Freegold, it is obvious that some of you still think gold is just another investment. That's fine, because that's all gold is to almost everyone in the West, so you're certainly not alone in your opinion.
If we could get everyone in the West to vote in this poll, I think "gold is an investment" would win in a landslide. If we could get everyone in the precious metals blogosphere to vote, then "gold is money" would probably win. So, to most Westerners, gold is an investment. To the gold bugs and HMS crowd, gold is money. And to the bullion banks, gold is a currency (ISO code XAU) upon which credit is issued and traded. So what did A/FOA mean by the statement that gold is wealth, not any of these other things? I mean, surely gold is whatever its users think it is, subjective use value and all, right?
Actually, that's exactly right! Gold is whatever its users think it is. And the point A/FOA was driving at was that the vast majority of the above-ground gold, today somewhere around 165,000 tonnes, is held by people who understand it as wealth. And, in fact, the only opinions about what gold actually is that will matter on the day after the Freegold revaluation, the only "votes" that will count, are those who carried (i.e., possessed or unambiguously owned) that gold through the transition.
The real vote for "what is gold", the only "poll" that will matter, will not be like a democratic election with universal suffrage. You'll only get a vote if you have some, and your vote will be weighted by how much you have. This concept is highly relevant to Freegold, especially in the context of the last thread.
Probably (to us) the most relevant conclusion drawn from the abstraction we call Freegold (which is really just the end of the use of gold as a currency denominating credit) is a future gold price that is more than an order of magnitude higher than today's price… in real terms/constant dollars. This is also the conclusion that sprouts most of the arguments against Freegold. And the main argument against such a shocking revaluation is that it won't stick because of supply and demand.
There are two schools of thought on the organic emergence of Freegold. The one that I don't subscribe to is that it will be demand-driven… from the ground up. This school of thought says that we will only see Freegold once the average man on the street understands how precious physical gold really is. It says that the demand for physical gold will someday undergo a phase transition thereby overwhelming the supply flow and bringing us to a new, physical-only price range (in real terms).
The other school of thought, the one that I do subscribe to, is that it will be supply-driven… from the top down. My school of thought says that the average man on the street will only understand how precious physical gold really is after Freegold is revealed in stark relief. It says that the supply flow of physical gold will someday undergo a phase transition whereby it goes into hiding due to the crashing price of its paper proxies. It says that physical gold, during this phase-shift, will further consolidate in the hands of only those who understand it as wealth and nothing else, bringing us to a new, physical-only price range (in real terms).
In future hindsight, looking back on the transition, it may be commonly held as a chicken and egg question as to which came first, the new price range for gold or the change in demand. Cause and effect is sometimes tricky that way. At the top of Moneyness 2 I wrote:
What will change is how we view money and wealth
Everything else in Freegold flows from that!
This is a simple statement of demand-driven cause and effect, but it doesn't say what will cause the change in demand—how we will view money and wealth. For this I think we need to look at the supply side; who will have the gold, whose vote will count when gold is suddenly $55K/ounce (in constant dollars) and the question is asked, what is gold?
Above-Ground Supply
It is actually quite a bit easier for me to describe the people whose view won't change because of Freegold than to convince you of everyone else's view changing because of Freegold. You need only understand the distinctions between the views, what sets them apart, to draw your own conclusions.
It is possible that some of you at this blog who still view gold as an investment may indeed make it to the vote that counts, depending on how it all unfolds. But if you are lucky enough to get there while still clinging to the idea that gold is an investment to be sold at the top, or that "asset allocations under Freegold" should be rebalanced away from "toppy" gold, then your vote will be in the tiny losing minority of those who reacted like lottery winners. But based on some of the comments in the last thread, I bet that most who view gold as an investment will cash in that lottery ticket too soon. And even if that's not you, most others will and will thereby surrender their vote altogether, diminishing that tiny voting block even further.
I want to tell you a story about one of my readers. We'll call him Jumbo Shrimp. Jumbo Shrimp started reading my blog in 2009, and he was one of the very first people to send me a donation when I put up the button that year. It was a sizeable donation, and it was repeated several times. Turns out that Jumbo Shrimp is quite successful as a financial market analyst of sorts. He's about my age, maybe a few years older, but his net worth is around $15 million.
Jumbo Shrimp first got interested in gold almost a decade ago, and he bought himself quite a bit of physical with an average purchase price in the $500s. From what he told me earlier this year, he had accumulated around 1,700 ounces of physical which he kept in his immediate possession. He even sent me a picture of himself holding a 10kg (320 oz.) coin worth about a half million at the time.
We had many conversations over a couple of years. We even talked on the phone occasionally. And one thing I could always tell about Jumbo Shrimp was that, even though he loved my writing, he never quite understood my view. He still thought of gold as an investment, one of many, and he considered the idea that paper and physical could ever diverge leading to a revaluation of physical to be a conspiracy theory. His rationale for owning some physical was simply eliminating counterparty risk on a portion of his "wealth".
As I said, Jumbo Shrimp is a financial market analyst, and his method of analyzing his personal gold investments (which consist of more than just physical) centers on tracking the mining shares. His fundamental operating principle is, in his own words, "Gold stocks ALWAYS lead gold."
Anyway, back in early May I received a flurry of emails from Jumbo Shrimp which also went out to a lot of other people, making a very bold bottom call regarding the miners. I quote from the first email: "As low risk/high return as I have ever seen." He was making a technical call, a buy recommendation, and also putting his own money on the line. Unfortunately it moved decisively in the wrong direction just a day or two later.
I don't know if it was because of his personal stake in it, or from the sting of having made such a bold prediction to so many HNW people that went so wrong, but six days later he threw in the towel on gold, emailing me, "It was a fun ride while it lasted. I sold 95% of my gold at $1,645."
He certainly did make a nice profit. If my math is right, he must have booked a gain of around $1.8M on a physical investment of less than a million. My apologies to Jumbo Shrimp for airing his story, but I think it will be helpful to others and I actually hope that he reads this and reconsiders. He is much luckier than others will be in that it's not too late for him to buy back in.
My point in sharing this story is that calling and then catching the top in gold is a fundamental part of viewing gold as an investment. Jumbo Shrimp was early with his call, but whether the price of "gold" keeps climbing from here or falls off a cliff tomorrow, everyone who views their physical gold as an investment will eventually be put to the test at some point before "the only vote on what gold is that counts", just like Jumbo Shrimp was.
I want you to forget for a moment whether or not you think the Freegold revaluation will actually happen. The question I want to table is simple: If it happens, can it stick long enough for everyone's perception about what gold is to change?
I'll give you a quick "what if" hypothetical scenario to help you visualize the question. It is not important whether this scenario happens because there are many possible scenarios that I can imagine leading to the physical gold revaluation, some quite different from this.
Here's the scenario: Imagine that we have another financial market collapse like September, 2008, only this time the price of gold keeps falling even as there is no physical to be found. The market collapse leads to an emergency print-fest by the USG in an attempt to "stimulate" or shock the economy and markets back to life. Trading is stopped to interrupt the free fall atmosphere. "Gold's" free fall is stopped at $500 per ounce and over the next few weeks, anyone holding a claim that was previously exchangeable for physical gold is cash settled in the spirit of fairness. At the next quarter-end MTM party we find out that the Eurosystem has marked its gold reserves at the equivalent of $55K per ounce in constant dollars. We also find out that this price (in real terms) was derived by averaging actual trades mediated by the BIS and ECB during the blackout after the paper markets crashed.
So we have a sudden step up in the (real) price of physical gold from $500 to $55,000 dollars. It is basically an "overnight" revaluation, even though it wasn't literally overnight, because $500 was the only known price in the interim. Any trades of physical gold that happened during the interim ("gold in hiding" period) happened locally and did not affect the price of gold because it was technically frozen at $500.
I'm happy to conclude that this news (the new MTM price) will be a shock to almost everybody, especially to those who missed out on the revaluation, and that their initial reaction to the shock will certainly not be to rush out and buy tiny gold bars at $55K per ounce. That particular change in demand will take some time to manifest in any scenario I can imagine. So I think it is really more a question of supply as to whether this new price range can stick in the immediate aftermath.
And this brings us to the vote for what gold is! The two main contenders will be 'investment' and 'wealth', because those choices represent the two competing schemes of action that will be faced by those who actually did participate in the revaluation by carrying physical gold through the storm, and who therefore get a vote. In fact, action is the voting method, which is precisely why only those with gold will get a vote.
For example, those who somehow made it through the revaluation process while still thinking gold is an investment will, upon seeing it gap up from $500 to $55,000, either cash it in like a lottery ticket or at least rebalance their investment portfolio away from gold. And if too many people do this all at once, supply will flood the newborn physical-only market and the new price range could falter unless the Giants and CBs step in with unlimited demand. It is possible that the Giants and CBs would do this, but the point of this exercise is to explain why they won't have to.
Those who understand that gold is wealth, on the other hand, will react differently. People with durable, tradable wealth generally have everything else that they need. Wealth is what you buy with your excess. And if you need to tap into that wealth, for whatever reason, to support or improve your lifestyle, then you sell it in drips and drabs as needed. Or, if your wealth preferences change, you can also trade wealth for different wealth. So here we have three actions that the wealthy take with their wealth. They accumulate it, they sell it in drips and drabs for consumption purposes, or they trade it for other wealth.
I'm sure this seems like a ridiculous distinction to those of you who view everything as an investment. That's really a Western shrimp perspective, and I think it's probably why you are struggling to understand Freegold. So let's take a closer look at it from a couple different angles. Michael H pointed us to this comment from FOA just the other day:
" " "Econ 675, Advanced Graduate Level Money and International Banking: Market Disequilibrium Scenarios, otherwise known as USAGold Forum" " "
-------------
Hello Mr. G,
Ha! Ha! That is some class you are taking. One of the things Another wanted to accomplish is happening. That being, getting Western citizens to reconsider exactly what gold was in the eyes of other real people. In order for that to happen, people had to understand the evolving modern politics of gold and how it has created a "New Gold Market". One far different from the one goldbugs of the 70s had grown to know and love.
In the beginning, many readers had no basis for comparison when reading most of Another's Thoughts. Yet, we walk this evolutionary trail of gold today with eyes wide open and better able to grasp the impossible road ahead.
Onward:
I have seen one sure sign that Westerners don't really know what has happened to their wealth. This is demonstrated when one "bemoans the loss of good times" if gold goes very high. It comes across the same every time; " " "if gold goes to $30,000 we won't have a dime and everything will fall apart" " ". Well, Another made his point that the dollar said your wealth was worth more than it really was. Let me demonstrate.
Like this:
Ever been to a high priced auction. They bring out the "Strad" violin and start bidding at $500,000. After a while it goes for $1 million flat and it's over. After that we listen to the perceptions around the room.
One guy in the back, who has 10 million cash, thinks the Strad was cheap at one mill and will pick one up next year. In fact he may get ten if they are offered. Some rich woman has 3 million and she figures her wealth is equal to three "violins" if she ever wanted them.
All around the room the feelings are the same as perhaps 100 million in assets are represented. They all equate their buying power to this one auction. Even though only one walked away with physical, everyone knows they are "strad rich" in wealth. Each goes home for the evening cognac and relishes in this knowledge. Their lifelong effort of hard work and shrewd investing has positioned them to own the wealth of many rare violins. Life is good, very good.
The one problem with all of this is that they based their "wealth holdings" on the outcome of just one auction. Truly, had they all bid, the violin would have gone for much more and their wealth would seem "not so much".
In much the same way our world of dollar assets carries the same risk. All of us stand in the same world auction room and watch the daily bidding for goods and services. We watch the prices of cars, gas, houses, clothes, etc. and conclude our wealth balances based on what we could acquire at this auction should we choose to bid. We see our economy in a light of infinite goods and services but fail to balance this with the potential of others to bid, "in mass". In this light, few have a valid perception of just how many dollar assets are out there. Indeed, without this grasp of "dollar inflation" we blindly consider our wealth and position in life using the present price structure of "things". A system in which we trade paper IOUs of infinite number for real things of finite number.
So, our belief that life is good, largely rest not on the confidence in the dollar. Nor is it in the confidence that others will value and accept our dollars. Life is good, because all of us do not "bid" at the same time! If we did, our life would not be as good as our dollar wealth says it is!
This is the deception in our Western grasp of what wealth is. Our life savings are valued at what they can buy today, even though, in reality it is based on an unknown purchase price in the future. Just as all of the wealth at the violin auction was a phantom in self delusion, so too is our present good life and bank account numbers. The evolution of a people that once gripped gold for the real wealth money it was, has proceeded to the hoarding of bookkeeping entries of account credits. History has proven that once humans begin to question the value of this dollar "wealth owed them at a future unknown price" they run a race to outspend their loved brothers. Buying goods now at the "known" price quickly balances the books so no one is any longer fooled. The currency equivalents remain as a trading medium, even as real things are held in the background for value proof.
No, a high price of gold will not rob us of our wealth. It will rob us of this perception of money value that was but an illusion in the clouds. Wealth for tomorrow is found in this context for today; one cannot lose something they never owned. Buying physical gold at today's prices ($200 to $500) will not help you maintain this modern illusion of wealth we never had. But will allow us to later spend the true value of gold that presently exists today. A value few will accept or believe.
Thank you all,,,,,,,,,,,,,,,FOA
FOA made some great points in that comment, but I want to draw your attention to one that I think was inadvertently made. The reaction of the millionaires observing the "Strad auction" illustrates the paradoxical nature of Giffen or Veblen goods which seem to violate the economic law of demand. These observers didn't have their own Strads, but as the price rose and the auction settled, they instinctively imagined buying their own Stradivarius and they also considered their own wealth in Strad terms—how many Strads they could buy.
These types of goods are sometimes called positional goods or status goods. It has been observed that rather than people diversifying away from these goods or substituting other goods as the price rises, the opposite tends to occur with world-class durable, tradable and collectible wealth items.
You've probably heard of the wealth effect as it was applied to the housing bubble. It says that people tend to spend more when they actually are richer, objectively, or when they perceive themselves to be richer. The point here is that the behavioral change effect comes from the perception of wealth, not the liquidation of wealth.
Imagine a painting that was purchased for $10 million and sold a decade later for $100 million. We have seen a rise in the price of fine art over the last few years, so why haven't we seen all fine art flood the market like a bunch of lottery tickets trying to get cashed in? When a wealth item like that rises in value and that new value is revealed at the margin (the auction house), the wealthy people holding similar items simply feel a little more wealthy. But they understand that wealth is not a lottery ticket. Perhaps some people view fine art as an investment, but not the majority, otherwise we'd observe something different than what we've observed.
The point is that Giants, who hold a good portion of that 165,000 tonnes of above-ground gold, view physical gold as wealth and not as an investment. No matter where the price goes, they will not sell it en masse, or even in mass. They already have everything they need to live an exceptional life style and they understand that the best way to dishoard wealth is in drips and drabs over time as needed or as individual preferences change.
But we are not all Giants, are we? Some of us are likely to want to "upgrade" our lifestyle if our gold is suddenly revalued, right? Will we do so in drips and drabs as needed, or will we decide to dump it all at once to catch the top and lock in our profit? Well, let's look at this "upgradable lifestyle" portion of the vote. In the West it will be an extremely tiny contingent. In Eastern countries like India, it is likely to be a fairly large contingent.
First the West. When I say tiny, I'm talking about maybe one person in a million tiny. Someone who has, say, 2% to 5% of his wealth/savings in physical gold—and is able to hold strong through the transition without cashing in that lottery ticket or panicking out along the way—is really only going to stay even or see a small gain (e.g., see Michael H's revaluation/rebalancing exercise here). So in this Western group of "voters" who will be faced with the choice of drips and drabs versus all at once lottery ticket are really only those who have a substantial enough portion of their wealth in physical gold that they will see what could be considered a life-changing windfall profit.
The bottom line is that this Western group is too tiny to even matter in the final vote for "what gold is" after the transition. And the dynamics of the transition will likely shake out all but the strongest hands which are more likely to consider gold to be wealth like the Giants do.
In the East they already view gold as wealth. So even though they will have the ability to improve their standard of living, they will likely continue to accumulate, only choosing to dishoard as needed. This would be a good question for Anand. How many of the gold holders in India do you think consider gold to be wealth versus how many consider it an investment that you should dump at the top? And how will the average Indian react to a gold revaluation? Will she sell it all at once and live large like a lottery winner? Will she sell a little in drips and drabs as needed to improve her quality of life? Or will she continue to accumulate while feeling (knowing she is truly) wealthy?
I suppose it will depend on each person's individual circumstances, but we generally aspire to that which is already present in our vicinity. So I can imagine that a general improvement in the standard of living in India would play out more gradually than it would for, say, an American lottery winner or an NFL draft pick.
So who else is there on the supply side that will get a vote on what gold is? Oh, yeah, the central banks! They use/view gold as a reserve asset, which is to the monetary system as wealth is to the individual. So I don't think we have to worry about them dumping their gold like an investment "to catch the top".
I guess that about covers all those whose opinion will matter (except maybe governments, but we'll get to them in a moment). The opinion of those who don't carry above-ground gold through the transition won't matter, but it will be forced to change specifically because it won't matter! Think about that while we move on to gold in the ground.
Gold in the Ground
While there are an estimated 165,000 tonnes of above-ground gold, each and every bit owned by someone, a recent estimate revealed known and recoverable in-ground deposits to be another 67,500 tonnes spread out all over the world.
The distribution of these in-ground deposits is as follows:
North America 34%
South America 17%
Europe 2%
Africa 17%
Russia/Asia 17%
Australia 12%
The average rate of extraction for the last five years, according to the WGC, has been 2,602.2 tonnes per year.
One of the arguments against Freegold is that all of this mining supply, if it went to market at $55,000 per ounce (or thereabouts), would constitute a dump requiring an offsetting demand of $4.6 trillion per year (in real terms—global net production) to maintain that price. This is a powerful argument that, in my opinion, deserves some more discussion.
To understand the counterargument, there are a couple of things you need to know about the differences between in-ground gold and above-ground gold. First of all, gold that is still in the ground is not worth as much as gold that has already been mined. Gold in the ground is worth the market price of above-ground gold minus the cost of pulling it out of the ground and then refining it. The second thing is that, while every bit of above-ground gold is owned by someone, the ownership of in-ground gold is not what you think, especially in extremis. Let me explain.
It is a pure illusion today that the owners of mines also own the gold in the ground under their mines. It is an anachronism, a relic of a bygone era and it can only last as long as the price of gold and the cost of extraction are in relatively close proximity. Here's what ANOTHER had to say about it:
Date: Sun Apr 19 1998 15:09 ANOTHER (THOUGHTS!) ID#60253:
The governments will revalue gold and "demand" that the public carry it and use it! It will be the source of all gold, the mines, that will be controlled! That's Controlled, with a capital "C", not confiscated!
When confronted with the argument that governments are slow-moving leviathans and will therefore be slow to tax the mines with some sort of windfall profits tax, FOA remarked:
FOA (6/7/99; 7:45:04MDT - Msg ID:7282)
Steve, on this issue, they will move no slower than with the speed of one who finds a gold coin upon a sidewalk!
FOA
Mining companies are sitting ducks. Hat tip to reader "B" for this recent quote from Doug Casey:
"All the governments in the Western world are really bankrupt and are, therefore, going to be looking for more tax revenue. Mining companies are going to be in its sights because mining companies can't move their assets; they are the easiest thing in the world to tax. The good news is that makes mining stocks very volatile, and sometimes extremely cheap. Volatility can be your best friend."
Mmm, cheap and volatile thanks to being sitting ducks for the government! Here's some more FOA:
FOA (10/25/99; 19:57:57MDT - Msg ID:17447)
reply
elevator guy (10/23/99; 21:30:08MDT - Msg ID:17282)
@FOA
Why will gold stocks be a risky place to be?
Hello elevator guy,
We have covered this area many times before. Simply put, when this new gold market runs as never before seen, shares will under perform bullion because they only represent the ownership of a business not money reserves. As a mining business, they must overcome the negative effects of a banking crisis, massive cost inflation and taxes old and new. Their dividends will never return the equivalent of the increase in bullion nor will the equity. Most investors do not retain a good historical perspective between government confiscation and government regulation. Production regulation and taxation are a different control of mine reserves that greatly impacts stock values. Many stock promoters often try to inject the "confiscation issue" as one for bullion holders while ignoring this other dynamic as it pertains to mine shares. The race will be for bullion and large international players will discount the leverage of mine reserves in terms of the crisis financial atmosphere they must invest in.
Even so, some mines will be sought after as they will be perceived as the best positioned of the lot and the last to be interfered with.
Anyway, it's a long hard subject that many will pay dearly for as this transition proceeds.
We will talk again on this. FOA
Imagine if the mine owners actually had as strong of a claim on the minerals under their mines as most people think they do today. With a market price of $55,000 and an extraction cost of only $1,500 or less they could literally "spare no expense" on all the modern mining technology and equipment needed to blast and dig those lottery tickets out of the ground and cash them in as fast as possible! They'd surely run up the extraction rate a bit and put a strain, if not an outright crash, on that Freegold price range.
But they don't have that strong of a claim. The sovereign or the collective (i.e., the government) does. The catch word here, a word you will learn more about, is "royalties". It's not unlike the oil in the ground that the House of Saud allows American oil companies to extract and bring to market in exchange for… royalties.
Even at today's price of only about $1,700 per ounce, some in government already have their fast eye on FOA's "gold coin upon a sidewalk"!
(Reuters) - Revising a 19th-century U.S. law that governs the mining of gold and other precious metals could add billions of dollars to federal coffers at a time of tight budgets, according to some Democratic lawmakers and a government study released on Wednesday.
Taxpayers receive no royalties on metals pulled from federal land, and officials drew a blank when they tried to find out how much gold, silver, copper and other valuable metal is sold.
"Federal agencies generally do not collect data from hardrock mine operators," said the report from the nonpartisan Government Accountability Office, which looked at the market in 2010 and 2011.
But applying a metals levy of 12.5 percent - the benchmark government share for other resources - could deliver hundreds of millions of dollars a year to taxpayers, according to independent studies and U.S. Representative Raul Grijalva, who sought the report and other data from the mining industry.
"As we face these fiscal challenges, these are the pennies that we should pinch," said Grijalva, the leading Democrat on the panel that oversees public lands.
Grijalva, of Arizona, and Senator Tom Udall of New Mexico, who jointly called for the GAO report, say taxpayers should also benefit from a gold price surge that has boosted the bottom line for miners.
Applying Grijalva's royalty formula on the 1.1 million ounces of yellow metal pulled last year from Goldstrike mine in Nevada, the largest in North America, could have yielded $150 million to taxpayers, according to a Reuters tally of industry data.
Barrick Gold Corp (ABX.TO), the mine operator, said only a fraction of Goldstrike is on federal land, and the company's taxes have already quadrupled in the five years of climbing gold prices.
Taxpayers are entitled to a royalty from metal sales nevertheless, lawmakers said.
[…]
NO-ROYALTY RULE
The 1872 mining law that drove prospectors into western states such as California still governs much of the industry.
But this no-royalty law is a costly anachronism when mining giants can stake a claim on federal land for a few dollars an acre, Udall said. The coal, oil and gas industries, by comparison, have no such exemption.
"We are giving our gold and silver for free and don't even know how much we are giving," said Udall, whose father, Stewart, was secretary of the Interior during the 1960s and called mining law reform his great unfinished work.
Lawmakers who have occasionally tried to reform the mining rules have never cleared all the hurdles to pass new laws, as the industry has strong political allies.
Senate Majority Leader Harry Reid, a Democrat, counts on mining support in his home state of Nevada, and lawmakers say it will be difficult to persuade him to take a bite out of the industry.
But on Wednesday, the two top senators on the Energy and Natural Resources Committee said they were open to considering reform.
"There's been agreement for a long time that the 1872 Mining Law should be updated to include a royalty" and reduce paperwork, said Senator Lisa Murkowski, the panel's top Republican.
[…]
State and local governments often catch a windfall from mining revenue, and Udall said Republican lawmakers from the West might be persuaded to increase the federal take.
"Everyone agrees we need a balanced package to find new revenue," he said, "and this seems like the right time for reform."
So the "production regulation and taxation" of the mines as FOA put it, or "Control with a capital 'C'" as Another said, will effectively transfer the vote for "what gold is after the revaluation" from the mine owners to the sovereign or the collective (i.e., the governments of the world). Will the governments of the world view gold as an investment or a lottery ticket? Or will they view it as a wealth reserve/monetary reserve asset? This is the question that you need to answer for yourself. I know my answer.
From FOA above:
"The currency equivalents remain as a trading medium, even as real things are held in the background for value proof."
Currency issuing governments like the USG can simply spend money into existence. The credibility of this common government system is generally maintained by three government abilities—the ability to tax, the ability to borrow and the ability to sell off or rent out public assets. To such an entity, the differences between windfall profits taxing gold miners and selling off public gold that is already in the vault are minimal. So if you believe that they will let all that newly mined gold hit the market for just a little extra revenue, you should also believe that they will simply sell their existing gold reserves outright in exchange for the same cash that they can print.
You see, a functioning printing press is infinitely more valuable than gold. Gold, as FOA said, is simply "held in the background for value proof." I can, however, imagine that a country like the US would want to keep its mining companies well-oiled and properly maintained. But that can be achieved by simply transferring in-ground reserves to the vault at some regulated pace.
A country like Canada which has more than 13,000 tonnes of in-ground reserves (the most of any country) and yet only has 3.4 tonnes in the vault would likely transfer at a higher pace than the USG which has a better balance between above- and below-ground reserves. But this transfer of gold from the ground to the vault would not pass through the gold market, even though the government would pay the mine owner the market price and then tax back most of the profit.
Similar principles apply to governments that are not currency issuers, like those in the Eurosystem, in that there is little difference between selling gold in the vault and selling gold in the ground via windfall profits taxes on the miners. One difference could be that, because of their membership in the Eurosystem, they cannot unilaterally choose to sell gold in the vault. But remember from the illustration above that Europe only has 2% of those global in-ground deposits. So even if half of those countries used their in-ground gold as a lottery ticket, that would only represent an additional flow of about 26 tonnes per year hitting the market. An amount that small could, and most likely would, be directly absorbed by the ECB.
I hope I've shown you that it doesn't matter what the rate of extraction will be in Freegold. It could be the same, higher or lower than today. All that matters is how much of that newly-mined gold is dumped onto the market like a winning lottery ticket, relative to the demand.
So let's take a poll. What is gold? Is it money, currency, an investment or wealth? What will your vote be when the time comes? And will you even have a vote?
Someone suggested a post on arguments against Freegold. I thought it was a great idea, but then I couldn't think of any arguments that hadn't already failed. I've been at this task for four and a half years now, and I've read almost all of the 12 years' worth of archived debates and arguments (now missing) at USAGOLD as well as the random debates that pop up elsewhere and someone inevitably links them here or brings them to my attention via email. And yes, I feel like I've seen it all, but maybe I haven't. So here's your opportunity to present your best argument against Freegold.
A reader and supporter of mine, an American medical doctor and surgeon named Jeff Allen, once commented on his view of what it is that I do here and why this blog is "so striking to so many people." I wanted to mention this in the context of this post not only because I loved the way he explained my logical approach to Freegold and its necessary conclusions, but also because I think this is the only way you're likely to succeed at debunking Freegold if that's even possible—by presenting a competing premise through principles, expressed in precisely defined, non-contradictory concepts that are grounded in reality, which lead to inevitable conclusions that necessarily exclude those of Freegold even when viewed from a variety of perspectives.
So good luck with that!
I'm combining a couple of different comments here, but what Jeff Allen said was that "the defining attribute of an objective manner of thinking is the ability to--more deeply, the recognition of the necessity to--think in principles. To see reality as it is, then to grasp reality in non-contradictory conceptual form.
But thinking in principles will not succeed unless its elements--the conceptual terms in which the principles are expressed--are solidly grounded in reality. This is where the term "objectivity" arises. You best reveal your own appreciation for this fact by the manner in which you validate your unwinding of the concept "money."
This is not the way most people think, and this is why your blog is so striking to so many people. But it is only your fellow thinkers-in-principles who possess the capacity to respond in this way. Those who don't get it, including those commentators to which you refer, lack that capacity. Ayn Rand called these the "anti-conceptual mentalities." The anti-conceptual mentality has been fostered and nourished by Pragmatism, the philosophy which dominated U.S. academia the first half of the 20th century, and dominates our educational and political systems still today. We swim in a sea of Pragmatism.
All new knowledge is inductive. Deduction is secondary, and depends on the validity of one's prior inductions.
From whence comes your syllogism's major premise, "All fiat currencies are eventually worth no more than toilet paper?" Was it deduced from a prior generalization, or was it induced?
The answer, of course, is that it was induced. Your deduction merely applies that general knowledge to the specific case of the dollar. If your inductively generated major premise is not necessarily true, then neither is your deductively generated conclusion.
From what prior principle did Newton deduce universal gravitation? Newton's theory is the product of a grand induction, an integration of prior inductions made by Kepler and Galileo, based on observations of planetary orbits, and of the behavior of physical bodies on earth.
Freegold, too, is a grand induction. Your method of approaching the issue from a variety of perspectives, all leading to the same necessary conclusion, after precisely defining your concepts, is essential to a proper inductive process (which, by the way, the mere enumeration of swans is not)."
It occurs to me that TA-based and GSR-based gold and silver trading is probably an example of Pragmatism. I'm no expert on Pragmatism, but Wikipedia says it "describes a process where theory is extracted from practice, and applied back to practice to form what is called intelligent practice."
The "grand induction" (Jeff's term) that we like to call Freegold was not my grand induction. Nor do I think it was Another's. Another merely shared it with us along with some of its "necessary conclusions". Why did he do that? I don't know, but I have a few ideas.
As for the "grand induction" itself, I think it was a European group effort that teased it out in the 1960s and 70s leading up to and also following—and as a result of—the abrupt and predictable end to the Bretton Woods monetary system in 1971. I won't go into the details here because I want to keep this post under 100 pages, but the main point is that I didn't come up with it.
Freegold is just a name. I didn't come up with the name either. But if you don't understand what we're discussing and extrapolating upon here at a conceptual level, ignoring the convenient name, you're going to have a really hard time debunking it. In fact, I don't think you can, even if you do understand it. That's one of the most remarkable things I've observed about Freegold—that those who make the effort to really understand it on a conceptual level not only fall in love with its elegant simplicity and obvious inevitability, but they also start buying physical gold hand over fist. And again, that's only because of one of the "necessary conclusions" that are (IMO) irrefutably drawn from it.
I will temporarily and conditionally lift the ban on the five commenters that have been banished from this blog over the last four years so that anyone is free to take their best shot. But only for this one thread, and only if they behave. I will not put up with abuse, hate, spam or personal insults. In other words, Art, AD and anyone else are all welcome in this thread only, unless and until they abuse it.
But don't expect me to personally debate each and every argument. I'm not going to waste my time on arguments that miss the mark like poor Skippy, our "'A' for effort" dog at the top, or on those arguments that have already been dealt with. There is one argument, however, that I hope shows up to the party. And if anything worthy comes out of this thread, I'll add it below in the space between the lines for the permanent record.
Just beware that Freegold is much easier to dismiss on superficial grounds than to defeat on deep, logically-consistent conceptual ground. So if you really want to avoid becoming another evil gold hoarder, jerk, time misallocator and brainwashed cult member, you should consider simply dismissing Freegold on the surface-level ridiculousness of its necessary conclusions rather than taking up the challenge in this post. Forewarned is forearmed.
And finally, you can't judge the worthiness of your own argument. That judgment, like credibility, can only be made by others. As for what ends up below in the space between the lines, that judgment is reserved for me, but I will consider the opinions of others who I think understand what I think I understand in making any decision. ;D
Two years ago, Martijn went through roughly 1,200 days-worth of the regular USAGOLD discussion forum and compiled (most of *) the intermittent comments by ANOTHER and FOA, along with a few others, into a 436 page pdf. That pdf is available for download on Scribd here.
But lately, the discussion forum archive on the USAGOLD website appears to be MIA. ANOTHER (THOUGHTS!) and The Gold Trail are still there, but not the regular forum. All we have at the moment is Martijn's pdf which is not covered when JR searches for applicable quotes on Google.
So I put those 436 pages of comments into two (search engine-friendly) pages linked in the side bar right under FOA. Blogger couldn't handle 436 pages in one post, but it was fine with 218 (my new post length limit ;). That's why I had to split it into A/FOA Discussion Forums 1 and 2.
There are some great posts in these archives. For example, my 2010 post FOA on Hyperinflation came entirely from the discussion forum, as did FOA to Martin Armstrong. Here's another good teaser for what you'll find in these archives. It's a post I happened across just the other day when Michael H posted it somewhere else (thx Michael H!):
---- My first question, though, is this: If gold should rise to, say, $30,000 per oz as FOA predicts, how, at that time could one's gold holdings be unwound? For what? $30,000 in paper money? Or would the actual gold bullion become the only negotiable currency? If so, what good would a one oz. bullion coin be? It can't be cut apart into small pieces with a pair of garden shears. Beyond that, Goldbugs are notorious for holding onto their physical holdings long past the time of maximum return. ----
(((NOTE: Strand: I find it interesting that goldbugs have become "notorious" for bad moves when their present universe has only existed some 20 years? and the lady has not sang the song yet?)))
You continue: ---In fact, I'm sure that some older people who post at this forum have held gold through several (albeit relatively minor by comparison) upmoves in gold only to kick themselves for not having sold at or near the top.---- (((Note: I know people that have been buying through this entire span of time! True, they have timed their buying on a cost averaging basis, but that concept has made them almost even today. In the believe it or not department. Ask MK about "cost averaging" using a fixed dollar amount. Then I suggest you see the show "Rollover" with Jane Fonda. You would not believe how true it is!)))
Hello Strad,
I'm going to ramble on a bit, so I hope this helps your perspective.
Back in the early oil days I was very close to some of the largest oil men in the country. When in Texas we would visit at the country club and shared a lot of our perceptions. Usually over a poker table. Looking back, I find their (and mine) viewpoints had much in common with the gold outlook today.
When oil went from around $3.00 to $5.00 everyone that had local reserves thought they had made a fortune. You wouldn't believe how many sold off not only their storage barrels but their best (lowest cost production) reserves for cash. The feeling was that oil had just zoomed in price and would quickly go back down. The percentage gain on those leveraged assets was simply huge.
Then oil went up to around $8.00! Good god, we were so stupid to have sold. What a bunch of buying fools out there. Those idiots buying $8 are going to get killed. Everybody knows the major producers can pump for $1.00. Oh well, it just a political thing.
When oil hit $15, some of them knew they had missed out on a train to $20. But they still thought oil would one day return to around $5.00. So as not to miss out completely many of the early sellers jumped on the Natural Gas wagon, using everything they had gained from their first sale. At first this new move made money, big time. Then something funny happened, oil soared and later returned to a more normal $18 to $25 range, but gas plunged from the higher supplies. The "oil boys" turned "gas boys" lost it all. Even into today, gas has never returned.
Truly, they used the silver vs gold concept, thinking the more leveraged natural gas would out run oil and regain their fortunes. It made sense as gas (like silver) was more industrially useful and "CHEAPER". You might even say it was the "poor man's oil" (smile)! Also: Just like silver, gas proved to exist in much larger amounts that the "statistics" demonstrated. As its price "coat tailed" oil, it brought out the massive increase in production that wasn't needed as long as oil was available. Incredibly, this was the exact same story for silver. All the stories about people buying silver as gold went up saw them sell the silver and keep the gold because people just didn't need both of them. The same will happen when gold runs this time. People will keep the high unit cost gold in their vaults, use the digital currencies for trade and sell the silver as it floods out of the woodwork.
Onward:
You see, oil in the early 70s is like seeing the prevalent gold concept today. The perception was that oil could never go up from the $1.00 production range into the $20s (just an unimaginable increase to those in the business) because such a price would flood the world with production. It was thought that there was so much unfound oil in the world that every home owner would have an oil drilling rig in their back yard at $20+. Just as $10,000 gold will have people taking gold from sea water.
Here is where reality gets in the way of concept based on perceived conditions. Yes, the $20 and $30 oil did bring out the rigs and production soared. But, even at the higher prices, the world found uses for this great new gusher of oil. The same human traits that dictate that "you can never have enough money in the bank" also said "we can never use too much oil"! If all the oil reserves in the world could produce at $2.00 then the price would return to $2 plus a profit. But, we want and use all oil produced from fields that pump from $2 cost on up to $30. Gold and oil are not like any other commodity, because under the right circumstances, people find both of their qualities useful and can never get enough of them at any price. It seems we accumulate assets until we die?!
The "paper boys" try and paint a picture of gold like "old oil men" looked at values "back then". They were wrong and so are the "paper boys" today. The Smiths and Arnolds of the world try to convince us that the supply of gold is never used up and creates a glut as it grows. They say that unlike oil that is consumed, gold holdings have become a stockpile that refining cannot use up. I bet these guys would have also sold their oil reserves in the mid 70s also.
Where they miss the boat is in their assumption that people will get enough gold. Not if it's money, they won't! People do consume money just like oil, rather it's just in the form of "savings consumption". Gold, just like money has an "unlimited demand". Again, have you ever seen anyone that said "I have too much money and have no more use for it". "No, don't give me any more of that cash, I've got a glut of it now, go away"! Yea, right!
Often, we read where people say, "oh what am I to do with all this gold if it hits, $30,000?".
Funny how Bill Gates never says "what am I to do with all these MS shares". Well, you too will act like anyone with too much cash or assets, just stash it away until you need to spend it. The old "what will I do with all this high priced gold I can't get change for" logic just doesn't compute when dealing in reality? Ever see someone in a flea market rolling around a cart full of $100 bills,,,and frantically trying to unload it because it buys so much and they can't get change? Help me out here, am I not seeing something?
I'm afraid that even the very poorest of people have a better grasp of spending and saving value than some of the "big time investors" present about gold. (I'm talking about the brokers, Strand)
Onward:
Anyway: The amounts of gold in vaults today is nowhere near enough to represent the only circulating world money. It would have to be priced at $++++++ to do that. So, if mine production can continue, the world will take any and all they can produce. Be it 3,000 ton a year or 10,000 a year because the demand for money (even a parallel supplement money) is unlimited. Personally, I would take all of it (smile) and let the rest of you keep the paper.
The reality of this is that people hold cash in banks as it is lent out and earns interest. If no one lent their cash and just saved it (like gold) to spend in later years, it would take an enormous amount of paper money. This is why the US goes to great lengths to identify gold to the public as a commodity, not money. They want you to know that it must be sold as soon as it goes up. Trade it, don't save it. Most Western investors have bought into this and are going to pay dearly because of it. Again money demand is "unlimited". The same will be true for gold. As people begin to buy gold as a currency supplement, to be spent "as needed", the price could reach enormous levels.....and be seen just like oil......a useful asset you just can't get enough of.
On the road... ...FOA
Enjoy the archive!
Sincerely,
FOFOA
* I will note that I think Martijn missed a few comments. One that stands out is FOA's Brown's Bottom comment which I inserted into my copy. So I don't know how many others might be missing. Hopefully USAGOLD will put the full archive back online soon…
"Gold is the only money the world has ever known"
Sounds like a simple thought, but it isn't.
To understand the following you must rethink your basic
knowledge of money and investments. Get your aspirin ready.
–ANOTHER
What will change is how we view money and wealth
Everything else in Freegold flows from that!
My purpose in writing this post is to state my personal view of the concepts of money and wealth as clearly as possible. I think that my view is useful in both understanding our unfolding present landscape as well as profiting from that early understanding. There are other views of money and wealth which are much more widely accepted, and I hope to explain why I think their biggest flaws are found in their useless conclusions and the destructive prescriptions to which they logically lead.
Anyone who chooses to read this post is free, of course, to take it or leave it, because all I care is that you see and consider it. If there's one thing I know, it's that I cannot claim credibility for myself, that judgment is up to you. So think of this post as a "stack of rocks" marking this spot on the trail. And since I can't say it any better than FOA did a decade ago, here's what I'm trying to say:
FOA: "I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."
There is no authority for the money concept
The first thing that is important to understand is that money (and later banking) was never designed, patented, invented and then rolled out such that we can pull up the original plans and put centuries-old debates to rest. It simply emerged over thousands of years. There is no original set of rules and definitions. There is only reality, a menu of different perspectives from which you can choose to view reality and the conclusions that are logically drawn from each perspective, and then how useful those conclusions end up being in hindsight.
Economists and philosophers, from John Locke to Adam Smith and Jean-Baptiste Say, to Marx and Menger, Mises and Keynes, Friedman and Hayek, to Minsky and Rothbard, have, for centuries, been adding their perspectives to the debate and collective understanding of the emergent concepts of money and banking. This has led to several formal schools of thought on the subject which I argue can be generally divided into two camps—the easy money camp and the hard money camp.
I'll tell you right up front that I think my perspective is far more useful, especially right now, than those offered by either camp. But one of the revelations that I found most vexing while walking this trail was that, in terms of describing money, the easy money camp has always been closer to reality than the hard money camp. Even so, the usefulness of the (macro and micro) conclusions (and prescriptions) coming out of both camps has run the gamut over the last few centuries due to what I think is a fundamentally flawed view of the big picture—a flaw which, in and of itself, has set the two camps perpetually and unnecessarily at odds with each other.
I make no prescriptions here, only observations. Even the personal action I endorse for savers—buying physical gold bullion coins and bars—is not recommended beyond what you understand. In other words, I don't even need to recommend it. If you understand, you will do. But if you do without understanding, your results may vary.* So I'm only sharing my perspective and, if it makes sense to you, you'll know what to do with it.
The goal of this post is to present a lens through which you can see the true role of money and wealth/savings in your daily life today and in the Freegold future. Only time reveals all things, including the full extent of any reward for understanding changes ahead of time and then acting with the full force of that understanding. But I can tell you, from personal experience, that there is an immediate reward from understanding something and then acting upon that understanding. And that reward is peace of mind.
In as few words as possible
Since I'm writing at length here, I thought I'd start out with a kind of abstract for those who can't stand long posts. Blondie once asked me how I would describe money in as few words as possible. My answer was: "Money is credit." I followed that up with a little more detail: "More specifically, it is the recording of current balances of credit. It can be recorded in your head, represented on an institutional ledger, or carried in your pocket as pieces of paper or metal with numbers recorded on them. But notice that it's the recorded numbers and not the paper/metal in your pocket that constitutes the money."
But you can't possibly understand the pure money concept without also understanding the wealth concept. The pure concept of wealth is really simple. Its only attribute is possession (or at least unambiguous ownership of something tangible, if it's not in your immediate possession). Your wealth includes all of your owned possessions, from the air you breathe down to your comfy, worn-out slippers. Value is subjective—it's in the eye of the beholder. Value comes from utility (usefulness) to the user. If something in your possession has no use to you, no value, then it is likely that you won't go to the hassle and expense of continuing to possess it. You'll probably just throw it away. So possession is the distinguishing characteristic of wealth, which also puts wealth squarely in the physical plane.
What sets your gold apart from your stinky slippers and other items you possess is that it is the most tradable—tradable wealth! Imagine that! It is tradable because someone else values it too, unlike your slippers. But not only does someone else value it, but almost anyone anywhere in the world values it nearly equally, even the Giants! How many of your other possessions would measure up to the quality standards of a Giant? None, I imagine. This is what FOA meant by "equal footing".
That's basically it in a nutshell. Those who have been following the comments know that Blondie prefers the term "credibility" more than "credit". It's a fine line, and I could go either way. In this post I'll use both words almost interchangeably, but I think I'll stick with "credit" as the closest proxy for the pure concept of money.
Okay, I guess a few more words are needed
Think of it like this. Value is subjective—it's in the eye of the beholder. You value your slippers, but no one else does. Gold is the one item in the world that comes closest to having a relatively objective value because your knowledge that others value it for the same reasons you do is the very reason you value it in the first place. It's the reason behind gold's utility as a store of value or, phrased another way, a wealth reserve. Salience is a good descriptor.
Credibility, like value, is also subjective. But unlike value it's not something you can claim for yourself. Only someone else can judge you credible. Ergo, credibility must be earned. It is subject to the judgment of others. Credit is like spendable credibility. Money is the fungible exercise of credit (accepted everywhere, even by those who don't understand why you're so darn credible even when you're wearing such ugly slippers). A bank doesn't really give you credit. You earn it before you ever walk into the bank.
If you want to buy a house, you don't need to have saved the full price of the house. All you need to have is earned credit/credibility. You walk into the bank, the bank checks your credit and, if it is not found wanting, facilitates the fungible exercise of your credit/credibility. And then, because it's now fungible, it circulates!
The real world operates on massive amounts of credit. And by real world, I mean the businesses that make everything in your life. Credit is not just about consumer credit cards, evil speculators maxing out their margin and housing bubbles. And the hard money view of "money" as something we all want to hoard is just as pedestrian a view as thinking credit (or debt) is something intrinsically bad. Money has always—ALWAYS—been credit/debt. That's not bad at all. Debt is simply credit (or credibility) fungibly facilitated and then exercised!
Short post fans can stop reading here
FOA wrote so much good stuff on this subject of which I excerpted some and extrapolated more and carried on into MMT and hyperinflation in my first Moneyness post that I implore any new readers to stop here and go read the first one first. I'm not going to rehash anything from that post, so if you haven't read it, it's like you're starting in the middle of a book.
Useless conclusions
I want to start by detailing how a faulty premise can logically lead to useless conclusions and worse—occasionally to destructive prescriptions. The faulty premise I want to discuss is one that is almost universally accepted in today's hard money camp. It is just one example among so many that I can't count them all, but it will also set us up to discuss why money is, and always has been, credit.
This premise was posted here in the comments a few days ago by a reader named Herb. So I'll just cut and paste it here from Herb's comment:
The reason gold is money is because it has the premier attributes of money. You know, the good old textbook qualities of fungibility, divisibility, portability, etc, etc. You can no more deny gold is money than you can deny that a dog is canine or a cat is feline. It simply is what it is.
Indeed, those are great attributes, along with durability, easy recognition and a relatively stable supply! But are those truly the attributes of the original money concept, or are they more befitting the concept of a salient tradable wealth reserve? Is there a difference between money and a tradable wealth reserve? And if so, why is it important to understand this difference? The answer is that not understanding the difference leads to useless conclusions about money and banking and terrible prescriptions for remedies whenever problems arise.
Obviously I am simply describing two different perspectives here. And hopefully we can all agree that common sense says Herb's list of "textbook qualities" at least applies to the very best tradable wealth reserve (or reserve asset). So then the main difference between perspectives is whether or not the concept of money is the same as the concept of a tradable wealth reserve/reserve asset. The hard money camp says yes; I say no. And to judge this distinction I think we need to look at the conclusions drawn from these two different premises.
FOA wrote that, in antiquity, gold was used as a tradable wealth reserve, not as money. From Moneyness:
FOA: Gold, that wonderful metal that has all the unique qualities to function as our one and only wealth medium, and we just can't use it without altering its purpose. You know, the Lydians had it right, back around 430 BC. They didn't struggle with the concepts of money, like we do today. They just stamped whatever pieces of gold they found laying around and kept it for trade. There was no need to clarify for certain that their gold money needed properties of "utility", store of value, medium of exchange, etc. etc.. They didn't need to identify these qualities were in gold before they stopped questioning if it was safe to use gold as savings. Gold was owned and the knowledge that people owned it and carried it for trade was alone enough to make it "worth its weight as wealth".
You see, back in antiquity there existed another property that could override our need for modern definitions of tradable wealth. That property was found in the one identifying mark of wealth that transcended all ages; real possession!(smile) This factor and this one factor alone had the ability to activate all the other modern attributes of money properties, even when the knowledge of these attributes was unknown in the ancient era.
It was only when governments stamped official denominations and numbers onto pieces of gold that we can say the money concept was applied to gold. But as I said earlier, it was the number recorded on the metal, not the piece of metal itself, which constituted the use of the money concept. FOA mentioned this as well. Again, from Moneyness:
To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item. In proper vernacular; a 1930s style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature.
There is a key concept hidden in that paragraph. If we look at all of history we find a whole host of materials that have been used to record the money concept—electrum, gold, silver, copper, iron, nickel, zinc, paper, wooden tally sticks, Yap stones, even silicon microchips buried in secure computer servers for the last 40 years or so. But even from the very beginning this was a sub-optimal use of gold in particular, because it had naturally emerged as the leader of the pack of tradable wealth reserve items due to our list of "textbook qualities".
But let's say that you reject this notion that money is really only the credit notation and insist that it is, instead, the physical item itself. What is the harm in that? Well, I think it leads to some horribly wrong conclusions, especially about how banks work.
Banks facilitate the fungible exercise and circulation of credit. If I have plenty of credit, I can walk into any bank and get a loan. Then I can spend that loan and my credit (money) will begin to circulate throughout the economy as a medium of exchange. But if I am to accept that money is actually some tangible wealth reserve item, then I have to be skeptical about the source of that bank loan.
If, on careful examination, the bank has less of these physical wealth items in reserve than it has in outstanding liabilities, I might craft the common description of fractional reserve banking to explain what I found. This would lead me to the cynical notion that banks are somehow cheating by counterfeiting the real money that they have on deposit or in reserve. It would probably just remain my theory until some sort of crisis happened, and then it could mature into an outright accusation of fraud.
Reserves, of course, have always been vital to the business of banking. They are how banks settle up amongst themselves, and in the case that a bank customer decides to transact in a distant land outside of his local system of bank settlement (or locally in a black market), reserves are what the bank gives the customer to take with him. But this idea that the reserves are the real money and the credit is some sort of counterfeit or fraudulent money leads to horribly wrong conclusions and destructive prescriptions whenever a banking crisis occurs.
There is a big hump to get over here if you are in the hard money camp. Simply, get over this idea that banks need to have something to lend. This is the faulty premise: that banks lend something to the borrower. They do not. The borrower already has the credibility, the credit, and the banks are simply facilitating the exercise of that credit so that it can be used in transactions, and so that the counterparty to those transactions doesn't need to understand the borrower's credibility. The bank has already verified it and now stands behind it. This is the very essence of money.
In fact, banks are not (and should not be) constrained by the amount of reserves or capital/equity they have. But that's not to say they are not constrained. They are, just not by reserves and capital as this faulty premise leads some to believe. Instead, they are profit constrained; they want to make a profit. And because of this, they are experts at verifying credit and managing their reserves.
I realize this is difficult to see given the current state of the modern banking and financial landscape, but worse, it is impossible to see without a proper perspective on money. Without a realistic view of money, a proper understanding of banking is impossible. And without that, if you happen to be one of the few with the drive to be heroic, you'll be spinning your wheels on "solutions" (prescriptions) that range from useless to disastrous.
I'm not describing the current state of banking. I am describing the timeless state of the emergent banking model. There is nothing wrong with it. You can hang bankers from lampposts and rage against "fraudulent thin air debt-based money" and "fractional reserve lending" all you want, but that will do nothing heroic. The solution to this crisis is already unfolding, and anything short of relaxing in your lawn chair and explaining the show to your neighbors while watching it unfold is the opposite of heroic.
The latest antihero movements I've seen have come from some who read this blog. Perhaps I isolate myself (I do), but that's why I'm writing this post right now—because of these "movements" which crossed my highly-filtered field of view. Freegold combined with full-reserve banking a la the Chicago Plan which completely misunderstands money was one, and Freegold combined with CB's tasked with centralized "control over the credit volume created by their commercial banks" was the other.
This is why I think it is very useful (at least in the peace of mind department), even for regulars of my blog who presumably understand gold, to also have a deep understanding of money. And this is why I am writing this difficult post. Don't spin your wheels unnecessarily. Embrace the view that money is credit, to the full extent possible! Freegold is all about enabling savers with a realistic understanding of money and wealth… everything else flows from that. Money is not wealth, no matter how stable it is.
Money is credit
Money is credit; it is quite literally "money of the mind." Money is one of those intangible things, very powerful, but not something to be saved for the unknown future.
I should state right up front that I have no problem with fractional reserve banking or fractional reserve lending, except when we do it with gold. I think that even using the term fractional reserve banking reveals someone who doesn't understand money very well. I went into some detail on it in my Honest Money post. It’s a long post, but here are the first couple of paragraphs setting the stage:
What is honest money?
And what does it mean "to return to honest money?"
The most common answers to these questions have roots in the Austrian School of Economics, developed and made famous by the Austrian economists Carl Menger (1840-1921), Ludwig von Mises (1881-1973) and Friedrich Hayek (1899-1992). At least the most common answers today come from modern followers of the Austrian School. And modern practitioners will tell you that gold and silver are honest money, and that the way to return to honest money is to make money harder and/or to limit or eliminate fractional reserve banking.
But this meme of honest money has been canonized in such a simplistic way that its proliferation has become a bit of a credibility problem for those who promote it, and a source of confusion among their more credulous followers. So I have a slightly different take on honest money that I'd like to share with you.
That old story about how the banker lends out more paper receipts than the gold he has on deposit has done a great deal of damage to the collective understanding of money, in my opinion. I think this is why FOA spent so much time discussing the pure concept of money, what it is, how we use it, where it came from and how it has been corrupted over the years to fit a hard money agenda which led to a modern understanding of money in the hard money camp that’s not consistent with reality. His discussion begins in Gold Trail III – The Scenic Overview with "The Gold of Troy" and continues onto the next page. I included several excerpts from his discussion in Moneyness.
The idea that "fractional reserve banking" is bad, wrong, or the flaw in the system, is simply wrong in my opinion. The way the real economy has always used "the pure concept of money" is, in one simple word, credit. When physical gold emerged as the most versatile item for long-distance trade, that was not really the use of money per se. It was still just a tradable item, one of many, and simply the best on the road. When it was used as money was when we started trading using credit denominated in it. But that doesn’t mean that there was an ounce of gold for every "ounce of credit" in existence.
That early banker who issued more receipts than the gold he had on deposit issued those receipts (lent them out) against the credibility or the character of the borrower—and his promise to repay the debt. We do this all the time in the real economy—issue credit to our clients and receive credit from our vendors based on their known credibility or character and this is what keeps the economy running. There is not a monetary base unit set aside for each unit of credit we extend to our clients. If there had to be, the economy would grind to a standstill.
Centralizing, aggregating and harmonizing this system of credit (money!) was an evolutionary leap in the right direction. Banks created a fungible credit system that could be centrally cleared. No longer did I need to extend credit directly to my client (although I still do to some extent), but he could get some of the credit needed to get the job done from his bank and pay me a deposit so that I could give my vendors a deposit. This is how money lubricates the economy!
And this credit (money!) is not backed primarily by gold, property or any kind of collateral. It is backed first and foremost by the character of the borrower and the credibility of his promissory note. Additional backing (like collateral) can lower the risk of loss through default and can thereby lower the interest rate. But collateral backing is in no way a universal element of credit (the pure concept of money).
Here’s a great excerpt by Randy Strauss from my 2009 Gold is Money – Part 3 post that was especially revelatory to me in understanding that money is credit, not the reserves used for clearing and settling credit, and recognizing a flaw in the "fractional reserve banking is bad" meme – money is credit backed by character, not by reserves. Notice that it takes place in 1907, before the Federal Reserve even existed and while we were still on a gold coin standard, yet top bankers of the time like JP Morgan and George F. Baker had the same, deep understanding of money that I am describing in this post:
"The following is a post by Randy (@ The Tower) describing the end of the gold coin standard and the dawn of the Federal Reserve System:
Continuing our investigation into the meaning/essence of "money"... In 1907 America was on the Gold standard and WITHOUT any central bank. Many modern goldbugs might be inclined to yearn for those "good ol’ days" when "money was money and banking was as it should be!"
However, that year is best known by the Panic of 1907 in which the people's economy was plagued by runs on trust companies, banking panics, and a bear market in stocks. Across the nation, banks were unable (and refused) to deliver gold coins and currency to satisfy the requests of depositors for withdrawals of money from their own accounts -- and 246 banks collapsed. It is not difficult to see how the frustration of depositors unable to obtain currency from banks (even solvent ones!) holding their deposits would lead to pressure for political intervention and change.
For a quick exercise in perspective, imagine what you would do today if faced with the same situation in which your bank could not give you any currency ($1s, $5s, $10s, $20s $50 or $100s) to carry away with you as a representation of the money residing in your bank account. No problem. You would simply write a personal check to meet your spending needs, or perhaps ask for a bank draft, or wire the money wherever it needed to go. Amazing! What IS money??? How did you get yours; where did it come from? How do you know what its value is?? Ponder that, and now we return to our glimpse at history...
Panic of 1907
In the wake of this banking panic, a National Monetary Commission was formed to undertake a scholarly look at the failings of America's financial system. Of these, the four major flaws cited were that the banks were decentralized, clearing methods were inefficient, the huge cash holdings of the federal government were not distributed where most needed, and the currency supply was inelastic. (Please ponder for a moment how or why the CURRENCY supply would ever be an issue if the amount of MONEY found in banks were at a one-to-one ratio with the currency (gold) that represented it. Surely, in this absence of a central bank there couldn't be more money than gold coin! That's impossible!! ) By 1911, the Commission had recommended a plan for a "Reserve Association of America" as the solution to these defects, giving rise two years later to what became our central bank -- The Federal Reserve System. However, that's another story for another time.
Through the coordinated stabilizing actions of three prominent NY bankers to arrest the banking panic [J.P. Morgan, George F. Baker (First National Bank), and James Stillman (National City Bank / Citibank)], their wealth and power was perhaps made more conspicuous in the eyes of the nation than perhaps it would otherwise have been. A prominent Wall Street lawyer named Samuel Untermyer suggested that there was a "Money Trust", and The Wall Street Journal also took notice of affairs and wrote, "So long as Congress will not give us what every other civilized country possesses, a central bank, it forces Wall Street to improvise something of the kind itself."
Samuel Untermyer
The House Banking and Currency Committee formed an investigative subcommittee to determine whether a Money Trust existed in NY. The chief counsel was Sam Untermyer, and I think you might gain some insights about the true nature of money from the testimony delivered by Morgan and Baker before the committee in Washington DC at the beginning of 1913.
In questioning Baker about the proposal for banking reform regarding expanded disclosure of bank assets and investments, Untermyer probed, "Why should not the assets, and the detailed assets, be a matter of public knowledge?"
Baker replied, "Business would come to rather a standstill."
Untermyer demanded, "I want you to explain to the committee why."
Baker declined, "I can not explain it."
Untermyer pressed further, "You mean you can give us no reason?"
Baker admitted, "It would be exposing all the details of that business to the whole world."
After following a sidetrack in questioning, Untermyer returned to this issue, asking, "Why should the public do business on confidence when it can get the facts?"
To which Baker proclaimed, "Mr. Untermyer, THE FUNDAMENTAL PRINCIPLE OF BANKING, perhaps more than some others, is CREDIT." [emphasis added]
It seems that George Baker sensed (rightly?) that the public, familiar with their Currency being a tangible asset (gold coin), would NOT be readily comfortable with the truth about Money. That is to say, that they might struggle to accept the reality that their Money Supply, as represented on the books of the bank, was created by credit, and existed through the grace of confidence. In effect, the tangible Currency had become a mere symbol for the Money (credit) it represented while circulating outside of bank account ledgers.
John Pierpont Morgan
If you don't care to believe my assessment, I have another point for you. When Untermyer had J.P. Morgan on the witness stand, he asked him, "Is not commercial credit based primarily upon money or property?" [In this exchange, it appears that Untermyer ignorantly used the word "money" as equivalent to gold coin, a usage which Morgan plays similarly until his concluding point about granting CREDIT.]
"Morgan responded, "No, sir, the first thing is CHARACTER." [emphasis added]
Untermyer, shocked, reiterated, "Before money or property?"
Morgan reassured, "Before money or anything else. Money cannot buy it. [credit]"
Untermyer remained obstinate against this notion, as though there were communication difficulties, and pressed again on this point.
Morgan then conclusively stated his conviction on the point that commercial CREDIT is based on character: "Because a man I do not trust could not get MONEY from me on all the bonds in Christendom."
From two eminent bankers who surely knew their business, you now have it that the creation or granting of Money (the extension of Credit) has more to do with the creditworthiness of the borrowers than the collateral that secures against possible default. And recall, these comments occurred while on a gold standard AND in total absence of a government-sponsored central bank -- which was authorized (against Baker's preference) a year later.
As you come to understand how Money and Credit are interrelated, the more you will understand the separate Wealth of gold and why you need it now more than ever."**
It might be tempting after reading that to think that the banks, through their "fractional reserve banking", caused the Panic of 1907. But, again, that would be to misunderstand how the economy has used "money" since the beginning of time. If that’s all you get from Randy’s post, then perhaps you are one who, as George Baker sensed, and because of your hard money upbringing, would NOT be readily comfortable with the truth about Money.
The inclusion of savings in the money creation process is the very root of the problem
Today all money is credit, even the monetary base. Today we use government credit as a base reference point for the private economy’s credit. To view this in the proper light, I like to think of the base, or the government’s credit, as a negative to the system, and the economy’s credit as a positive. When the government borrows to spend it never really pays back in real terms, because governments are always net-consumers.
We enable essential government functions through taxes, the parts of government which are a necessary foundation for a functioning economy, but beyond what politicians can get away with through direct taxation, the rest of government is essentially a negative force on the monetary system. That’s what I mean by government credit is a negative as opposed to private credit which is economically positive. It’s a tough concept to swallow right now because everything is so topsy turvy on both the government and private banking sides, but that’s really the gist of it.
What allowed it all to get so out of whack to the point that it is today is very simply the inclusion of savers' savings in the monetary process. This inclusion can be most clearly seen with the emergence of debt securitization in the 70s and 80s. Banks extend credit, but securitization allowed them to sell their income stream to savers for a fee. This cleared their books for more lending. Eventually lending standards had to be reduced in order to feed the demand for securitized debt from the savers. The added risk of lower lending standards wasn’t a big concern because the banks never planned to sit on that risk; they planned to offload it to savers, China and German pension funds. This led to sub-prime and ultimately to collapse.
It is not that securitization reduces the banks' risk and liabilities. It is an ongoing process which gradually increases the risk banks face while reducing the profitability of their primary business model—lending at interest—forcing them to rely too heavily on fees and speculation for income. They are selling their profitable loans first while adding new riskier ones for the next round of securitization. What securitization does over time is make the risk of default from poor quality loans systemic so that it must be socialized in the end.
There are only so many profitable loans that can be made at any given point in time. Eventually you run out of responsible people with good credit with whom to extend loans. With securitization, the banks started making more profits from the fees from selling securitized bonds to savers (mostly pension funds and foreign CBs) than from their normal business. So once you've run through all the good borrowers with credit, where do you go? You create new borrowers by lowering lending standards, especially if your profit is now coming more from sales commissions than from interest. This was demand-driven, not bankster-greed-driven. The banks met the demand and made a profit from the fees while being spurred on by ignorant politicians. The banks never wanted to carry sub-prime mortgages on their books to maturity, but once the collapse began they had no choice. Neither did the Fed.
Without securitization, banks would never get down to the sub-prime "bottom-of-the-barrel" borrowers (and purely speculative borrowers). There are plenty of good, credit-worthy (producing) borrowers to keep the banks in business, but not if the savers are hogging all the prime "income streams". Eventually, even the savers started buying up the sub-prime MBS garbage and then, when a few debtors started defaulting, it took down savers, banks, hedge funds and day-traders alike.
Take away the demand from savers and the banks will stick to the prime borrowers so that they can turn a profit from their primary business. This is also how we devolved into such a debt-driven consumption economy… because of the systemic demand for our debt.
Debt is not bad by nature. It is the natural essences of money, period! Money is debt. That's not a bad thing! But yes, because debt is the essence of money, bad debt leads to bad money.
And it's more than just securitized debt held by savers that brought us to this point. It is systemic in that our international trading partners like China stacked up our debt rather than settling trade imbalances by purchasing a tangible reserve asset on the open market with the left-over currency. It is the stacking of debt which allowed for the non-inflationary expansion of the US govt. (USG) consumption machine just like the stacking of MBS by savers allowed for the expansion of sub-prime and consumption-based debt. This led to a USG addicted to an artificially high rate of consumption which led to the necessity of QE once the budget deficit exceeded the trade deficit.
There is no need for bank deposits to be any more than the money we all earn and then spend within a normal period of a few months. That’s all of the money anyway. Think about it! And if no one is sitting on "money" (credit) for more than a few months, then mild inflation (like 2% p.a.) is not only inconsequential, but it becomes economically beneficial and desirable.
The inclusion of the savers' savings in this process only damages the savers disproportionately to everyone else. And it damages the savers more the more they save. Inflation "taxes" savers disproportionately. But not in Freegold. As I said above, Freegold is all about enabling savers with a realistic understanding of money and wealth… everything else flows from that. Money is not wealth, no matter how well it is managed.
Thinking about the bank runs of the 1930s in terms of fractional reserve banking is an interesting exercise. It certainly was a problem in 1933, and it was precisely this problem that was the reason behind the FDR confiscation—to stem the tide of bank runs. Today that kind of a bank run is a thing of the past. That’s not to say it cannot happen, but that even if it did, everyone would get their money in the end, unlike the 30s. And that is because today the CB can create commercial bank reserves at will.
Opponents of fractional reserve banking (FRB) blame the banks and the practice of FRB for the shortage of reserves in the 30s. But I think that misses the bigger issue. If the system's store of value simply floated in value and was available to anyone at any time at the current price, the runs would have never occurred. They occurred precisely because money (credit) was denominated in the store of value, the system's ultimate reserves. It is the lending of credit denominated in, and redeemable at a fixed exchange rate for, tangible reserves that is the problem.
Today we have a better system. Floating gold as reserves behind the CB money (Eurosystem model) and the CB money (CB credit) as reserves behind the economy’s money (commercial bank credit). So the ultimate reserves in the system float in value against everything else and float in price against the money, and are therefore available to anyone, anywhere, anytime.
Try to imagine the gold ounces at the banks in the 30s floating in value relative to paper dollars rather than being fixed in value. You might have a deposit of $X,XXX, but that number only references a fixed number of paper dollars, not a fixed number of gold ounces. In the case of a bank run, if everyone wanted to withdraw their deposits, perhaps preferring a withdrawal in gold, then the bank would do a self-evaluation and likely render over the requested deposits in dollars telling the customers to go and shop for the gold themselves. The price of gold would simply rise.
Back in July, Lee Quaintance asked me this: "If debtors seek to borrow in the medium which they plan to spend (fiat paper money) and lenders seek to lend (save) only in a medium which they believe will maintain its purchasing power (gold), does not the entire borrowing/lending platform simply break down? This seems to be a manifestation of Gresham’s Law, no? Can the spending and savings medium truly then be separated if no one is irrational enough to lend in paper money terms?"
Truly, it is supremely rational to lend (grant credit) only in terms of paper units. It is likewise irrational to forsake the sublime paper unit avenue and opt instead to put your tangible reserves out on loan where they will then be subject to both devaluation and risk of non-repayment. Remember, and this is a key point, banks only require nominal performance. If a promissory note held by a bank devalues in real terms, the bank's liabilities devalue equally. So there is no loss to the bank through currency devaluation.
"For more about why FRB and time deposit maturity transformation are not the root of the problem—the root is simply the lending of the monetary reserve, a problem that would still exist even with Rothbard's 100% reserve banking—please see my Reply to Bron. Here's a short excerpt:
** Spending Gold into the marketplace, whether by the owner or by a borrower, would tend to result in prices "that weigh more"--cost more Gold, that is.
** As ever more Gold is borrowed out of other people's savings to be spent into the economy, the Gold's purchasing power is lessened from what it otherwise would be...hurting those who have elected to hold their Gold instead of risking it by lending it out as a source of income.
[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]
** For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent! [Gresham's law alone is adequate to achieve this.]"
What about bank reserve ratios and capital requirements?
What about them? Haterz gonna hate, loverz gonna love, and central plannerz gonna plan, right? But that still doesn't change the essence of money. Credit/credibility exists within the economy in amounts that are unconnected to the capital or reserves at the banks. It is the banks' business to enable the fungible exercise (and circulation) of that already-existent credit whenever it shows up wanting to be exercised. That’s how banks contribute to society.
A reader asked me a question about an article that someone posted in the comments. The title of the article is "The Myth of the Money Multiplier" but it could just as easily have been called "The Myth that Central Planners Actually Control the Size of the Money Supply through the Transmission of Monetary Policy".
Interestingly, the author of the article, Steve Keen, makes some of the same observations I am making here, like "In the real world, banks extend credit… and look for the reserves later" and "bank lending creates deposits… reserves are largely irrelevant." The term he likes for this is endogenous money, which is remarkably close to how I am describing that "money is credit" in this post. But even though he seems to understand money and banking very well, there's a vital ingredient missing from his money model which I think leads to faulty conclusions and prescriptions.
His point in the article is that Bernanke is now pushing on a string that is not going to translate into credit inflation or revive consumer demand. I agree. But his implied conclusion/prescription is apparently that, because "the textbook treatment of money in the transmission mechanism" (meaning how CBs purport to control commercial bank money creation) doesn't actually work the way other people say it does, we need to find a new way for central plannerz to constrain these banks gone wild and that we would have never gotten to the point of collapse if we hadn't let Capitalism run awry through an empirically unconstrained banking system.
So, while he understands "modern monetary theory" very well, he doesn't understand the wealth concept (unambiguous ownership of something tangible) and therefore he still equates money and wealth (along with most everyone else) which leads him to the conclusion that monetary reserves are the real money while "endogenous money" is just a problem of Capitalism that needs a new centralized regulation model. He sees "debt deflation" – a contraction in "endogenous money" which has been overextended due to the reasons I cited above – and concludes that the lack of an observable constraint on the banks (he doesn't see that banks are actually profit constrained in the absence of the systemic demand for debt securitization cited above) is responsible for booms and busts, including the catastrophic bust we are still heading into today.
What I'm trying to say is that, because he doesn't have a full understanding of money (remember at the top of the post I proposed that you cannot properly understand money without also understanding the pure wealth concept), he draws the conclusion that the banking model is to blame, and also that deflation will be the outcome. I, on the other hand, conclude that the systemic choice to use debt as savings and reserves is the primary cause, and that there's nothing fundamentally wrong with the banking system. I also conclude that USD hyperinflation will be the outcome. More on that in a moment.
Anyway, my reader's question was this, first quoting from the article:
"M2 averaged about $7.25 trillion in 2007 … bank loans for 2007 were about $6.25 trillion... if we consider the fact that reserve balances held at the Federal Reserve were about $15 billion and required reserves were about $43 billion, the tight link drawn in the textbook transmission mechanism from reserves to money and bank lending seems all the more tenuous."
If required reserves were $43 Billion and bank loans were $6.25 trillion does that mean the required reserve ratio was 0.69% (43/6,250), or to put it another way, that the money multiplier was 145 (6,250/43)? How can that be? Do banks have a capital cushion on top of reserves, which at 0.69% system-wide would be razor thin?
Is my thinking correct about the money multiplier being 145 in the example Keen cites. This would put the Reserve requirement ratio below 1%, effectively unconstrained. I am guessing this is possible because capital adequacy ratios are a better metric than the reserve requirement ratio?
I replied yes, you are basically correct, but I say "so what?" You are talking about the money multiplier, reserve ratios and capital adequacy requirements as if they are constraints. As I said, they are not. Banks are not lending deposits. They are not lending anything. They are simply facilitating the exercise of credit/credibility that already exists in the economy. You earn credit, and then in order to exercise it you go to the bank which facilitates your desire to exercise your credit (purchasing power).
The problem is that some people who didn't have credit were facilitated anyway (sub-prime, for example), because the system today demands debt well beyond what banks would normally facilitate given that they are naturally profit constrained and would otherwise have to carry the debt on their books.
Who cares about the reserve ratio? The CB can create commercial bank reserves with the click of a mouse today. They can swap a bank's assets (promissory notes) with reserves, temporarily or permanently, in any amount, at any time. Commercial bank reserves were more important back in 1933 when they included gold coins. But today they are not. Just look at the changes since Steve Keen's 2007 example.
Today, required reserves are $107B and reserves held at the Fed are $1.5T, for excess reserves of $1.4T with an M2 of $10.2T. So what's the big deal? If your money multiplier of 145 and reserve ratio of 0.69% mattered, then today the problem is fixed! Today's multiplier, using your same math from above, is 6.8, down from your 145 in 2007. And your 0.69% reserving is back up to a very comfortable 14.7% today. So problem solved, right?
Remember what I wrote in my first email?
"There is just what emerged (what is), the perspective from which you choose to view it, the conclusions you draw from that perspective, and how useful those conclusions end up being in the long run."
What conclusions were you drawing from that 2007 data and how useful did they turn out to be in 2012? If they were important, then the problem seems to be resolved, right? Or maybe the problem is something else. Maybe the problem isn't that the banks are unconstrained and don't know when to stop making loans.
Maybe the problem is that the insatiable systemic hunger for new debt as reserves/savings drove lending standards and interest rates down to the point of collapse. It's a little bit of a different perspective from Steve Keen's, don't you think?
Say what?
Since I'm already talking about Steve Keen, I want to take this opportunity to point out how the widespread misunderstanding of money and wealth leads to conflict, macroeconomic problems and flawed analysis. And the corollary to this point is that the emergent widespread understanding of these concepts that Freegold will naturally usher in will solve these same conflicts and problems.
In Nudge Nudge, Wink Wink, Say No More, Steve Keen, author of "Debunking Economics", debunked Say's law which, very roughly stated, says supply equals demand in the physical plane even with the inclusion of money. Or, perhaps, supply comes from demand while demand is supplied by supply which comes from demand created by supply. A circular logic no doubt, but profound nonetheless. From Wikipedia:
In Say's language, "products are paid for with products" (1803: p. 153) or "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another" (1803: p. 178-9). Explaining his point at length, he wrote that:
It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J. B. Say, 1803: pp.138–9)
Keen correctly notes that Say's Law is widely disregarded in economics today, so I guess it was an easy target to debunk. A common criticism of Say's Law is that it only applies to a simple barter economy, and that he didn't really understand money since he was apparently describing an economy devoid of the capitalist drive to accumulate wealth. But it seems to me that Say might have understood money and wealth on a much deeper level than any of his critics.
I don't know, but let's take a closer look and you can decide for yourself. Here are a few excerpts I took from Steve Keen's paper debunking Say's Law. I tried to capture the essence of his argument here, but I'd still recommend reading the full article linked above.
Belief in Say’s Law is a minority position in economics today. Those who adhere to it appear to believe that it is a self-evident truth that is misunderstood by modern economists of all persuasions, and that properly understood it is not only true, but the foundation of an accurate appreciation of the functioning of a market economy and the phenomenon of the trade cycle.
I concur with the majority perspective that Say’s Law is fallacious, but not for reasons that make me a member of any defined majority in economics at large.
[…]
As Marx showed far better than did Keynes, the conditions under which Say’s Law is correct are not those of a capitalist economy.
[…]
Use-values must therefore never be looked upon as the real aim of the capitalist. Neither must the profit on any single transaction. The restless never-ending process of profit making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never ending augmentation of exchange value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation. (Marx 1867: 151)
Say’s ‘Law’ therefore, is not a recondite insight into the nature of a market economy, but evidence of a basic failure to comprehend capitalism.
[…]
While we ‘do not consume money’, people certainly do seek to ‘conceal’ (or accumulate) it. Though a capitalist will undoubtedly consume with part of the money he accumulates, it is not true that ‘he may be considered as already asking for the merchandise which he proposes to buy with this money’ since if he converts all his profit into consumables, he has failed to accumulate wealth – to be a capitalist.
As Marx puts it, capitalists are characterised not by an equality of their supplies and their demands, but by an inequality. This inequality is possible because … production produces a physical surplus that the capitalist hopes to turn into a monetary surplus:
The capitalist throws less value in the form of money into the circulation than he draws out of it . . . Since he functions . . . as an industrial capitalist, his supply of commodity-value is always greater than his demand for it. If his supply and demand in this respect covered each other it would mean that his capital had not produced any surplus-value . . . His aim is not to equalise his supply and demand, but to make the inequality between them . . . as great as possible. (Marx 1885: 120-121)
[I want to pause here to point out that the "net" portion of a term I use for savers—"net-producers"—represents the "inequality" between what is produced by a saver and what he consumes.]
Thus as Marx emphasises in the immediate term and Veblen in the long term, a capitalist’s supply, if he is successful, is greater than his demand.
[Also, a net-producer's production is greater than his consumption.]
There is an inherent inequality at the core of capitalist society, and the simple balance of Say’s Law collapses.
[…]
Marx also realised that… money has an essentially new role in addition to those of medium of exchange and measure of account: it is now also a measure of accumulation. Failure in accumulation can now result in money being withdrawn from circulation, which in turn can lead to deficiencies in aggregate demand:
money functions neither only as measure, nor only as medium of exchange, nor only as both; but has yet a third quality… It is very true that money, in so far as it serves only as an agent of circulation, constantly remains enclosed in its cycle. But it appears here, also, that it is still something more than this instrument of circulation, that it also has an independent existence outside circulation, and that in this new character it can be withdrawn from circulation just as the commodity must definitely be withdrawn. We must therefore observe money in its third quality. (Marx 1857: 202-03)
In this ‘third quality’, money is more than the mere lubricant for barter that Say perceived. It is also the form in which wealth is accumulated:
The third attribute of money, in its complete development, presupposes the first two [measure and medium of exchange] and constitutes their unity. Money, then, has an independent existence outside circulation . . . as money, it can be accumulated to form a treasure . . . This aspect already latently contains its quality as capital. (Marx 1857: 216)
[…]
Expanding debt also becomes an essential characteristic of a growing economy, as Minsky realised… in the aggregate there had to be an inequality between income and spending if the economy was to continue growing in the context of a constant or rising price level:
If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, . . . it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963 [1982]: 6)
[…]
All attempts to provide a formal expression of Say’s Law rest on the same fallacious proposition that there is neither the desire nor the possibility to accumulate wealth for its own sake in a capitalist economy.
[…]
Therefore Say’s Law – and Say’s Principle, and Walras’ Law, and all other concepts which portray the sum of all excess demands as zero – is thus a ‘law’ applicable only to a market economy without capitalists and the accumulation of wealth. We live in a market economy with capitalists and with the accumulation of wealth, and we will continue to live in such a society for the foreseeable future. Say’s Law is thus irrelevant to the world in which we live. Rather than discussing Say’s ‘Law’ any further, we should consign it to the dustbin of the history of economic thought.
Some interesting thoughts in there, huh? I think it's clear from this article that there's not much difference between money and wealth in his view. The "accumulation of wealth" which he says is capitalism means the accumulation of more and more money. And this, he says, leads to a supply glut and insufficient demand which leads to deflation and depression.
"if [a "capitalist"] converts all his profit into consumables, he has failed to accumulate wealth – to be a capitalist."
"production produces a physical surplus that the capitalist hopes to turn into a monetary surplus"
"If [a "capitalist's"] supply and demand in this respect covered each other it would mean that his capital had not produced any surplus-value"
Would a net-producer's demand equal supply if, in his "accumulation of wealth" he purchased Veblen goods and physical gold? Someone has to supply those hard assets and gold, right? Mr. Market and his price adjustments would, in this scenario, make "the sum of all excess demands equal zero" as all wealth accumulation would have to be matched by either new wealth production or wealth dishoarding by net-producers of the past.
"Therefore Say’s Law… is thus a ‘law’ applicable only to a market economy without capitalists and the accumulation of wealth."
Using my definition of wealth, which I propose is a necessary element in understanding the reality of money, this statement suddenly appears fallacious. I honestly wonder if Steve Keen would agree. Or does his disdain for (his Marxian idea of) Capitalism run too deep? I don't know. But enough about the wealth concept. Let's see if Say understood money.
Say wrote that "a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value."
He’s talking about the creation of credit, aka credibility, aka purchasing power. Imagine you’ve got a crazy inventor working for years on a contraption and everyone just laughs at him saying "that’ll never work. It’ll never fly." Then one day he finishes his project and it flies! It's going to change the world, and everyone applauds! He has instant credibility (purchasing power) that he didn’t have before. And the world is also a richer place for it.
He may not yet have actual product units to sell, but he can certainly afford to immediately improve his standard of living while also funding the production of units of his new invention for sale to the marketplace. In fact, depending on how earthshattering his invention is, he may have more credit than he needs for his standard of living and business overhead. This is surplus value, which he is unlikely to spend until after he starts selling units.
At the point that he sells units which the public values higher than his cost of production plus the cost of his standard of living, he will start to accumulate wealth from that surplus value. But, in fact, the purchasing power used to accumulate wealth – the surplus value – was present long before he actually exercised it. Sure, he could have bought gold on credit as soon as his invention's success revealed his credibility, but that's not usually the way it's done.
It seems clear, at least to me, that the widespread misconception—and thereby the misuse—of the money and wealth concepts goes back centuries at least. And that this simple misunderstanding has led to some longstanding conflicts, major macroeconomic failures and entire schools of flawed economic analysis, some of which are reflected in the above paper. (See also my post The Debtors and the Savers)
I think it can be stated as simply as this: When a single medium is used as both money and wealth, it leads to a conflict between those who choose to accumulate wealth and everyone else. This applies to both hard and easy money systems. It's like FOA said, applying the money concept to gold coins was "not the best way to use gold, considering our human nature."
The accumulation of wealth need not be a drain on anyone. When viewed properly, it is apparent that the "wealth circuit", supplied and demanded only by those who accumulate and dishoard wealth, is isolated from the "money circuit" through the magic of Mr. Market and his price adjustments. It's only when we call money wealth, and wealth money, that we join the circuits creating conflict and crashes.
And my main message here is simple. No one needs to understand this for a change to take place. Because, when the current system crashes, what will change is how we view money and wealth. Everything else I talk about flows from that one change.
Hyperinflation
Credit requires some unit of reference. You could borrow an egg from your neighbor and you might say, "thanks, I owe you." If you happen to take that debt seriously, your unit of reference might be one egg. Money is essentially our shared use of a common reference point which makes credit fungible and allows it to circulate. This is what I wrote in Moneyness:
The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."
Money is not something you save. Wealth is what you save. Yet money still needs something to reference. When hyperinflation occurs, it occurs not in money itself, but in that reference unit. It is true that, when ounces (or any other unit) of gold is used as the sole reference item, hyperinflation per se is unlikely because gold has that property of a relatively stable supply. But again, that's not the best use of gold because of its intrinsic salience as the tradable wealth item par excellence.
But hyperinflation is not just about the supply of the reference unit, it is more about its perceived value relative to everything else. Hyperinflation begins when the perceived value of that common reference point goes into free fall. This could hypothetically happen with something like gold if, say, aliens arrived and explained to us that exposure to gold was somehow harmful, perhaps limiting our lifespans to only one century. Then you might see something like hyperinflation as humans quickly devalued their golden reference point against all else. But again, I'm only talking about the hypothetical here to make the point that hyperinflation begins with the perceived devaluation (currency collapse) of the monetary reference point.
Today we use the US dollar as the common monetary reference point unit. The US dollar gets its value from price tags that list dollar amounts rather than from the cost of making a dollar. I realize that this seems paradoxical, or some kind of circular logic, but it's actually quite sublime, and it works!
It is true, however, that we only get full-blown hyperinflation, like we saw in Weimar and Zimbabwe, with government "fiat money". Circulating real money (bank credit!) all but disappears when full-blown hyperinflation takes hold. So you see, hyperinflation is not really about money. It is about the loss of confidence in our shared reference point, which is usually because it has been abused by the government, and which often leads to a vicious feedback loop of further abuse by the government.
It's a shame that the most efficient form of money ever devised by mankind has this downside, but I think you'll find that the risk of abuse is worth the innumerable benefits, especially once there is a systematic and foolproof way to protect yourself from the worst of it! And this is why Wim Duisenberg so proudly stated that the euro "is the first currency that has not only severed its link to gold, but also its link to the nation-state."
Tribal Life & Government "Fiat Money"
With the potential for abuse and the risk of hyperinflation, why do we keep returning to government "fiat money"? Why do we, the productive economy, lend to our Tribal Chieftain and Tribal Council enough of our credibility to allow them to print currency for the good of the tribe and then use that currency as the reference point for money? Is it really forced upon us as some in the hard money camp proclaim? The answer is no, we demand it.
Since the beginning of time, man has been exploring and discovering the advantages of tribal life. Of course we must give up some measure of individual freedom to be part of a tribe, but in most cases the benefits have far outweighed the costs.
Given the current state of "tribal leadership" and "government money" in the US, I thought it quite timely to include a few posts from FOA which can be found here. They might even help us understand the outcome of this most recent election. Has the US really passed some disastrous tipping point of human desire for free stuff, or was this election just business as usual?
Hello ORO,
Well, I knew that if I only asked, we would all receive! Boy did you deliver in ORO (Msg ID:25113).
Good stuff for everyone to read, my friend. You mentioned; """ The comments below - particularly those to Aristotle, are somewhat harsh. I hope this is taken in the spirit of friendly criticism."""
Sir, you can serve me (and probably everyone here) your "harsh" anytime. Waiter ,,,,,,,, I'll have a double order of that please! (smile)
OK, brace yourself ORO ,,,,,, a big plate of my "Trail" harsh coming up!
=============================
You write:
-------There are consequences to the existence of a fiat currency and for the use of debt money for trade settlement. FIAT HAS NEVER BEEN THE CHOICE OF THE PEOPLE ACTING IN COMMERCE OF THEIR OWN ACCORD. Even when wildly popular, fiat money has not had a single instance when it had not been established by force - by laws imposing its use.-----------
ORO,
On a larger scale there was always more to it than this. Human society has from the very beginnings formed tribes and picked sides against each other. When we are not battling nation against nation, we jockey for position within our own groups. Right down to "me and my neighbour against the three houses down the street. As a tribe ,,, as a nation ,,,,,, as a group ,,,,,, our war is really a human problem with each other and always has been. In better context; the problems are in the way we use our laws and governments to gain advantage over the next in line.
Whether through force (war) or democratic means, we subject ourselves to the order of governments. We rightly perceive that,,,,,, the order gained from this action ,,,,,,, the security of a group, overcomes the rights and property lost on an individual level that living in a tribe requires. It's been this way through the ages. It's a political process that has always had its in-house battles ,,,,, namely portions of society try to circumvent their percentage of lost rights and property by maneuvering the rules (laws) in their favor. Yes,,,,,if I can gain the advantages of tribe life and still keep my "lost portions",,,,, I'm gaining wealth to the disadvantage of the group. Truly, the most obvious action of not paying your taxes,,,,, and that's only a small item when viewing the world battle as a whole.
So, how does this apply to money?
When you and others say """ FIAT HAS NEVER BEEN THE CHOICE OF THE PEOPLE ACTING IN COMMERCE OF THEIR OWN ACCORD """ ,,,,, this is true.
This is true, but this was never the thrust of the argument. The use of money in any context, fiat, gold or seashells, has always entailed the use of borrowing and lending... And as long as economies function at a profit, debts are made and paid back without argument. However, when the eventual downturn arrives, some portions (perhaps a large portion) of the owed wealth (debt) cannot be returned.
It's here,,,, at this point in tribal life,,,,,,, that all of the context from above comes into play. The "reality" of life on this earth is this: ,,,,,,Some portion of society will use their influence or control of the leaders to make their debts easier to pay. In fact,,,,, it's times 2 for that number of government influencers ,,,, because even the ones that have debt owed to them will try to alleviate an impossible pay back situation to save the ones that owe them face.
You see,,,,, tribal life and the human nature that comes with it ,,,,,,,, will not allow any money system to "completely" destroy the wealth of a good portion of society. Even if everyone is plainly shown that they are going to lose something ,,,,,,they would still opt for the good of the overall tribe. This is why we return,,,, time and again to fiat monetary systems. In the few examples where a gold system brings the harsh reality of loses to bear on a nation,,,,,, usually war is the result. Not a good outcome.
Yes, we can break gold into many small parts,,,,, 'stamp it into coins and circulate gold certificates as money. We can borrow it, lend it and also circulate gold bonds as the economy grows. It is the perfect "weights and measures" monetary system. Exactly representing our productive efforts in every facet of human endeavour. But, when the losses mount, our tribal human tendencies will not allow us to support a government or banking system that forces these real losses on only a portion of the group. Never has,,,, and never will! Without this escape valve, we go to war ,,,,,, internally or on a world scale,,, so we all can share the loss,,, one way or another. As a human society of thousands of years,,, outside of war,,,,, we have learned to inflate our loses upon everyone as a whole,,,,, for the good of the keeping the whole from each others throats. Even to the point of a total loss of the current system,,,,, and all the destruction that entails for everyone.
Yes, indeed,,,,,,,we will transition to the next fiat system from the dollar, when the time comes. Believe it!
Further:
For myself and other observers ,,,,, we know about "peace on earth" and live our life in this context but,,,, as a member of the world tribe,,,,,, and following our best interest,,,,,, one must still arrange his affairs to shield their family from the "I'm going to get yours" times we live in. Should we get our leaders to help us? Well, the leaders of this world can only be but a reflection of us as a whole. Yes, many things are not right, but they can only strive to do what can be done, not what must be done.
Consider the dilemma:
If a small portion of society telegraphs thoughts that "if we cannot have our oil we will go to war",,,,,,,, how would you force them to not elect officials that ease their pain from a gold money system? What's right and what's wrong is not the issue,,,,,, it's what this present generation will live with that rules. If they will break the gold yoke, no matter what,,,, then why place gold on them? Is it not better to at least free the "knight" (gold) for the good of those that would stand with him?
During the period we are now entering,,,,,we can see all the ugly aspects of a fiat system that is failing its tribe. Look far and wide and witness the various groups ,,,, all jockeying for position as they use whatever influence they have to lessen their own private losses. If this had been a gold system, the outcome would be the same,,,,, as players force their leaders to lessen the gold debts that could not be paid. They would raise the price of gold and inflate their way out of it,,,,,, for better or worse ,,,, come hell or high water.
So, my friend (smile),,,,,,, as you can see,,,,, I completely agree with all of your post. Only, my trail is hiked with a different mind. "Another" mind set, if you will. We use the life experiences of man to dictate the best path to follow. As such,,,,,, Gold must not be part of any money system,,,,,, it must reside as a freely traded asset without debt or paper to resemble it. In this position ,,,,, its value can fully represent the ebb and flow of the affairs of man. And in doing so retain the wealth of man as a holding of things. Truly, the "Wealth of Nations" in the people's hands. We move forward by starting at the beginning of time.
We'll talk much about this and all the affairs of the world,,, including gold,,,, on the gold trail.
"We walk this new gold trail together, yes?" I hope to see everyone there when I return.
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.-------
Thanks for your reply, ORO.
My comments presume that readers have read our full posts.
Your major point, logic and comments that I got from your post (25310), followed by my comments:
ORO's POINT:
I pointed out that it is the existence of a "lender of last resort" that causes the debt boom
ORO's Logic:
It is obvious then, that had there not been a lender of last resort there would not have been a substantial credit crunch, because the lenders would not have taken the same risks they allowed themselves once a promise of bailout was given, and thus would have avoided the credit boom.
ORO's Comments:
The argument is false in that it is circular. (FOA note: I think he is referring to my logic?) The lender of last resort was there in the first place, the inevitable credit boom followed, the credit crunch followed - just as inevitable - and a further lender of last resort was needed. History shows that the credit policies of the BOE led to its bankruptcy before WWI and before the Fed was created. This was among the reasons for the argument for the Fed being pressed. All the previous lenders of last resort were tapped out and a new one was necessary. In 1929-1930 the Fed was tapped out and the gold standard obligation was abolished shortly after.
My (FOA's) Comments:
ORO, I cannot accept that a "lender of last resort" causes a debt boom. It presumes that a great portion of lending is done for reckless, uneconomic reasons. Yet, at the end of great expansions many projects that were considered "blue chip" in the beginning still go bad. Sometimes, the most necessary economic activity is curtailed because people's needs change during the course of life ,,, not to mention a recession. Thus changing business dynamics.
How many instances can we document where banks lent into real demand ,,,,,,, backed with the very best demographic patterns ,,,,, only to find the loan blow up from changing demand. Oil in the late seventies would be a convenient example for us (smile). People were breaking down the doors of the old "Texas Commerce Bank" in Houston ,,,,,,, all in an effort to finance hugely profitable petroleum projects. This was no flash in the pan, as the oil industry had a progressive expansion history of 15++ years before this. Truly, a lender of last resort was the very last thing on their minds. [FOFOA: Reserves were the last thing on their minds.] Later, even paper based on $10 producing reserves was trashed! Certainly there are many, many other examples,,,,,,,, most are of a more mundane, unglamorous nature, but fine examples.
Further:
Was this really circular thinking on our part? Did the Lender of last resort exist during the 'South Sea Bubble" or the "Tulip mania",,,,,, and did the "Black Plague" of Europe shut down a few sound financial systems then? I think gold was the norm in that period?
ORO, this portion of your thinking needs to include the other side of the lending aspect,,,,,, people want and demand loans for sound, economically justifiable, profitable projects,,,, and they get them on sound lending principles. [FOFOA: Real credit exists and then banks facilitate it] Still, some 90% of them can become only "at the margin" when demand changes. And typical of our human society, we all shift at once.
Truly, my friend, bank loans often fail because human events change the course of money dynamics ,,,,,, and it does so in a way that is beyond the vision of any lender. Be the lender you, me or a group of people such as a bank, large portions of deals go bad just as much from human affairs as from "over lending".
After all, the entire economic structure of the world is nothing more than a people dynamic ,,,,,,,,, in the long run it's just too risky to bet one's physical gold on (huge smile)! [FOFOA: from above – "Truly, it is supremely rational to lend (grant credit) only in terms of paper units. It is likewise irrational to forsake the sublime paper unit avenue and opt instead to put your tangible reserves out on loan where they will then be subject to both devaluation and risk of non-repayment." ]
Yes, our present financial system gives the impression of total insanity,,,, but we are looking at the very "end of the timeline",,,, not how it began. It all starts with the very first loan and progresses until everyone has borrowed "too much", but no one wants the music to stop. Last resort lenders then become the norm because society will lose "across the board" if everything is "marked to the market". It is not a circle (smile) as it starts and ends with the currency system (gold or fiat) everyone demands to borrow into. It all ends in the shared pain of debt collapse as the debt is discounted to zero from price inflation ,,,, even if it's based on gold ,,,,,, gold that cannot be returned. Not much different from our present gold loan structure. We will move on to the next money system when this one ends.
If it were gold we started with? The banker would lend his gold only to find the same metal returned to his bank as a new deposit. The "society at large" would remove his franchise if he did not re-lend that same gold during "good times", "booming times" no less! Round and round the gold goes.
Reserve lending hits its limit and society demands the limits be raised again ,,, and again ,,, and again! Lender of last resort ,,,,,, or not.
In our modern world we must remove gold from the official money system, place it in a free market and people will use it as wealth money, not borrowing money. Then the fiat can come and go as the wind! Yes?
I have read much of Mises and even a few others. Actually, I completely agree with them that the Gold money systems of the nineteenth century worked very well. As such we do not fall into any of the groups that argue against that concept. Our problem is with people (smile).
In a Money and Freedom speech at a Mises meeting Mr. Joseph T. Salerno made this point:
-------Unfortunately, the monetary freedom represented by the gold standard, along with many other freedoms of the classical liberal era, was brought to a calamitous end by World War One.----------
Further, he stated:
------Within weeks of the outbreak of World War One, all belligerent nations departed from the gold standard. Needless to say by the wars end the paper fiat currencies of all these nations were in the throes of inflation of varying degrees of severity, with the German hyperinflation that culminated in 1923 being the worst.--------
My point (as an extension of earlier posts):
No country, however rich in gold or resources, can continue to fight a war once their money runs out! Consider ,,,,,,, You and your family as a country, a nation ,,,,,, you are under attack and have spent the last of your gold ,,,,,You will print money and continue the effort, no matter the inflationary costs,,,, come what may!
Many nations utterly failed to return to the original gold standard simply because they were mostly tapped out from the war. At the best, the richer, surviving countries would have taken a major economic hit by going back into a full gold system. All the eventual gold deals and non-deals were little more than a part of the progression of events that led us here today. All in an effort to keep from fully marking to the market the cost of a shared loss in war, defence and other financial failures.
There is not one person among us that ,,,,,,,,, if their family was completely broken from the war experience ,,,,,,,,,, would have asked for a return to gold. In full a honest context, millions would have starved in the process. The world opted to share the loss and spread it out as far and as long as possible.
The war experience is but one example of why society has such a hard time with an official gold system during times of stress. Over and over again we have seen where gold is the very best holding and defence against private and public financial loss. Yet, when large scale national loss threatens society as a whole ,,,,,, it's always the money system that receives the brunt of the demands for change. Society demands that whatever money system is in place at the time of stress be shifted so as to spread the burden amongst all. Is it right?,,,,,, is it just?,,,, I do not think so. But it is what we do and have done for a long time!
Today, if gold can be forced out of the official money system, it will be to the benefit of everyone during times of stress in the future. In times of war people spend the legal tender in commerce. Yet they save the food, liquor and necessities. A common currency of the world would be just such a necessity to hold as part of your wealth.
Trail Guide
____________
Money versus Wealth
The essence of money is credit, which is a reflection of the amount of credibility in the economy currently being exercised and circulated. In reality, in fact, even if not in the textbooks, money is a reflection of ongoing and planned future production. Wealth, on the other hand, which is everything physical that is owned and possessed, is the embodiment of past production.
So here we have a very simple dichotomy. Money reflects present and future production while wealth is, in fact, production from the past. But there's more. Money is an extremely useful, vital, and very powerful tool used by the Superorganism. But it is also used by those central plannerz. Price signals are what the Superorganism gets from money, and price signals are also what central plannerz try to control. Strangely, it is what we demand from them.
It is the very nature of our humanity that makes money a poor substitute for wealth when saving for an unknown future. And it is the nature of money itself that makes not understanding this simple view so widely destructive in the long run.
The fallacious premise that money and wealth are—or should be—one and the same (or at least managed to attain parity) is the flaw I mentioned at the top of the post "which, in and of itself, has set the two camps perpetually and unnecessarily at odds with each other."
The de facto abandonment of this premise in both camps is what I see coming. There is no need for anyone to convince the camps that they will abandon this premise. As ANOTHER said, time will prove all things. You cannot convince them of this. Only the unfolding of time can.
What you can do is consider – with a measure of intellectual integrity – the effects that will flow from a more realistic widespread view of the concepts of money and wealth. And, most importantly, how that view applies to you and how you use money and wealth/savings in your daily life.
Today, money is widely used as wealth, or at least as a measure of one's wealth. If you believe that the current system is not sustainable, perhaps even at the end of its timeline, it would be incongruent not to consider the implications of this simple change in widespread perception. Here are a few things ANOTHER had to say about it. I present these now because I find them to have enhanced meaning in the context of this post:
When an investment in stocks, bonds, bank accounts, CASH, businesses etc. is priced in US$ currency you are really holding the "intentions of providing value" locked away in the thoughts of another mind.
_____
One day ( it has already started ) a type of nuclear chain reaction will occur in the currency markets as people start "unvalueing" the thoughts of others. Little by little all debts owed will be marked down.
_____
The "wealth of nations" are held as "thoughts of value" not real value! And even these thoughts are "in debt" as they are owed to other nations. As it has always been, time moves the minds of people to change, and with this, the thoughts of value also change. In this day, as not in the past, the loss of paper value as a concept will destroy the very foundation of wealth that this economic system is built on. This drama has started and is well underway!
_____
How can one know value in currency, when paper does not lie still? It moves at night, where no one can see, and this we hold to prove our worth? Real things know not this paper value, for they hold tight in the earth. In this time, we do stand firm with value and watch as "thoughts of others change in the wind"!
Thinking ahead
There has been some debate recently in the comments about the functions of gold (and other less-salient items of tradable wealth) and currency as it relates to savers after the transition. It has been suggested that, because gold will finally be functioning properly, currencies (money) will become relatively stable and will therefore function as savings for the masses.
Here's what I think.
What will change is how we view money and wealth. Everything else flows from that. But it is not our change in view that is causing the transition. It is the other way around. The transition will cause a widespread change in view. What is causing the transition is the de facto failure of the present system.
In the future, I think that if you are saving for something known, especially something with a known currency price like a down payment or a car, you'll save currency or "money". But if you're saving for the unknown future, you'll apply your newfound understanding of the difference between money and wealth and you'll probably choose gold, the most salient and liquid of the tradable wealth items.
This view even scales up from the individual to the national or regional level. I think that short-term trade imbalances—due to known factors that are expected to be short-lived—will be recorded in currency or even debt terms. But structural or long-term imbalances will be settled in gold through the open market, effectively eliminating structural or long-term imbalances.
Gold is real, tradable wealth. Money is not wealth, no matter how well it is managed. You will understand this distinction in the future and you will act upon that understanding.
Today I hold gold for the expected revaluation, because the weight of gold that I find I can still buy because the former system is still functioning is so vastly disproportionate to the relative shrimp I am. But even after the transition, I expect that I'll still feel the amount of gold I possess is vastly disproportionate to my "size". So I expect that I will, at that time, apply my new understanding of wealth and trade some of my gold for other tradable wealth items that are better suited for display and enjoyment in life than gold.
There's a reason I keep mentioning other "hard assets" like antiques, fine art, classic cars and high-end real estate when talking about Giants today. That's because those items are the closest thing we have to "Freegold-like savings" today. And yet they are only accessible to the Giants because of their nose-bleed prices. But they are still quite inferior to Freegold. They are not as portable, durable or liquid as gold, but most importantly, they are not divisible like gold which, as FOA said, puts us shrimps "on equal footing" with the Giants!
Another recent debate in the comments was whether our central plannerz of the future will target consumer price inflation, monetary inflation or the price of gold to achieve stability.
Here's what I think.
I think that this whole question is somewhat "old paradigm" thinking. In the "new paradigm" I think I'd say that the real economy will manage the money supply since, as I proposed above, "money is a reflection of the amount of credibility in the economy currently being exercised and circulated."
Of course the monetary base will still be subject to abuse by governments in places where, unlike the Eurozone, the government retains ultimate control of the central bank. But like I said above, I think you'll find that the risk of fiat currency abuse is worth the innumerable benefits, especially once there is a systematic and foolproof way to protect yourself from the worst of it!
And remember, this is why Wim Duisenberg so proudly stated that the euro "is the first currency that has not only severed its link to gold, but also its link to the nation-state." I don't really think the euro architects came up with this ground-breaking idea because they thought they were smarter central plannerz than the Superorganism! ;)
In Conclusion
FOA: In this light we should know that our real things in life will not change all that much. Your tools, chairs, clothes and cars will remain yours. Houses and land, TVs and boats, all will retain the exact same "value" they always had. What will change is our ability to use our currency and paper assets as a medium to measure the "real value" that's always so inherent in these items, yet so well hidden in our perception of today. Yes, the currency price of things will greatly change, even as their "use value" moves little. Such is the nature of dying paper money systems. Such is the ending of a currency timeline!
Trail Guide
ARI: So you see, learning how the world works is all about each man coming to the understanding about the real wealth we all require to best ensure our survival. Knowing that Gold is the master proxy for our life's day-to-day and year-to-year shifting requirements for food, clothing, shelter, and energy, it simply makes more sense to gather in Gold for later use than to gather in clothes (that we may outgrow,) food (that may spoil,) houses which are more than our needs, or energy (that we can't store.) You see, time bears witness to this undeniable fact: Gold can be called wealth because it is an enduring wealth proxy in exchange for our life's needs. Currency, on the other hand, serves a specific modern economic purpose--to be borrowed and inflated in placation of man's immediate desires. It is not wealth, it fails as a proxy for the Gold it tries to immitate. Do not confuse the two.
Understanding how the world works is easy as soon as you understand the Wealth Hierarchy. Like this: Earn money/currency, buy what you need, save Gold, enjoy what life has to offer.
Real wealth. Get you some. ---Aristotle
ANOTHER: Sir, Thank you for reading my thoughts, as I do read yours! As in all life, "events make truths", not the words of Another. "time will prove all things" Thank You
Sincerely,
FOFOA
*If you buy gold because of my blog without really understanding my view, I think it is possible that you will sell your gold "to lock in a profit" with the worst timing in the last 5,000 years. You don't want that on your headstone, now do you?
**For anyone who would like to read J.P. Morgan's full testimony before the House Bank and Currency Committee on Dec. 18 and 19, 1912, with cross-examination by Samuel Untermyer, for context, here is the full 55 page transcript of Morgan's testimony as archived by the Library of Congress: http://memory.loc.gov/service/gdc/scd0001/2006/20060517001te/20060517001te.pdf
____________
We gold, we gold, we shine!
"Shine Your Light"
F-ff-f-fresshhhh music from Rita Ora (h/t DP!)
We gold, we gold, we shine
We gold, we gold, we shine
We gold, we gold, we shine
We gold, we gold, we shine
Hey there rock stars
Turn up your radio
I can hear you coming
Start up the video
You're still standing
They'll never knock you down
The beat never ending
Let me hear your heart pound
Eh, ah, eh, ah
Eh, oh, a shining star
Eh, ah, eh, ah
Don't matter where you are
Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)
We gold, we gold, we shine
We gold, we gold, we shine
We going solar
Push up your lights out
Faster and faster
I see the sun rising higher
Eh, ah, eh, ah
Eh, oh, a shining star
Eh, ah, eh, ah
Don't matter where you are
Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)
Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)
And we don't give up till we run out of desire
We see the finish and we never get tired
We are the winners cause we hold the world title
We started slow, but we beat you in the final
Eh, ah, eh, ah
Eh, oh, a shining star
Eh, ah, eh, ah
Don't matter where you are
Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)
Wo-oh, shine your light
Wo-oh, set the world on fire
Wo-oh, shine tonight
Wo-oh
(set the world on fire)
We gold, we gold, we shine
We gold, we gold, we shine
We gold, we gold, we shine
We gold, we gold, we shine
