Tuesday, November 5, 2013

Advance Warning


This post is my replies to two reader emails. The first one was to "Victory", one day after my Gold as a FOREX Currency post went up. And the second one was to "Burningfiat" on Friday.

Hello Victory,
"... My thinking is this, won't the end of $ support be clearly visible in the currency exchange rate? Isn't that where the rubber meets the road, there really should be no guesswork needed. The US is a perpetual net exporter of dollars and has long ago hyper-inflated…"
There is definitely a glut of dollars right now. In September the Fed announced its new "reverse-repo" operations. There is, of course, a lot of debate about what those are really about, but I think it is obvious that they are to mop up the glut of dollars and raise short term interest rates in money markets and t-bills. The Fed even said so. They said that these operations will raise overnight rates in the money markets so that lenders can actually earn some interest.

When there's a glut of dollars, it's hard for banks (who create dollars) or money markets (who auction existing dollars) to make money on interest because there's so much competition for the limited pool of borrowers. Too many dollars drives interest rates to zero and even negative in some cases. So the Fed is actually competing against real organic borrowers for its own liabilities. The Fed will pay you to lend your extra dollars back to the Fed, even though what the Fed is "borrowing" are its own liabilities. So the Fed is creating synthetic demand for its own product to drive overnight and short term interest rates higher.

You're looking for a crash in the USDX to indicate the imminent end, but I have always expected a spike in the dollar, and I think Another expected that as well. I have written in the past that we could even see the USDX spike (very quickly mind you, not a slow rise) to something like 150.

What we see right now is big money piling into short duration, even overnight, assets. To escape, that money will have to pass though dollars once again. Where the rubber meets the road, in my opinion, is not anywhere inside the monetary plane. Instead, it is where the monetary plane intersects the physical plane, and that is in prices, the prices of real physical things, the price of physical gold and the price of (primarily imported) necessities. That's where I expect to see the break, in one of those two places: the LBMA or a real price jump in necessities. Whichever one comes first, I think it will quickly cause the second one to follow.

What that means, practically, is that either physical gold goes into hiding first, or there's a sudden devaluation of the dollar against the physical plane, meaning necessities, especially those necessities needed by the USG which must be imported. When that happens, the USG will print whatever is needed to keep its imported necessities flowing in under the aegis of national defense. Actual hyperinflation will follow.

When this happens, or a top level disruption within the LBMA, all that money piled into short duration assets will panic out and bid for dollars which it needs in order to pile into anything else. This will briefly drive the dollar way up on the USDX. It may even happen before you know what's happening, because big money tends to panic before small money even knows there's something to panic about. Remember this story from Unambiguous Wealth 2?

"Compare these big money folks to the average guy who rides the bus. You miss a bus, so what? It's inconvenient but another bus will come. It takes a long time to sink in that another bus isn't coming. It's not until there is such a big crowd waiting at the bus stop for the next bus that people start thinking "even if a bus comes there are too many people to fit on one bus." In that mindset the surest way to cause a riot is to send one bus i.e., not enough buses. You have to fight to get to the front of the queue. This is a bank run mentality.

And this is a key difference between the average guy and the big money. Big money isn't used to being kept waiting. Big money owns the "bus company". They know the buses aren't going to run before the little guy. They panic early. There was an electronic bank run around the time of the Lehman collapse. That was one of the reasons why governments around the world stepped in with fresh deposit guarantees. But there were no lines outside the banks to alert the average guy to what the Giants were up to.

Right now gold is $1,712 per ounce. If you have $200,000 in ambiguous claims floating through system-space, your account is right now worth 116 one-ounce gold coins of unambiguous wealth. But here's the thing. You are never going to beat the big money to that panic button. There are enough gold coins on the market right now that you could get your 116 of them without affecting the price. But if you're waiting for the first signs of panic, you're not going to get anywhere near 116. You'll be lucky to get six or seven.

There's only one way to beat the Giants to the gold, and that is to run in front of them."
Apply this reasoning to the signals you are watching. Even though you aren't waiting to buy gold coins at the last minute, you are still looking for signs that systemic transition is imminent. So what you want to look for are signs that big money is panicking, not the signs that you think will cause big money to panic. Because chances are that the really big money will see those signs before you do, and panic before you even know they are there. Therefore, signs that you think should be making big money panic, when it's not panicking, are probably the wrong signs. See?

In the comments section, it often seems like the Freegold holy grail is to be able to predict the proximate cause, and therefore get some advance warning, and therefore be the first to make a correct timing call on Freegold, even if it's only by days. But if you follow my reasoning, then it is most likely a waste of time trying to gain some advance warning. The advance warning is in the logic, and in the A/FOA archives. And the holy grail is simply buying physical gold now, before it happens. That alone will make anyone look like a genius in hindsight.

Some people look for rising short term interest rates as a sign of systemic stress, while others look for rates to fall to zero or below. Some look for a falling DX while others look for a spike. That's all monetary plane stuff, and not where the rubber truly meets the road. As I said, the Fed is trying to levitate short term rates right now, so why would rising rates indicate stress? To me they indicate that the Fed has sufficient control over the monetary plane, which I kind of assumed it did. What it has no control over is where the monetary plane intersects the physical plane.

"So my question is really this, until we see the $ drop rapidly on the FX market don't we know that official support from someone besides the USG is still in full effect. And the corollary that FG will not be imminent until this support is withdrawn, which we would see immediately in the FX market as a $ devaluation?"
We could see a sudden drop in the USD versus other currencies in the FX market, or we could see a spike. But I think we will eventually see some sudden, unexpected and highly unusual volatility. That's what I would watch for if you're one who likes to watch the pot, waiting for the water to boil. Watch for unusual and extreme volatility, because that should be what we see when the monetary plane comes unhinged from the physical plane. And don't forget the concept that there can be a head-fake right before a phase transition, a sudden and major move in an unexpected direction.

For me, I already have the advance warning in the logic and the A/FOA archives. I try not to watch the pot, but instead to explain the logic to others, because I think that's better than trying to predict how the monetary plane markets will behave at that moment when the physical plane lets go.

Sincerely,
FOFOA

Hi FOFOA,

Hope all is well!

Do you have an opinion of the latest strange GLD inventory update behaviour?

Could it be a sign of rumblings further down in the machine room? Or do you really think it's all just meaningless pot watching? :)

/BF

Hello BF,

I certainly think it is interesting, but the short-term variations we see don't change my opinion of what is happening behind the scenes. I think the consistent drain this year is a sign of rumblings further down in the machine room, but I find it hard to believe that the reporting anomalies are reverberations from the same thing that is causing the drain. More likely, I think, there is probably some explanation for the reporting anomalies that we just don't know about, something that we haven't even considered.

The indisputable story is that GLD has lost 36% of its inventory, 487 tonnes in 10 ½ months. Title to that gold was transferred to someone. The only question that matters is whether it was transferred into BB reserves (the plenitude view) or into private ownership (my view, and obviously the correct view ;). That's more than 46 tonnes per month.

The BBs probably have at least twice that much coming in through mining and scrap (just a guess), so let's imagine they have 100 tonnes coming in each month. The outflow is obviously higher than the inflow, but the pressure is widely distributed across the LBMA. So the rumblings in the machine room are widely distributed and therefore isolated from what we see in the reservoir drain reporting. GLD is where the buck stops, where they obtain that shortfall of incoming gold, but it is not likely going to a specific buyer. More likely, it is simply restocking the subterranean stream.

The point is, I wouldn't expect the underlying cause of the drain to transfer "short term vibrations" into the daily reporting of the drain, I only expect it to show up in the greater trend. Therefore I think it is more likely that there must be a more mundane explanation for the reporting anomalies that we see, something we simply don't know about and therefore haven't even considered. That's the way I apply Occam's razor to a situation like this.

I expect the short-term machinations of the system to appear outwardly normal right up until the moment the pistons seize up and the whole machine comes to a grinding halt. That's the way these things usually seem to end. So I expect that could happen at any moment, without visible warning signs. In hindsight, I think we'll realize that OBA was right, it was just a hair's breadth away. But watching the pot can make even a hair's breadth feel like an eternity from the watcher's perspective.

So yes, it's interesting, but Occam's razor tells me that we are most likely watching the effects of some mundane cause we are not aware of while "superstitiously" trying to attribute those effects to the greater cause which is clearly obvious in the long-term trend. That's fine, and it is human nature to do so, but at what cost? The cost is that a hair's breadth starts feeling like an eternity, and some people can't handle that feeling and end up throwing in the towel.

Have you noticed how many people that have only been following my blog for a year or so eventually start making emotion-based predictions that Freegold must be 5, 10, or 20 years away? I have been at this for more than five years, and I still have the same view I had in 2008, that it could happen at any moment and each moment that passes brings us one moment closer. In fact, I think it must be almost here right now! And I think the reason I am able to maintain that view is that I have never been a pot watcher. I have always paid more attention to FOA's logic and the long-term trend than to the short-term vibrations.

The long-term trend is that the commodity bull/dollar bear market ended more than a year ago, even though dollar inflation *policy* is firmly in place. Shortly after that, the GLD drain began. And shortly after that, support for "foreign dollar settlement with CB storage" reversed and began declining. This is very close to what FOA said in one of his last posts: "The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollar's timeline as we are already stretched to the leverage limit. They know that [the Fed] has but one policy to use and that will be super printing."

Anyway, keep up the great work with your auto-pot-watching app! I do enjoy the short-term show, even if I don't put much stock in it. ;D

Sincerely,
FOFOA


882 comments:

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DP said...

My pleasure, Victor.

Are these the excellent materials we seek?

Meanwhile freegolders, ponder this one:

FG states that savers saving in gold will constrain the banks.
But surely we all know banks are not restrained in their lending by having deposits? They can create credit from thin air!

Fofoa wrote:

'As we move forward in this discussion, I want you to keep in mind my first fundamental take-home point which was that reserves are the base on which bank money expands. Commercial banks expand their bank money on a base of Central Bank-created reserves. And (as long as there is trade with the world outside of your currency zone) the Central Bank's reserves are the base on which the commercial banks' reserves stand.'

So, apart from the view that Western savers will never save in gold for cultural reasons, even if they did, it wouldn't constrain the banks!

No, what will constrain the banks is the break from the state (in the Eurozone), the knowledge that (as in Cyprus), if they get it wrong they go bust. Nothing to do with gold.

H/t Capt Goodvibes for these a-ha moments. It's wonderful to have a truly open mind! The future is bright.


Thank you, and good night.

Victor The Cleaner said...

Yes. Better read it in its context (including a few comments before and after) and think about banking until you understand banking. Good luck.

Victor

Unknown said...

Sam and Bimby,
So Funny ... but TRUE!!
It IS all about acceptance, after all ...
;0)

Unknown said...

" ...what will constrain the banks is the break from the state (in the Eurozone), the knowledge that (as in Cyprus), if they get it wrong they go bust. Nothing to do with gold."

Sorry if I interpret this incorrectly, but ... is someone saying that if Euro-banks (do X) they won't get bailed-in?

Now ... define "get it wrong".

Yes Poopy, the branches seem even to osbcure the trees, let alone the trail view of the forest.

said...

Sam and BYoung, thats hilarious. Hilarious because it accurately displays the utter stupidity behind the actual analysis the internet fanboys offer.

It will be an interesting week after the revaluation. The silver stacking youtube and bitcoin community will be devastated.

michael3c2000 said...

http://thebricspost.com/brazil-india-sa-part-of-new-global-ratings-agency/#.UoMQ1uIljAk

Bright aurum said...

@ Victor
Sure Blondie has moved on ( I count on a comeback though). For the other guy I am not quite sure he has left at all. At times I have the feeling he is shooting arrows up some trolls` asses around here.
Still, it is for FOFOA to confirm this based on IP/location stats.
About your other question that went unanswered about the ECB`s o.25% cut seen as proUSD and perhaps this too. I guess wait ‘n’ see is the best approach. Maybe it is all about physical gold accumulation in the Eurozone (because the savers look like being abandoned in the mercy of the banks/ bond/ equity markets) that is set to undermine the GLD/LBMA for the US cannot turn its guns around to face the gold price vs. physical drain problem that they see on their computer screens.
@ the peak-oil doomers
eat this and
<a href="http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20131110186216>this</a>

Bright aurum said...

http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20131110186216

Anand Srivastava said...

I hope its not wrong to post messages from other blogs. I was told to read neuralnetwriter. But the website seems to be invite only. I couldn't see a register page.

Victor the Cleaner wrote at Wed, 17/07/2013 - 13:10
It's not incompatible. I am just saying that once gold is free to function as the reserve and the connection between oil and the dollar is gone,
a) It is the best policy for any CB to target zero inflation (i.e. print in order to prevent deflation, but not in order to prevent deleveraging)


Also VTC said at Mon, 10/06/2013 - 21:41

Why would the ECB lower their inflation target from 2% per year down to 0% per year at some point? Wrong question. The right question is, AG, where would you get 2% inflation from? Answer: You wouldn't. (Unless you have bank credit again grow faster than the economy for decades, or, alternatively, your CB prints base money and hands it to governments for spending - both scenarios are kind of outright dumb - why would anyone want this?).

Now the two comments look contradictory to me. One says that ECB will print to prevent deflation at 0%. What happens to that money. Will it not go to increase BASE?
Are we sure that ECB will have such great powers to keep the price stability at exact zero for the CPI? Yes this will mean that there will be deflation in some aspects at some times and in some regions, and inflation in other aspects at other times and in other regions.

Wouldn't it be easier to target 2%, so that there is deflation in a lot less aspects and times and in regions. Ofcourse ECB can print to target the 2% inflation. What does VTC mean by your CB prints base money and hands it to governments for spending - both scenarios are kind of outright dumb - why would anyone want this?)

I am not sure why would it be dumb, everybody likes free money :-). Governments are not free from this malaise. Also the people want this. They want less taxes and more freebies. It is just the ECB's 2% target preventing this from happening. Who would want to stop ECB from printing to provide 2% inflation. Rest assured its not the political class or the Citizens.

I think asking the question "Why would anybody want this printing" shows utter misunderstanding of why printing happens in the present world (and why it will happen in the future). It is not only done to satisfy the oil trade. Ask Gideon Gono why he printed into Hyperinflation.

One more thing. In the present world USD works exactly as gold for the countries that have minor currencies, if they are in deficit. They must get more USDs before they can use it by exporting. These nations face currency devaluations (as will happen in RPG against gold), with inflation and if things continue to deteriorate hyperinflations. True it doesn't work as gold when you are in surplus, because you cannot hold the USDs forever, as they lose value over time, and will be worthless soon.

Motley Fool said...

Vtc

I went looking.

"Why would they consider adjusting the inflation target down? Wrong question. The right question is, after the transition to the new financial system, where would they get 2% inflation from?

That would be far from easy. In the absence of any serious turbulences, velocity is approximately constant. Then there is basically one way you can get inflation. The total volume of fungible “money” that is available to purchase goods and services, has to increase. At present, this happens, for example, when commercial banks create credit and when this credit is used to purchase goods and services. It happens when a commercial bank borrows liquidity (=reserves) from the ECB and pledges government bonds as collateral. (This is because, in aggregate, this allows the governments to write additional bonds without exerting any pressure on the interest market and, in turn, makes new base money available) Thirdly, it happens when the ECB buys assets (e.g. government bonds) directly and pays with reserves (=Euro base money).

Now after the transition, do you think that
a) consumer loans will keep growing faster than GDP?
b) loans to governments will keep growing faster than GDP?
c) the ECB will keep printing money and hand it over to the governments?

No? You don’t think so, do you? Then where do you get 2% inflation from?

The answer is, you won’t. "

Is this meant to be your explanation?

Let us examine it.

" In the absence of any serious turbulences, velocity is approximately constant."

This is true. My question. Do you expect 'the absence of any serious turbulences' indefinately AG?

"Then there is basically one way you can get inflation. The total volume of fungible “money” that is available to purchase goods and services, has to increase."

Sure.

"Now after the transition, do you think that
a) consumer loans will keep growing faster than GDP?"

No. But what the hell are you thinking? Do you think it will remain stable in relation to GDP? Do you foresee no cyclical periods of overextension and then deleveraging?

"b) loans to governments will keep growing faster than GDP?"

Ditto the above.

"c) the ECB will keep printing money and hand it over to the governments?"

Do you think this will never happen? Are there no possible circumstances where the ECB might consider a temporary policy of the sort? None you can think of?

Finally, IF savers save in a currency such as the euro, doesn't that make it an excellent political target as a cash cow?

"Thinking that the real price of gold would be approximately stable is a hard money fantasy. Get rid of that baggage, gentlemen."

Who exactly is living a fantasy?

TF

Motley Fool said...

Ps. I have no idea what this reply means or how it relates to my observation. Really.

"I suggest you take a look at the figures first: Average annual inflation in Germany during Deutschmark times before 1999 was slightly higher than average annual inflation in Germany under the Euro since 1999. So the German currency has already been slightly stronger since the introduction of the Euro. Not much left of that "argument", isn't it? You can also take a look at some long term charts of the major currencies and inflation rates, and you will find that 2% was a rather plausible guess of the required rate BG (=before gold)."

You : "If Euro zone inflation had been 0% rather than 2% since 1999, the Euro would be at $1.70 rather than the $1.35 as it is today. There is no way the Euro zone would have retained its balanced trade account in that scenario."

Me : "However, there is the historical example of Germany which increased it's exports whilst it's currency was strengthening."

What has guesses as to an inflationary number, or that the euro as a stronger currency to do with prior history as relates to balanced trade?

Anand Srivastava said...

Luke:
It will be an interesting week after the revaluation. The silver stacking youtube and bitcoin community will be devastated.

Agreed about silver. Because we know how it should behave.

But not clear about Bitcoin. It is totally a new thing. We don't know how people will behave after reval. Yes it will drop a few times. Problem for people who got into Bitcoin during the crisis, but not for people who got in before.

What will make or break bitcoin is whether it remains sort of stable (and not continuously lose value) after the initial drop post reval.

This would depend on whether it can reach a critical level, where it will be stable. I would expect that level to be a market cap of around 1 Trillion Euros. Nothing says that it cannot reach that level, although it does look difficult at this point. I would expect 10X ascent during the crisis before reval. But that still leaves 20X ascent before the crisis. Will it reach there before the crisis. I am skeptical.

So although I am bullish on bitcoins before reval, I am ambivalent post reval.

Indenture said...

Victor wrote: ”Why would the ECB lower their inflation target from 2% per year down to 0% per year at some point? Wrong question. The right question is, AG, where would you get 2% inflation from? Answer: You wouldn't. (Unless you have bank credit again grow faster than the economy for decades, or, alternatively, your CB prints base money and hands it to governments for spending - both scenarios are kind of outright dumb - why would anyone want this?).

I’m looking at this from the lower echelon of understanding but there appears to be something amiss when you say the actions of human in the future will be different because otherwise it would be dumb. Have you seen humans?

After many years of reading FOFOA there are a few constant reverberating themes which stand out and one of them is humans want things they cannot afford. From the beginning we were taught about the ‘Original Market’ where script was used to ease the flow of commerce and how this morphed into currency and now, in order for Freefiat to work humans can’t act dumb? It is the use of the word dumb which struck me as odd because if the success of Freefiat is based on people suddenly living within their means, even after a worldwide currency collapse which should teach monetary humility, we are still the same creatures which desire what we cannot afford.

I must admit I’m a little confused when I think Freefiat is based on humans not acting dumb.
I submit we are incapable of acting smart.

byiamBYoung said...

All joking aside, what would prevent Satoshi and his band of merry men from copying their bitcoin.c source files as SHMITCOIN.c, and compile a complete clone of the entire Bitcoin platform?

This is the giant hole in the whole Bitcoin thing IMHO. It's analagous to being able to clone gold, which would make gold worthless.

Unless, of course, I am missing some critical piece of information, which is quite possible.

Motley Fool said...

byambi

There are already several variants, the source code being open, and some with improvements.

There is a thing in economics called first mover advantage. Bitcoin has that, despite its flaws.

It would be like making an exact copy of idk twitter and trying to make it a success. Unlikely.

TF

Motley Fool said...

Ps. Satoshi isn't a real person. Just a pseudonym used by the creator of bitcoin, whoever it is.

byiamBYoung said...

MF,

Yup. I get that, and true Bitcoin has that advantage.

As a MOE, it has some merit. BUt it's a sketchy SOV as I see it.

It seems to be going parabolic right now, BTW. I'm waiting for the giant popping sound.

Cheers

Motley Fool said...

Sure, let's see what happens. ;)

Franco said...

Since Bitcoin keeps being brought up, there is one feature about it that in my opinion is a fatal flaw from the point of view of BTC being used as an everyday transactional currency: when you "push the button" to send a payment to somebody, that payment doesn't instantaneously show up at the other end. The transaction goes to a giant ball of twine with every other transaction ever done, and it has to be "confirmed" by "nodes" (sorry if I'm getting some of the terminology wrong). The first confirmation may take several minutes to happen (or an hour, I don't know). At that point the recipient can be somewhat confident that the transaction has, in fact, taken place. Or he/she can wait longer (hours?) for further confirmation from other nodes. Anyhow, I'm getting into the weeds, but my point is, if one has to wait even ten minutes to get confirmation of a transaction, how can BTC be practical for everyday use? Maybe as a speculative investment, but not for buying your gas and groceries.

Having said all that, I've never used BTC, so if the above paragraph is way off, please correct me. Thanks.

Franco said...

About BTC, I forgot to say that the confirmation time for a transaction may be expedited if, when you send a payment, you include a small bribe for the "node" (or "miner", or whatever it's called). I'm not joking.

Unknown said...

FOA has left an old comment on the post "A quick note from the "TrailHouse"! (smile)":

Don't expect Western dollar investors to fully taste this flavor just yet. But, they will as their local economic structure begins to hold complete sway over the Feds actions. And all those deflation boys thought our Fed would not inflate? Shoot, even our treasury in manning the guns now!

Second Target: Wait long enough for the US to have to drop dollar rates even lower before you move. "Watch him Alan,,,,,, Old Wim keeps his Euro biding a little higher than your dollar! I got a bad feeling about this trend!"


It's all about context.

Sam said...

@anand

Good logical points and questions

Unknown said...

Anyone might easily be tempted by their confirmation bias to quote the other half of that comment by FOA, apply it in a way that happens to suit their purposes, but choose to omit the remainder that made his actual thinking far more apparent.

Indenture said...

How does a currency offer a real rate of return if currencies exist so gold can flow?

DP said...

Yes, Boner. Everything is relative.

In a world of crisis and collapsing demand for all but the bare essentials, even then most being unable to buy as much as they might like, any Central Bank with an inflation target will find it mandatory to devalue their currency somehow alongside the values of their wider basket of consumer goods ("real terms") that they target. Which are traded on global markets, where their values are impacted accordingly by events both outside the local economy and within.

Unknown said...

Yes, DP.

So much better relative performance, as a store of value, than "free gold"?

DP said...

No, Boner. You just don't understand future.

The world will shun your "free gold", in favour of the newly-released "free fiat". That is price-fixed to those fluctuating (over time, with the relentless advance of technological progress, on balance falling) "real terms".

Unknown said...

DP,

In your "free fiat" world people will hold currency rather than clear trade imbalances by demanding gold, but I am given to understand the Central Bank will force the clearing of imbalances by issuing more of their currency and using it to buy gold on behalf of the little saver who wouldn't?

Doesn't this just mean the same demand that in a "free gold" world would have gone direct into gold (elevating its relative value), is simply provided indirectly by the Central Bank (elevating its value) - in addition to there also being more of their issued currency out in the wild?

So isn't it a pipe dream that in your "free fiat" world gold will not on balance go up more than it will go down, just like it would in a "free gold" world - perhaps even more so given there is more currency hiding under mattresses and being passed from hand to hand under cover of darkness?

DP said...

Just to be clear… it is not my "free fiat", Boner. ;)

I agree — IMO gold is more than likely to on balance rise against currencies, and "real terms", in either a "free gold" or "free fiat" world.

Don't worry, be gold buyer!

Lara said...

Those Nixon era documents on gold were very interesting! Thanks, Michael Pierce, for reposting that link here, since I missed it on ZeroHedge. I laughed out loud at the transcript of a Kissinger staff meeting discussing the EC proposal to use higher (market) priced gold reserves for balance of payments between central banks. After lamenting that this would undercut American control over the banking system (since Europe was determined to have more gold), they had the following exchange:

Secretary Kissinger: Who's with us on demonetizing gold?

Mr. Enders: I think we could get the Germans with us on demonetizing gold, the Dutch and the British, over a very long period of time.

Secretary Kissinger: How about the Japs?

Mr. Enders: Yes. The Arabs have shown no great interest in gold.

Secretary Kissinger: We could stick them with a lot of gold. [...] For the bathroom fixtures in the Guest House in Rio.


Ha ha ha!

Unknown said...

OK.

I also question where the CB will get this gold from, that they will buy on behalf of the net-producer that doesn't demand it (and the net-consumer who in a "free gold" world would have found themselves having to part with)? Am I right in understanding in a "free fiat" world, consumers don't have gold - and therefore can't be expected to part with it whenever they net-consume?

My brain hurts.

DP said...

:D

My brain hurts.

+1

Unknown said...

Maybe if the CB just bids a high enough price, they would find a willing seller among the non-net-consumers somewhere?

Oh, wait no that's no use - the price isn't supposed to rise is it.

That would take someone having to sell despite the absense of a great deal for them. Like if someone doesn't have much choice about selling, if they really want to consume. Something like that.

Unknown said...

If I may be so impertinent as to answere CGV's question on behalf of MF.
The reason Gold is the ultimate SoV, is not because it is an absolute SoV, it is because it is better than everything else as a SoV. Also, ultimate implies, at least IMO, long term, i.e. generational SoV.

DP said...

Maybe there will simply never be any surpluses to save, Boner?

Then the Central Banks wouldn't have to find a way to buy gold without raising the bid, on behalf of the absent savers.

Unknown said...

I give up, DP. Does it really matter to me? I think not.

Motley Fool said...

http://www.zerohedge.com/news/2013-11-13/euro-tumbles-after-ecb-hints-qe-contemplated

DP said...

In the case of international trade imbalance, it may well be true that while one Central Bank is looking to buy gold on behalf of one his local little savers that wouldn't, there in a perfect world ought to be a matching Central Bank looking to sell on behalf of one of his local little savers that should be. So they ought to balance each other out.

So what about at other, more domestic and personal scales? Perhaps it will be handy that for any desire to net-consume domestically, there will be an eager provider of their credit — more currency in the system, a larger banking system balance sheet, as one person takes on more debt they owe to another person saving it somewhere across the system. But wouldn't this desire for moar savings by the productive selling to his neighbours, just create the same kind of excessive demand for someone to go into debt somewhere… ultimately leading right back to where we are today. I've noticed Germany is taking some heat lately for essentially this same scenario. Being branded anti-social for not playing the game in a fair and balanced manner. China before them too of course. But, if a system relies on everyone being nice to each other all the time then it's probably doomed.

I agree, Boner… it doesn't really matter to me either. In either scenario, gold is necessarily "freed" and as a result revalued against everything else that didn't undergo the same kind of "phase transition" (i.e.: everything else). After passing through the eye of that needle, all are free to make up their own minds what is the best thing to do next.

Thank you and good night! ;)

Roacheforque said...

Yes Motley, the "break from the state" in all its glory.

Motley Fool said...

Idiot. Well trolled.

I have this habit of posting interesting and relevant info here. You will find I have linked many ZH articles over the years. This is never blanket approval, but merely a suggestion that interesting info can be found, and that opinions thereon are your own problem.

In this case it is tacit acknowledgment of vtc's comment that the rate cut in itself was not enough to get back to 2%. I certainly am not surprised at their considering other means.

As regards that question, I am curious why you didn't also post my response, which is in that thread, or even post the context of the question.

Meh

Roacheforque said...

I second the notion:
http://www.zerohedge.com/news/2013-11-13/rbs-fed-now-responsible-monetizing-record-70-all-net-bond-supply

S P said...

Gary:
Credit, not gold, is a claim on future prosperity. Gold is present wealth. There is a difference.

Having said that, I agree that gold doesn't have to always rise in purchasing power. Post freegold, though, it should stay high for some time.

Franco said...

A lot of sarcasm and bad blood lately. So there is FOFOA's opinion that after a revaluation of gold, it will remain rather stable in terms of purchasing power. And there are some other dudes who think that after the revaluation, gold will have significant swings in value, but the Euro will be pinned down to 0% depreciation, making it ideal as a store of value. Is that it? That's what the disagreement is about?

FoNoah said...

Hello FOFOA - I notice there have been a series of changes in the design and content of your Sidebar over the past few weeks?

Some old and familiar Links have gone. Care to comment?

byiamBYoung said...

Hi DP,

"But wouldn't this desire for moar savings by the productive selling to his neighbours, just create the same kind of excessive demand for someone to go into debt somewhere… ultimately leading right back to where we are today."

Yup. All roads eventually lead back to wherever the Hell we are right now.

Humans is humans.

Cheers

Knotty Pine said...

Yes Franco, as far as I can tell that about sums it up. My brain hurts also. So after the most insane monetary experiment in fiat exorbitant privilege blows up the superorganism will embrace a new fiat regime as a long term store of value? Not likely IMO.

One Bad Adder said...

KP: - I'm kinda thinking the SO will be cajoled into embracing a new Fiat regime (out of necessity) ...however we need to identify the process whereby that might transpire.
The FF crowd (I feel) are identifying just such a scenario where Faith in the Future is re-established ...after the total loss of Faith in (both) the Future and Present. FWIW!

Anonymous said...

OMG, so top germans pushing Jan2015, getting ever closer?

ECB’s Weidmann calls for earlier introduction of bail-in rules
FRANKFURT Tue Nov 12, 2013 6:04pm IST
http://in.reuters.com/article/2013/11/12/us-ecb-weidmann-idINBRE9AB0KU20131112

Robert said...

Franco, I think Bitcoin is practical for everyday use only for those engaged in illegal commerce. I find it interesting that Bitcoin's recent resurgence coincides with the return of the Silk Road site. As long as Bitcoin remains secure, anoymous and untraceable, it will be the medium of choice for the world's underworld. In the long run I think that will also make it a target for more government regulation.

ein anderer said...

Some more from Germany:
http://info.kopp-verlag.de/hintergruende/wirtschaft-und-finanzen/michael-morris/stirb-langsam-.html

In regard to derivatives:
http://www.seiten.faz-archiv.de/faz/20131112/fd120131112_vbl__vbl_2013_11_12_1_5.html (2,00 €)

Handelsblatt (Sept. 2013):
http://www.handelsblatt-hochschulinitiative.de/index.php/arbeitsmaterial/handelsblatt-inhalte/branchenuebersichten/2858-zocken-bis-zum-crash.html

DP said...

Ekathimerini: EU set to tell markets it will stand by weak banks

Anand Srivastava said...

Robert:

Bitcoin is not going up because of illegal commerce. It is going up because more and more people are realizing its potential for normal commerce. Bitcoin is going up because Baidu has accepted it, and so you can do a lot with it in China. Now you can buy houses with it there.

Bitcoin is secure and anonymous, but not untraceable unless you use Tor. Tor is not easy to use, and will never go mainstream.

Internet commerce using Bitcoin will be taxed.

Yes during a crisis bitcoin can be used for moving money out of the country.

I guess by regulation you mean banning. Only govt which are fearful of their currencies will ban bitcoin. China has already shown that it is ok with bitcoin. Germany has also shown its not negative about it. I expect that Eurozone as a whole will come out positive about it. I also expect that Russia will go with it. I expect US and Japan will ban it at some point in time, just like they will ban all other currencies as part of capital controls.

DP said...

Only govt which are fearful of their currencies will ban bitcoin.

Yes!

Bitcoin is their friend! Any flavor of asset (i.e.: anything not money) that people choose to spend their money on rather than hoard it, is the government's friend.

They don't want people to hoard stacks of currency. Currency is the lifeblood of commerce. Hoarding it is like mainlining coagulant into the economy.

Hoard money? Even if it works, you're a jerk!

Spend your money now! It's the patriotic thing to do.

… And it'll save the government the trouble of having to pump in some more to replace the leak you created in their nice monetary system.

DP said...

Why else would they be so mad keen for you to stay in stocks, bonds, and realestate? And therefore out of cash.

DP said...

Munger would've been right!

If it wasn't for forgetting that pesky memo about gold no longer being money.

Unknown said...

Spooky!

I was just re-reading this blog post, and a moment ago I got to the part that makes one think... where can I get a car title loan?

Jeff said...

Anand,

How do you determine which percentage of bitcoin's rapid price jump is due to people using it to buy houses in China vs. simply speculative bets by bitcoin gamblers?

Anonymous said...

I admit I do not understand the nuances of the free fiat argument. However, it appears to me that the underlying assumption of the free fiat argument is that FG will occur, and that FF is how the Euro will be managed post FG to make the Euro a stable SOV, more stable than gold.

Ok, why can't the Euro be managed now to achieve the FF goal? Why does it require FG first? Does FF theory suggest FG is not even necessary, but the FF result can be achieved solely by internal management of fiat? To me that is the more interesting question because it suggests that FG is not necessary and hence not "inevitable."

On what basis is FG "inevitable" anyway? I get that it solves the problem of restoring a functioning international trade if the dollar hyperinflates, a desperation move that works when everyone's backs are against the wall, but I thought hyperinflation was not striclty speaking required for FG to come into being. Everyone is trying to manage the devaluation of their currencies, so why don't we just have a slow burn of about 10 years of devaluation that get's us to more or less the same point, with currencies intact, without the sudden collapse of a hyperinflation? I would appreciate it if someone would point me to the articles that lay out the case for FG "inevitability."

Having a printing press is more valuable than having gold, per Another or FOA, so why would anyone give up this great scheme for the discipline imposed on the printing press by FG if FG can possibly be avoided? In other words, it seems that only someone without a printing press would ever initiate FG voluntarily, as opposed to having to do so because under the duress of a dollar hyperinflation. Further, since having a printing press is more valuable than gold, it makes sense to me that post FG currencies will be managed to entice people to put their savings back into fiat currency. Trust will have to be rebuilt to lay the foundation for the next wave of extraction and predation opportunities that exist when people save in the medium of exchange. It would not suprise me therefore that any currency that can be managed to be highly stable and resistant to inflation will be managed to achieve that result for a time after "all paper burns."

Moreover, I thought that revulsion to saving in currency post-FG was founded purely in the memory of the massive pain that will be felt when "all paper burns," and certainly not in any new legal regime. This implies that if a slow burn is managed, as opposed to an overnight conflagration, most people will not wake up and that gold will not become the SOV of choice. This also implies that, even if the conflagration occurs, when memory fades, people will make the same stupid mistake as always of taking currency for wealth and treating currency as a long term SOV. This imposes a two or at best three generation time limit on how long FG will really be able to stay FG.

I know the FF argument is over the extent to which the Euro really will be a SOV, but to me this is far less important than the question of the so-called inevitability of FG occurring in the first place, or what FF theory says about that inevitability.

Sorry to dump the holes in my understanding on the blog, but if anyone has suggestions to share, I would appreciate it.

Sam said...

Gold is an asset that is currently an investment on the speculation that it will some day be a SoV asset for savers. Bitcoin is an asset that is currently an investment on the speculation that it will some day be a global MoE. Many people think they want a medium of exchange like bitcoin. I think in the end most won't want it though it may remain as a niche. It is too hard to be a MoE and lacks intrinsically to be a SoV.

Brady said...

skimmed through the WGC Q3 (July-September) report and make the following comment/obvsersation, which may or may not be the correct one.

Here's the link:

http://www.gold.org/download/pub_archive/pdf/GDT_Q3_2013.pdf

Seems the WGC considers physical flowing out of ETF’s as lowering demand…but it's the other way, no?

Looking at page 14 – ETF’s for 2013 have had physical removed as follows: Q1: 176.5 Tonnes, Q2: 402.2 Tonnes and Q3: 118.7.

But the report makes the assertion (my words) that physical removed from ETF's means a decline in demand.

But this is actual physical removed and hence indicative of demand.

What we are seeing is investors (western or whoever) are getting out of paper ETF's (ie. owning shares) but physical gold is being removed from the ETF's.

So when you look at page 15, Table 6, it looks like demand & supply are equal for each year/each quarter. But it’s not – demand includes ETF physical gold being removed – so demand has actually increased by 176, 402 and 118 Tonnes for Q1, Q2, Q3 respectively

Similarly, in 2011 & 2012, there was additional "supply" of 195T & 279T respectively as ETF physical holdings increased.

So going a bit further, I've looked at spdrshares (gld) excel data & to see the difference in outflow from start/end date for each quarter for 2013.

So it seems out of the "ETF and similar" category:

Q1 - 176.50T of which about 127T from GLD
Q2 - 402.2 T of which about 252T from GLD
Q3 - 118.7T of which 63T from GLD

anyone know what comprises, in addition to GLD, the "ETF and similar" category?

Indenture said...

"so why don't we just have a slow burn of about 10 years of devaluation that get's us to more or less the same point"

Does this slow burn devalue the dollar against oil?

DP said...

Is this the real life? Is this just fantasy? I'm but a poor moron, with a bad case of confirmation bias. Not at all prepared to respond (RE: Freefiat in a gold-not-freed-to-perform-its-role world). Any way the wind blows, doesn't really matter, to me.

So less hope sumdee wiv da smartz show up soon & puss y'all out your Misirlou…

Can you do the fandango? Magnifico!

Carry on. Carry on!

… Meanwhile, a quick spot of #AskJanet for anyone with a hankerin' for popcorn.

Unknown said...

"In March of 1968, the outflow of gold had reached hundreds of tons per week. At that point, the nations participating in the Long Gold Pool realized they had only a few weeks’ worth of gold left at that staggering rate of outflow. So, they closed the London Gold Pool.



The dollar price of gold literally failed at that point. The price of gold was $35 an ounce of gold one day, and the next day there was no price at all because there was no official market. I suspect that either that will happen, and the gold that is available will run out, or more likely the central banks will see what’s coming and arrange an international currency revaluation. At that point there will be chaos in the gold and currency markets, but in the end this will mean substantially higher gold after the official reset of the international gold price.”

The above was the last portion of the latest post on KWN, with Chris Powell's comments regarding off-the-record comments between him and Asian Central Bankers.

Almost exactly what FO/FO/A has been postulating all these years. The only question is WHEN is the reset going to occur... Note that the CB'er indicated it will be an International Currency Revaluation (against) the new Re-Priced Gold. Guess we just sit tight and hold on!

Jeff said...

Sir Tagio,

Why would anyone give up the printing press if freegold can be avoided? Good question! Why do you think all the countries that joined the Euro gave up their printing presses? Why do more countries want to join?

Why freegold?

FOFOA: "What the world needs now, other than love sweet love, is recapitalization through true, international liquidity. The kind that can only come from the MTM revaluation of true reserves. And when I say needs, I am talking about the kind of need that is a constant, not a variable. In other words, it is a fixed need that all other variables must, will and do conform to, one way or another, manipulated or not."

Anonymous said...

@Indenture, yes, it will take more devalued dollars to buy oil. I guess you are trying to imply that this means gold will also have to increase in devalued dollar terms but there is a limit to how far that can happen before the gold as FX /paper gold system crashes and burns. Can that be sufficiently controlled to prevent the crash of the FX gold/paper gold markets? If that happens and the losers are bailed out with helicopter drops, do we still need FG, or is that by definition FG?

To elaborate, I thought the answer to my question has something to do with the fact that the creditor nations of the world can't keep using the debt-based dollar as a reserve currency because trade imbalances are never resolved or settled. The dollar must lose reserve status. But again, why can't a slow burn with a gradual replacement of the dollar as reserves and the trade nations using one another's currencies for trade do the trick. Why must we go to FG to solve the problem? This is what I am trying to understand.

Thx

Anonymous said...

@Jeff, frankly, I am not sure that the European nations really understood what they were doing when they joined the Euro. Probably the buzz words, unified trade zone, prosperity and elimination of war were more in the front of their minds. Plus the Euro zone as a whole has a printing press, no?

I agree with Fofoa that FG is what the world needs, but people have a remarkable talent for not realizing what they need and prefering what they want.

Roacheforque said...

IMHO, Yu are correct!

Anonymous said...

Sir Tagio,

thank you for your comments. These are rather constructive points (sadly in contrast to what has otherwise transpired here and also in private communication lately).

However, it appears to me that the underlying assumption of the free fiat argument is that FG will occur, and that FF is how the Euro will be managed post FG to make the Euro a stable SOV, more stable than gold.

Agreed. FG will happen. Gold will return as the major international reserve. "Free Fiat" was basically poopy jim (right?) mocking Blondie's idea. I used this term, too, because it will rather literally be true, but it seems some (including FOFOA) have employed this term in order to twists its meaning and to distract from the true insight.

Here are the key steps:

1) Once gold is set free (=AG) and everyone has the option of clearing international balances in gold, it becomes possible to manage a paper currency in a truly purchasing power stable fashion. The Euro has been engineered to play this role.

Ok, why can't the Euro be managed now to achieve the FF goal?

2) Before that (=BG), oil is sold only for dollars, and as long as that's the case, the U.S. can force some amount inflation on everyone else which in turn funds their double deficits.

Does FF theory suggest FG is not even necessary, but the FF result can be achieved solely by internal management of fiat?

3) The Euro can be managed in a purchasing power stable fashion only if the ECB can settle cross-currency-area trade and capital flows in physical gold.

IMO, what is now called "freefiat" is not a counter-proposal to freegold, but rather the full understanding of how the new financial system will look at. I do appreciate most of FOFOA's work (among my favourites are the "It's the flow, stupid" series, the "GLD/paper gold" posts and "Once upon a time") and still think this is some of the best ever written on this topic. But I also think that the "Glimpsing the hereafter" series is largely flawed and that although "debtors and savers" contains many relevant ideas, still relevant AG, but also that this post is probably the one that has caused the most misunderstandings. FOFOA's dilemma (term coined by MF if I remember right) is part of this.

...

Anonymous said...

4) Finally, it was FOFOA who reminded us (in Once Upon A Time) of Jacques Rueff's work on the international gold standard, in effect before the Genoa conference in 1922. This understanding tells me that it is the real price of gold in the various currency areas that has to transmit price signals. I conclude that gold cannot be purchasing power stable on time scales of less than 5-10 years. If you would force it to be, you would go the way of the gold exchange standard.

On 2) Why is everyone forced to inflate under the old dollar based IMFS? If you need to import oil, you need to acquire dollars first. In order to get these dollars, you need to export something into the U.S. or, more broadly, into the dollar countries. You need to be a net exporter into the dollar based consumer countries before you can satisfy your own energy imports.

So you need to remain competitive enough in dollar terms. This has always been one rationale for "manipulating" other currencies and prevent them from rising relative to the dollar although these countries had a trace surplus with the U.S. Of course, the U.S. have no interest to stop this "manipulation" simply because this is the very essence of the exorbitant privilege and ensures a free flow of real goods into the U.S. that is never paid for in real terms.

Even worse, the US have demonstrated that they sometimes hike the oil price (read It's the Flow, Stupid with the Yamani interview). This caused balance of payments crises in many European countries, and we now know that this was one of the starting points of their monetary cooperation, of the idea of a floating gold price and of the gold for oil trade.

The introduction of the Euro has made the Euro zone largely independent of the dollar world, except for one issue. The Euro zone has a roughly balanced trade account. In fact, it was constructed like that. The Euro zone imports energy, and they export consumer and industrial goods. So they need to make sure that they earn for their exports the same currency they need to pay for their imports. This currency can easily switch from the dollar to gold, but as long they need dollars in order to pay for oil, they need to sustain their exports into the U.S..

...

Anonymous said...

The worst case for Europe would be that the dollar devalues rapidly, but oil is still available only for dollars. In this case, they would have to devalue the Euro, too, or lose their exports into the U.S. and their balanced trade account and face a balance of payments crisis as in the 1970s.

As I said before. Had the Euro had 0% inflation rather than around 1.5% since 1999, it would now be at $1.70 rather than $1.35. Although Germany has always successfully dealt with a strong currency, we know that their trade account is balanced around $1.35..$1.40 and so it would most probably not be balanced at $1.70.

Hence, it makes a lot of sense AG for Europe to target about 2% inflation. This gives them a rate of currency appreciation relative to the dollar that they can still live with.

Btw someone showed us a reference above that the "close to 2%" inflation target was specified only in 2003, i.e. once it was obvious that the dollar would survive the turn of the millennium turbulences intact.

Finally, how do they get 2% inflation:
1) Continuously monetize dollar reserves
2) Have consumer debt grow faster than GDP forever
3) Print money and hand it to governments for spending

They stopped (1) in 1999. (2) is not sustainable and it blew up in their debt crisis 2010/2011. They are slowly running out of options in order to create 2% inflation. Well, we can see this from the recent data, don't we?

Anonymous said...

On 1) AG, i.e. once the dollar-oil link is gone, the ECB has the option to manage the Euro in a purchasing power stable way (i.e. inflation closer to 0% than to 2%). It is not automatic, but rather their choice.

We now know that they had a "max 2%" target between 1999 and 2003 and a "below but close to 2%" since 2003. Interesting, no?

Well, take a look at the three ways they could keep up 2% inflation. Looks more or less stupid in the AG world, doesn't it? They have made clear that they don't want to accumulate dollar reserves. They have made clear that they don't want to monetarily finance governments. Finally, growing consumer credit faster than GDP eventually hits a wall. So their options are gone, no?

[Geek note: When I wrote about Draghi's press conference a few days ago, I said I was concerned that they are resuming (1)]

Btw the idea that deflation was bad per se, is clearly rubbish. There is a kind of deflation caused by increasing productivity or cheaper resources that is nice to have, and their is a kind of deflation caused by collapsing confidence that's bad. It obviously makes most sense to fight the latter and enjoy the former.

As an example of the former consider the consumer electronics and telecommunication industry. Falling price level for four decades !!! Oh, my god. Downward spiral on prices and wages.... that industry must certainly be in tatters after 40 years of decline.

Quite the contrary rather. That industry is one of the healthier, not only in China, but also in the U.S., and wages are clearly above average even though the U.S. has lost the labour intensive parts to Asia.

So the claim that "deflation is always bad" is utter nonsense.

So AG, the Euro can easily perform all three roles of money: unit of account, medium of exchange and store of value.

The idea that you need to separate the medium of exchange from the store of value is not valid.

What is still true though is that you need a reserve outside money in order to settle trade and capita flows.

Franco said...

victorthecleaner:

This thesis that the EUR will become a stable store of value post-revaluation, how would it be relevant to anybody living outside Europe?

Anonymous said...


How does this work, the ascent of the Euro to an international reserve that can be held in paper, alternatively to the dollar?

Firstly, if the ECB does manage to keep the Euro's purchasing power stable, that would be fine - perhaps not for a generation, but for a few years - definitely for the few years on which businesses plan ahead and allocate funds. Very important !!! (Oil exporters, i.e. for the very long run, will still accumulate gold - nothing in "freefiat" says otherwise. If you hold it for decades or generations, the short term fluctuations in the real price of gold need not concern you. On the other hand, the political risks associated with a paper currency such as the Euro, are bigger the longer you want to hold it for.)

Nothing in "freefiat" says otherwise. But the key point is that the Euro can be managed in a purchasing power stable fashion for, say, 5-10 years. On the other hand, gold needs to function, and will not be purchasing power stable on such time scales. (It then will be if you wait for more than 10 years or eve generations).

Finally, who would hold Euros rather than gold. One answer was businesses that plan for 2-5 years, but not for a generation or longer.

The second answer is what was the essence of the Noyer speech that so many have commented on without ever thinking it through.

If the Euro zone has a trade surplus as a whole, but if their have a trade deficit with China, then China will receive Euros. What to do with them.

If you think it through, China has an incentive to hold on to these Euros (because they will appreciate as long as the Euro zone has that trade surplus), but the ECB has an incentive to settle in gold, and so the ECB must print Euros (for China to hold) and buy gold in the market, in order to implement what China could have done but didn't.

On the other hand, if the Euro zone as a whole has a trade deficit, then the ECB has an incentive to give China Euros rather than gold, but China now has an incentive to sell these Euros for gold.

You see, there is a balance of checks and incentives, and either side can enforce final settlement.

...

Aaron said...

The idea that you need to separate the medium of exchange from the store of value is not valid.

Victor, help me out here.

If you loan out your store of value, you increase the existing store of value stock. The very act of loaning your store of value is working against your reserve.

How does not separating the MoE and SoV not cause a problem for the SoV?

Anonymous said...


Then you will FOFOA complain that the "the ECB can purchase..." story is central planning economics and that it would rather be the free market that would enforce monetary policy. FOFOA just used this to discredit what I wrote about the cash, trade and capital flows. This is, of course, nonsense. The incentives among the actors in the private sectors are exactly the same, it is just much easier to explain if I pretend it was done by the CBs.

Nothing in "freefiat" claims that this wouldn't be done by the actors in the private sector. You would get exactly the same cash, gold, and capital flows. Perhaps, if the private sector doesn't fully settle, the CB could take a look at their statistics and then decide about enforcing settlement of the remaining balance. I don't expect that they will intervene regularly AG.

The flows are just much easier to explain this way!

Finally, what would you do personally.

BG, "freefiat" says the same as freegold, simply because this is about the demise of the dollar as an international reserve and about a new function for gold.

AG, you would be comfortable holding Euros for much longer than you would hold dollars now. Shrimps (who in aggregate save only very little) would be perfectly fine with Euros. If I wanted to save something for more than 10 years, say, for my grand kids, I would, of course, consider gold. I wouldn't call this "saving" though, because the Euro is now the Store of Value, too. So let's say that if I had a surplus that I wanted to store for 10 years or longer, I would consider "holding the reserve (i.e. gold)".

Nobody in "freefiat" say otherwise (although some here keep claiming this).

What we are saying though is that if you want to hold savings for 6 months to perhaps 5 years, it may happen that the real price of gold fluctuates quite a bit more than the purchasing power of the Euro, and that it may do so in both directions. This is nothing bad because it would just mean that gold is doing its job of transmitting price signals.

Victor

Anonymous said...

Aaron,

How does not separating the MoE and SoV not cause a problem for the SoV?

The ECB will manage the Euro to be purchasing power stable. Internally, this is fine as long as the volume of Euros that circulates in the goods and services market (base money plus credit created in the banking system that was not just borrowed in order to acquire financial assets) grows in proportion with real output. That's doable. (They have show they can target 1.5% to 2% pretty accurately, and in exactly the same they could have targeted 0% to 0.5%).

Externally, this is not possible without free gold. If, say, China was a net exporter into the Euro zone, China could accumulate Euros and thus "manipulate the Euro up and the Yuan down". Europe can counter this in three ways
a) enact trade or capital controls
b) purchase real assets in China
c) purchase the reserve that's outside the currencies

Obviously they want to avoid (a). We know that (b) is usually not possible in the huge amounts needed to settle international balances. But with freegold, (c) will be available.

Victor

Btw the inflation question always leads to a discussion about bank reserves. Once again: Bank lending is not reserve constrained !

Aaron said...

The ECB will manage the Euro to be purchasing power stable. Internally, this is fine as long as the volume of Euros that circulates in the goods and services market (base money plus credit created in the banking system that was not just borrowed in order to acquire financial assets) grows in proportion with real output. That's doable.

That's the part I don't see. To me, this sounds almost exactly like the hard money camp. I believe this is what FOFOA was talking about when he said, "we need money in unrestricted amounts!" This is the whole idea behind a flexible money supply.

From FOFOA's comment in Focal Point Gold,

So we need money, and lots of it. In fact, we need money in unrestricted amounts! (I'll bet you are surprised to see me write this!) Yes, I said it, we need unrestricted money in order to fulfill this most vital function in our modern society – lubrication!

If the EU is going to try and limit credit to real output, how is this different than a gold standard? You can only spend it after it's been mined?

Indenture said...

Victor: Thanks for explaining your thoughts. Your separation of the time frame (0-5 years vs. more than 5 years) helps.

Savings vs. Holding The Reserve
Hmmm.....

Archer said...

Victor wrote:

This is nothing bad because it would just mean that gold is doing its job of transmitting price signals.

Gold can't and won't transmit price signals. The prices of real economic goods and services transmit price signals not the saver's wealth reserve asset.

said...

"If you loan out your store of value, you increase the existing store of value stock. The very act of loaning your store of value is working against your reserve."

If you had loaned out your store of value, you no longer have it. You can't bid on real good at the same time as the one who now has your money. That is what logic would tell you, but I know the current banking system is far from this.

I used to be a hard money guy. To say otherwise meant you were an evil Keynesian. I still believe a true hard money system could work, if the logic above was used, but we are not in that world. The idea of separating MoE and SoV finally set in with me, in that there must always be value in the MoE, because it is what gives you access to the ultimate SoV(gold). If a MoE was managed poorly or a country stopped producing and instead began consuming, its link to the ultimate SoV would be hurt. As long as the MoE was accepted by(or forced on) a country, it would have value. How much value would be cleared in the markets via supply/demand. Gold would be the barometer.

FOFOA said...

Does everyone understand the difference between the monetary plane and the physical plane as I use those terms? I thought it was obvious, but I'm starting to wonder since someone as smart as Victor who I thought understood these basic concepts obviously doesn't.

Why do you think FOA put in the effort to explain the pure concepts of money and wealth (and I did as well in my two Moneyness posts)? Money is credit. It is essentially the way we keep track of trade imbalances in the short run, until they are settled in the physical plane. And wealth exists in the physical plane, its main characteristic being possession. You will know wealth by this attribute: that it can be physically possessed. "And possession is how most people in antiquity understood wealth." (FOA)

Today, however, most people think of wealth as existing in the monetary plane. We carry monetary plane balances (which are actually physical plane imbalances) for the long run. We carry them for retirement, and for unforeseen emergencies. We carry them in many monetary-plane forms, stocks, bonds, bank balances (CDs) and even cash. These all represent unsettled trade imbalances, which we hope will perform as promised when the time comes that we need them to perform.

There will always be short term trade imbalances, and there's absolutely nothing wrong with that. One man builds intricate clocks while another man milks cows. The milkman's product is produced and consumed on a daily basis while the clockmaker spends 6 months building a single item. Money lubricates commerce by making short term imbalances easy to manage such that the milkman doesn't have to store 6 months-worth of milk in order to buy a clock, and the clockmaker doesn't have to go without milk for 6 months at a time.

This is money's most important function. It is the medium of exchange that eliminates the double coincidence of wants problem. Of course it must also store value in order to perform this primary function, but that's not the same thing as being a true store of value physical object. DP posted a tweet yesterday about Janet Yellen saying something like "we need to get people to spend their savings!" I couldn't agree more! But spending your monetary savings does not necessarily mean consumption spending. You could also spend it on a store of value object.

Victor challenged us in a recent comment:

"If anyone wants to figure it out (why the Euro is engineered to be managed as a store of value, and why this does not contradict the ascent of gold to the role of the primary reserve)…"

I have said from the very beginning, even in emails with Blondie weeks before he left and deleted his own blogs, that the problem with this (what we now call) Freefiat view was his use of the term "store of value". Of course currencies will naturally be more stable in Freegold, because the natural *movement* of gold (physical movement, not price movement) in combination with the natural *price* adjustment mechanism of the foreign currency exchange market will naturally balance trade.

Cont…

FOFOA said...

2/6

"Store of value" as a function is different from "store of value" as an object. "Store of value" as a function is relative, and all currencies serve this function to some degree. All currencies have three functions, just as Wim Duisenberg said: "Economists know that money is defined by the functions it performs, as a means of exchange, a unit of account and a store of value." But Victor and Blondie are confusing "store of value" the function with "store of value" the object. "Store of value" the object is anything that is used as a "secondary medium of exchange" as articulated by Mises:

"He who owns a stock of goods of a high degree of secondary marketability is in a position to restrict his cash holding. He can expect that when one day it is necessary for him to increase his cash holding [p. 463] he will be in a position to sell these goods of a high degree of secondary marketability without delay at the highest price attainable at the market.

[…]

Consequently there emerges a specific demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specific demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the resultant of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render.

[…]

One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them--in a roundabout way--for paying or for increasing cash holdings."


Common stores of value (the object, not the function) are often referred to as hard assets, wealth reserves, collectibles and many other terms as well. They are many and numerous, and today they include all manner of paper proxies as well. Here's a link that I have used in the past to illustrate just how wide the range is, of assets that can fall under the common understanding of the term "store of value" (the object, not the function).

Now let's take another look at Victor's challenge:

"If anyone wants to figure it out (why the Euro is engineered to be managed as a store of value, and why this does not contradict the ascent of gold to the role of the primary reserve)…"

I'm sure he won't see it, but perhaps you can now spot the confusion embedded in this very statement. Let me reword it a little: "If anyone wants to figure it out (why the Euro is engineered to fulfill the store of value function which is necessary for its primary role as a medium of exchange, and why this does not contradict the ascent of gold to the role of the primary store of value object)…"

Cont…

FOFOA said...

3/7

As we can all see (most of us, anyway), there is no contradiction, except in the conclusions that Victor draws. Victor thinks the ECB is engineering the euro to be its people's (and its trading partners') primary store of value object while also keeping gold as its own primary store of value object, when all it really wants is for the euro to fulfill the store of value function that all currencies must fulfill, as well as possible, while also avoiding the periodic devaluations of the past. It's not about defeating inflation. It's about defeating the periodic disruptions that result from the accumulation of perpetual imbalances.

The phase transition and this whole new Freegold paradigm is all about settlement, because the core problem today is the persistence of imbalances (non-settlement). Remember this: any monetary plane balance represents a physical plane imbalance. It's really quite simple. Of course everybody will be free to settle or not to settle their monetary plane balances at any moment in time, but the basic idea is that the impact of the $IMFS' demise and the performance of physical gold both through the transition and in the new Freegold system will favor gold for savers as a class, as opposed to debtors, investors and speculators.

I'm sure that all of you except Victor can see that his plan to have the ECB buy gold, if/when China chooses to carry a euro monetary balance, does not represent "forced settlement" as he claims. All it does is to weaken the euro the same as it would have otherwise been weakened if China had spent those euros on gold. That's not settlement. That's a monetary operation. The monetary plane balance still expands, as does the physical plane imbalance.

This may be a CB tactic in Freegold, but it's not the post-$IMFS plan that "Freefiat AG" claims. Like I said, it's not about defeating inflation, it's about defeating the periodic disruptions that result from the hoarding of monetary balances. And if China hoards a bunch of euros, even if the ECB buys gold at the same time, the potential for a massive disruption is still there.

What do you think would cause China's storage "tank" of hoarded euros to spring a leak? Think about that, and then think about what those home-bound euros would be seeking. If they were only seeking gold, then no problem. The ECB would just sell the gold it had previously purchased. But no, that's not what they would be after. Those hoarded euros would be after European goods and services if/when China springs a leak after accumulating a large physical plane imbalance with the EU.

What that means is that Europe will have to go on a sudden consumption diet, the Europeans will have to start massively underconsuming, in order to fulfill the promise of stable purchasing power for those euros that China accumulated. Will it work? It doesn't matter, because the point here is that by accumulating euros rather than gold, China has subordinated its independence to the monetary policy of a foreign central bank, the ECB, and Europe's commitment to a stable euro, even in the face of a natural disaster in China.

You see, China is not counting on the ECB to buy gold if/when it hoards those euros, it is in fact counting on the ECB to sell gold if/when it needs to reclaim that physical plane imbalance all at once. This is not a situation that would be desired by either the PBOC or the ECB, because this is precisely the type of situation that might force the ECB to temporarily abandon its mandate and allow a euro devaluation due to something completely out of its control that happened in another land.

Cont…

FOFOA said...

4/7

Here's something Randy Strauss wrote back in 2009, talking about CB independence with gold reserves, versus subservience with foreign currency reserves, as featured in Gold: The Ultimate Hedge Fund. Note that he must have been talking about post-transition here, because gold can't function quite this way pre-revaluation:

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

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

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

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

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


Korea in 1997 was a good example of how gold doesn't quite work this way in the present system. Here's what Another wrote about Korea: "Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno."

Post-reval, however, gold will gain "mass" in currency terms. What I mean is, of course the same amount of physical gold mass will still exist, but if it is revalued, say, 40X, then it will take 40 times as much currency "mass" to push gold's price around. Try this. Put a bowling ball on your pool table and take a shot at it with the cue ball which has much less mass. The cue ball will just bounce off. It might nudge the bowling ball (gold price) slightly, but it's the cue ball (currency) that will do most of the moving.

Cont…

FOFOA said...

5/7

This is what it will be like with revalued gold. First of all, you won't have the paper markets with the "hot money" of traders and speculators flowing in and out depending on which way the wind is blowing, but also the price of gold will have much more "mass" in currency terms. What this means is that the price of gold, meaning the real price of gold in terms of other goods and services, will be very stable. So when a CB chooses to create an impact between its currency and gold, it will be the real price of the currency that does most of the moving, not the real price of gold.

Victor seems to be stuck on a notion that I introduced in 2011 in 'Once Upon a Time' regarding the "sterilization" of the effects of gold flows that began with the 1922 Genoa monetary convention. Here's a line from that post:

"So in the early 20s, along with raising interest rates and federal budget cuts, the US began a policy of gold "sterilization" to resist the natural price mechanism—inflation—that would have otherwise acted not only as a brake on the inflow of gold all through the 20s, but also as a spur on the struggling European economy."

Notice in that line that the "natural price mechanism" they were resisting was inflation. Gold was base money at that time, and as such, the "real price" of gold (its purchasing power) moved right alongside the purchasing power of money, i.e., inflation. Gold was a subset of money. And therefore gold's purchasing power was subservient to the purchasing power of overall money.

Any measure of price inflation or deflation during that time will of course correlate perfectly with the purchasing power of any gold held by savers as a store of value object during that time. If there was inflation in the general price level, which there was from the late 1890s onward, then the purchasing power of the monetary unit was declining, and so was the purchasing power of gold held as a store of value by savers, since gold was a subset of money.

Gold was linked to money at that time, so, if you held gold during a time of price inflation, you were punished with a loss of purchasing power in your gold. Gold was not a very good store of value being linked to money! So smart savers would have abandoned gold as a store of value during inflationary times. But ask yourself this simple question. Was the inflation driving the savers out of gold, or were the savers abandoning gold driving the inflation?

This is important, because it's where Victor gets the idea that gold needs to fluctuate wildly in order to have a stable monetary unit. Money and gold were fluctuating together, so if we sever the link between money and gold, and money is suddenly stable while gold fluctuates wildly (in Victor's imagination), what does that say about how Victor views the causal relationship between gold and money before 1922?

In fact, the relationship was pro-cyclical in that it fed back on itself. Severing the link simply cuts the pro-cyclical feedback mechanism; it doesn't free one from the wild fluctuations of the other. All it does is solve 'FOFOA's dilemma' once we also get to where gold is free to function as a stable store of value object for the savers.

Cont…

FOFOA said...

6/7

Price signal transmission is extremely complex, as illustrated in I, Pencil. In Freegold, price signals will be transmitted through the changing prices of millions of different things, everything except gold. The true function of gold is to remove the savings portion of savers' income from the complicated business of price signal transmission. Savers just interfere with the signal!

What makes gold so perfect for this role is that it is so separate and isolated from the industrial inputs and consumer products that actually transmit economic price signals. In this way, gold is just like the very finest art and extremely rare collectibles, only gold has a few other properties that will keep it on par with the very best-of-the-best collectibles in terms of perpetual appreciation, while also eliminating the uncertainty inherent in one-of-a-kind, best-in-the-world stores of value.

I have one more thing I want to comment on, and then hopefully we can be done with this nonsense here. Perhaps Victor can then start his own Freefiat or "AG" (or whatever acronym he wants to call it) blog rather than confusing my readers with lists of which posts and concepts are right, and which ones he thinks are wrong. I mean, seriously Victor? "Flow-yes; Glimpsing-no; GLD-yes; Debtor and Savers-no; Once Upon a Time-yes; FOFOA's dilemma-no" Ugh! WTF? Is this kind of ridiculousness common on other blogs that allow reader comments?

The last thing I want to comment on is this 'oil priced in dollars' thing. Someone emailed me just last night with a question. I'll let his question and my reply speak for themselves:

Q: "Does a nation theoretically need to run a trade surplus to the US (or dollar countries) to get dollars. Can't you just get dollars on the FOREX. Say for instance you run a surplus with Japan. You send them stuff and you get yen in return. Couldn't the yen be exchanged for dollars and the dollars used to import oil?"

A: "Yes, of course! Dollars are freely available via FX, so the hoarding of dollars obviously has more to do with the current monetary system that began in 1922 than needing to hoard them to buy oil in the future. This is a major flaw in Victor's reasoning that I have addressed in the past. It is the external hoarding of dollars, not the oil-pricing, that keeps the dollar overvalued and keeps dollar price inflation at bay. And that began decades before the external dollar-oil trade became a major factor.

A country that does no trade with the US can still buy dollars in the FX with either its own currency or another currency it received from one of its trading partners. Changes in the FX price of the dollar will then show up in dollar-denominated prices relative to the balance of trade. The trade flow will always balance due to price changes in imports and exports except when dollars are hoarded externally. In that case, there will be an imbalance and the dollar will be overvalued. So it is the external hoarding of dollars that overvalues the dollar, not the pricing of oil.

Victor is confusing the two, making it sound like you have to hoard dollars first in order to have them when you need them to buy oil. This is simply not true. China did not hoard all those dollars to buy oil. That was a monetary operation. You don't need to run a trade deficit with the US (or anybody for that matter) in order to buy oil. That's just ridiculous."

Cont…

FOFOA said...

7/7

And here was his response:

"That is exactly what I was thinking. Hoarding dollars to buy oil sounds reasonable at first because it seems unreasonable to hoard dollars for any other reason. I'd say some countries hoarded dollars to defend their currency at some point, but European hoarding up until 1999 and Chinese hoarding last decade could not be to buy oil and it's way too much to defend their already strong currencies. It was a monetary operation with the only logical reasoning being to buy time."

Remember, 1. the next system is about defeating periodic disruptions, not about eliminating slow inflation. Who really cares about a little inflation anyway? The whole point of Ari's 5-part series and FOA's focus on "Tribal life" was that the "tribe" always demands easy money in stressful times, so hard money systems periodically end in disruptive devaluations. 2. Any monetary balance is an unsettled physical-plane imbalance. And 3. gold and currency can both be relatively stable at the same time. It's the price changes of individual things that matters in price signal transmission, not movements in the general price level. Inflation (or deflation) in the general price level is a monetary phenomenon, because it means the prices of everything are moving at the same time.

Sincerely,
FOFOA

PS. Blondie told me that he had a problem with my Debtors v. Savers concept from the beginning. Ari, on the other hand, told me that he thought it was my greatest insight out of all of my concepts and posts on this blog. The only other person I recall having a big problem with it was Ash. He wrote a whole series of posts at TAE trying to debunk it.

Anand Srivastava said...

Jeff:
How do you determine which percentage of bitcoin's rapid price jump is due to people using it to buy houses in China vs. simply speculative bets by bitcoin gamblers?

You can't :-).

In any case Bitcoin is going up because more and more people are getting into Bitcoin. The selling point of Bitcoin is that it is the ultimate internet currency. The transaction costs are very less. And Baidu Chinese biggest website is using bitcoin, so this lends credence to the Ultimate Internet Currency meme for the Chinese at least. So I would think it is not as much of a speculation thing, as people genuinely thinking that it is the best currency for internet commerce.

Anyway there will be big jumps as one crisis comes after another. Just wait for the January 2014 ECB bank testing. I think there will be another jump. The biggest jump will be when we have the USD currency crisis.

I think there will be a big drop after Gold revaluation, but can't be certain.

Anand Srivastava said...

VTC:

Shrimps (who in aggregate save only very little) would be perfectly fine with Euros.

I would think that AG, there will be no Ponzi scheme of Social Security. Do you agree? The thing is Austerity will force all social security schemes to fail, and govts will be forced to become smaller and more efficient.

This means that people will be expected to fend for themselves. People can only fend for themselves by saving in Gold. As by your own admission, Euros will not be price stable over a decade. (I don't know what this means of having a 0% inflation over a year but, not being stable over a decade. I would think 2% is stable over a few years and not stable over a decade).

In any case the 100,000Euro limit for saving in banks will not be sufficient for people to save for their old age.

So people will need to save in gold.

You say that Gold cannot be stable below 5-10 year range. I am not sure how you are coming to this conclusion. I would think this conclusion cannot be made from older data, as Gold was never free. When people can openly save in gold, gold will be much more stable. Still it cannot be as stable as a currency. I would think +-5% would be a good rule of thumb around a 4% value increase per annum (assuming close to 2% Euro inflation). So the drop in price will be small and for short durations. But sometimes it will rise upto 9% again for short durations. Banks would probably pay around 3-4% interest.

This would have gold behaving just like we see in India, although at a much smaller magnitude (barring the international crises). I said before for India, the dollar provides the same forces as Gold will AG.

Roacheforque said...

Quite interesting Gentlemen (VTC and FOFOA) and I thank you both for taking the time to better articulate your arguments in the context of this continuing discussion.

I will say that FOFOA's position on the matter appears closer in kind to A/FOA, and Victor's position (IMHO) is closer to what we have today, a currency which the world once accepted as an actual store of value (physical plane, time resilient, universal reserve asset) "object" or asset.

In my opinion, again humbled by the degree of thought expressed above, any intention to seek this role for a currency is in fact an intention to secure an advantage or privilege (however exhorbitant or not) over other currencies.

Whether this is the design or intent I do not know. One might concede that the designers of the Euro had different intentions by some small degree between one another, but I continue to reason that no paper construct can truly BE the "physical plane store of value object" as FOFOA distinguishes, except for gold.

Paper does not have the qualities to act as this object, and seldom the discipline to act in this function, as time will no doubt tell.

It is always clarifying to understand that credit is DEBT, and therefore money is DEBT. This simple truth goes a long way toward clarifying the limits of money, or currencies, or FIAT in terms of these types of distinctions.

DEBT never has, nor will it ever, faithfully fulfill the wealth reserve OBJECT (if you prefer) role. I do not feel it is necessary to overcomplicate that simple notion, and I would challenge anyone to refute that argument.

Though it is clear that people, and nations, and the currencies they back through the government's that "represent" them, will always endeavor to make that claim, including perhaps, the founders of the Euro (if we are to take VTC's argument as evidence of their intentions).

Still, it is always a pleasure to contemplate such things as the intentions of a plan or a monetary construct which is truly unknowable, and therefore never truly provable, as the sweet morning mists of the flower of understanding encircle our steaming cups of hot Nicaranguan java.

This we contemplate, as the great master of all, TIME, marches on ...

Anand Srivastava said...

FOFOA: Thanks for a very nice comment. Should probably be an article. So that it can be pointed to easily in case of future freefiat wars :-).

PS. Blondie told me that he had a problem with my Debtors v. Savers concept from the beginning.

Yes, that statement in Blondie's View

You see, my friend, in this world there are two types of people: those who PRODUCE, and those who consume. YOU consume.

showed me that he didn't really distinguish between savers and debtors very well. Producers and Consumers, sure, but not savers and debtors. And I think savers and debtors is the more important concept.

For me also that was one of the most profound article (after superorganism one). Debtors and creditors are opposites, but in a way Debtors and savers are also opposites.

Roacheforque said...

(in my 4th paragraph above it makes more sense to substitute "except for gold" with "as is gold"). -R

Jeff said...

'Bitcoin is going up because more and more people are getting into Bitcoin.'

Sounds like pets.com. It's going up because more people are bidding it up. Are the transaction costs less than using electronic money? We watch this bitbubble together.

Sir T,

Does the idea that the european states didn't know what they are doing seem reasonable? And how to explain that no one leaves (no grexit) after learning the truth? And more countries still are joining.

Jim Rickards: 'The euro system, and Greece in particular, those are not Wall Street piñata. I know traders like to bang them around, you know the spreads widen and then the spreads come in. There are trading opportunities there. But this is taken much more seriously by the Europeans. I mean you go all the way back to the Counter-Reformation in the late 16th century which was extremely bloody. And then the Thirty Years' War which was devastating. And then the Seven Years' War and the Napoleonic Wars, the Franco-Prussian War, World War One, World War Two... this is one catastrophe after another! And Europe literally destroyed itself and exhausted itself in fighting all these wars. And finally after WWII they said enough! We're going to pursue unification. It's the only way to keep from fighting each other.

Now, political unification has had modest success. Military and foreign policy unification has really had no success at all. But the crown jewel of European unification is their monetary system, the euro and the European Central Bank. So that's the pinnacle of their world historical efforts to unify the continent. They're not going to give that away lightly. I mean, they view it in a much broader historical context than Wall Street and Americans. And so it's of the utmost importance to them. And they're going to do everything they can to preserve it.'

Sir T, in the next system, the printing press won't recapitalize you, but your reserves will. And since freegold really is inevitable, why fight it?

Beer Holiday said...

Your seven part answer made my day FOFOA, it's awesome. I think your distinction between SoV function and SoV object deserves a post itself.

Jeff said...

http://www.vanityfair.com/business/2013/11/gold-secretive-trading-business

Anonymous said...

Victor,
Thank you for that clear exposition.
You predict that the Euro will be managed to achieve "mid-term" stability as a SOV This has two components - one that this is possible, and two that this is what they will do and will achieve. Some people seem to disagree with you that it is possible, given the nature of fractional banking, more seem to disagree with you that they will actually do this even though it may be possible, human nature being to want to live beyond our means, which is an enticement that bankers seem unable to resist. I have no firm position on the latter - whether they WILL do it -- but I agree that the kind of currency management you predict is more than likely POSSIBLE with the Euro, and go further in believing that, after the turmoil experenced in the transition, it would be wise, politic and good for their economies if they did so. I also believe that gold priced in currencies will fluctuate quite a bit in the short term because the balancing mechanism for settling trade with gold reserves is not instantaneous and its effects can be achieved only over time, but it will continue to be the SOV par excellence long-term.

Your argument that it's not saving in the MOE that is the problem so much as being able to settle trade imbalances with a wealth asset and not currency, is very intriguing, and I must give it more thought.

If you can spare some brain power and time for it, my question is, AG, why cannot the same thing be achieved with - let's call it - the New Dollar? As a trade deficit economy, won't the US have an even greater incentive to rebalance its economy and manage its currency to stabilty than the Euro? Or will the fact that the USD can supply a lot of its own energy needs provide a continued enticement to a currency de-stabilising over-extension of credit ? I suppose it depends in major part on exactly what the New Dollar is. So I guess the bigger question is how will the US restructure its currency system once it has to settle trade imbalances in gold. How are the banks going to get the gold they need for this function (where are they going to get the assets with which to acquire it -spending all those reserves the Fed has doled out to them)? Where is the planning or early signs for this major transition that is going to have to occur? Who is going to be sitting in that cat-bird seat AG? Lots to speculate about.

Roacheforque said...

Bitcoin appears to have been great play for FIAT if you got in early, and dumped high. If that's your thing..
And that spare FIAT could be converted back to a currency, and that currency buy gold.
I'm not sure that gold can be bought directly with Bitcoin, but I suppose some dealer will accept it.

It's really all about acceptance, isn't it?

MatrixSentry said...

Speaking of Ari's 5 -point series...

Here it is in PDF form

A fine introduction for newbies. A fine overview for those considering "alternatives".

Anonymous said...

A few more comments, continuing from yesterday.

Franco,

This thesis that the EUR will become a stable store of value post-revaluation, how would it be relevant to anybody living outside Europe?

1) Any area with a purchasing power stable currency will have a competitive advantage, and so there will be an incentive to adapt to the new paradigm and become "like the Euro". This advantage is already there today (compare competitiveness of Germany with that of the U.S. - Germany has had lower inflation and a stronger currency for 3 or 4 decades).

2) The more business your country does with Europe, the less likely that holding Euros will be penalized in any was (taxes etc.), and so you can hold some, too.

Aaron,

If the EU is going to try and limit credit to real output, how is this different than a gold standard?

That's a fantastic question. It is indeed different.

Under the old gold (not gold exchange) standard, base money was fixed, i.e. bank reserves were fixed. But bank lending is not reserve constrained, and indeed credit creation went ahead regardless of the available reserves, giving you first a bubble and then a bust. (Deep in the 19th century, when you paid somebody by cheque, the postal coach went ahead, carrying coins to the other bank in order to settle - during that time, credit was constrained by procedure. But later, when lending became country-wide, this limitation disappeared).

The Euro is different. Base money is not fixed. In fact, the ECB has been expanding base money (2010 to early 2012) and then contracting it again (since fall 2012). On the other hand, we know that credit is not reserve constrained. But the ECB has used other tools, perhaps tacitly even some targetting of total credit volume, in order to maintain price stability, and they have indeed managed to stay rather close to their inflation targets.

What's hard about the Euro is that it preserves purchasing power (this argument does not depend on whether the inflation target will eventually remain at 2% per year or be reduced). But it's not inflexible.

The gold standard didn't give people stable prices in the short run (less than 5 years), but rather only in the long run (more than 10 year), and so it wasn't as hard as the Euro in that respect. On the other hand, it had an inflexible monetary base and therefore was too hard in a different aspect.

Victor

One Bad Adder said...

Promises to be an interesting read Jeff.
...from the lead-in:-
"In The Golden Constant, a classic study that tracked gold’s purchasing power through time, the University of California, Berkeley, economist Roy Jastram confessed to a “nagging feeling that something deeper than conscious thought, not an instinct but perhaps a race-memory,” was behind our attachment to gold. In other words, we loved it because we always had."

I think the "nagging feeling" expressed will ultimately be proven to be meta-physical in nature - we'll see.

MatrixSentry said...

FOFOA,

Nice rebuttal. Comprehensive and complete.

It strikes me as peculiar that someone who has demonstrated such a deep understanding of Freegold can seemingly abandon the very foundations upon which that understanding is built upon. It doesn't make sense from my perspective. However if I alter my perspective I can make sense of it.

IMO, what we are dealing with here is not so much a difference in philosophy regarding the foundational concepts. Instead we are seeing a split because of the need of some to distinguish themselves from the pack. To be unique and to be seen as trailblazers in their own right. In my experience this is a powerful urge for the intellectually inclined.

I have seen people argue indefensible positions that were born from a split hair, for no better reason than to be seen as the top dog. Then when they find themselves in the wilderness, alone, after their initial excursion into the weeds, they refuse to listen to the calls of those from the main trail who seek to provide a beacon back to safety. Once the trail is abandoned it cannot ever be used again. To do so is to admit error. This is weakness and cannot be tolerated.

In my view, VtC wants to have his cake and eat it too. He wants to acknowledge Freegold, yet put his own unique stamp on it. He must split a hair to do so. He must massage and contort his argument to justify his foray into the brambles.

I see this as human drama rather than a true philosophical schism within the Freegold ranks. Just my opinion.

As far as I can tell VtC still advocates buying gold. This is encouraging and should not be lost on the observers of this ongoing debate.

Anonymous said...

sometimes its hard not to get caught up in the bushes. I think the deal is done. basics. everything else is a bad signal.

its a simple question of what would you sell your piece of gold for.

I'll open with $10k and 5%
20k and 7%
50k and 8%
100k and 2%
200k and .05%


MatrixSentry said...

Saturday homework assignment:

Read The Debtors and the Savers

Then ask yourself the following question:

Can a currency ever be managed to be a stable long term store of value?

MatrixSentry said...

2 new PDFs added to the PDF library. Both come from the USAGold Forum Hall of Fame.

Aristotle: A Very Special Gold and Monetary Discussion

Aristotle: Gold & Money - More Than Meets the Eye

The only thing better than RTFB is to RTFSM (read the fucking source material)!

Edwardo said...

The great misunderstanding of the practical utility of gold, as exemplified by Professor Jastram, is, alternately, depressing and annoying.

Nagging feelings aside, the attachment to gold has nothing to do with anything other than the requirement to hoard for that time, aka senescence, and/or long term disability, when one can no longer earn their crust. Because gold is all of the following things (as opposed to some number of the following things) fungible, divisible, portable, indestructible, (and, yet, malleable) possessing a high stock to flow, and, last, but certainly not least, because it doesn't, except minimally, interfere with day to day economic life, it has become the asset that best fulfills the absolutely essential function of a wealth reserve asset to hold across generations. Ancestral memory, Professor Jastram, has nothing to do with it.

And, as we are fond of saying around here, if you have one asset that fulfills that function, you don't need, the key word being need, another one. Yes, objet d'art can do very nicely in that regard in certain contexts, but such things have some very demonstrable shortcomings. See the above list and notice which attributes a Van Gogh, a ceramic bowl from The Ming Dynasty, or a one hundred year old bottle of wine, don't possess that gold does.

Having said that, gold, in the right hands, can be fabricated into something aesthetically very pleasing.

So, you see, it's not mysterious, though a lot of folks even ones who are incessant and ubiquitous commentators on gold,don't always have as firm a handle on "why gold" as they ought to.

Michael dV said...

As I read the news, particularly the news about the economy, I often find myself in disagreement with the author's assessment. This is not just with 'gold' news either. It is when I do this that I realize that freegold is not only a theory about gold going to a higher price but it is truly a perspective. When you understand the heart of 'Debtors and Savers' and 'A Return to Honest Money' and the comments of Another, FOA, Ari, FOFOA (and even a few others here) you have different way of analysis. It is not Keynesian or Austrian but it holds up better than either for one trying to make sense out of what is happening in the world today. When Victor or anyone else can put together a sound basis upon which I can view the world I will be happy to put in the hours of reading to understand it. Right now I just do not feel the pull to do that.
I'm content with what we call freegold. Perhaps after transition there will be subtleties we have not covered here. For now rereading seems a better use of my time than exploring some theory of future central bank activity.

RevolutionOfNations said...

Email to FOFOA regarding Jim Sinclair's timeline for global currency reset:
-------
What are your thoughts on Jim Sinclair's timeline regarding the unfolding of the global currency reset and the emancipation of gold from paper?
http://youtu.be/8IQ_TBJHrcU

Here are some of my thoughts on this while staring into my virtual crystal ball..

The leveling he speaks of makes sense to me as we need to bring our western societies down to a level where our purchasing power matches our production. They will need to sell this to their populations by making them believe what is happening is their own fault, and not due to some foreign enemy, as war is no longer an option in today's nuclear world. -They speculated, they let banks run wild etc are comments we'll hear in the media... Some test cases have been made to check people's reaction(Greece/Cyprus) and it seems to be working as there haven't been revolutions or major destruction to the countries real assets or infrastructure.

The emancipation of gold from paper gold will be necessary to facilitate world trade in a new monetary system where international participants in world markets can choose to either pay through delivering services and goods, or pay with physical gold. There will no longer be any way for a country or regime(not even IMF) to to just print numbers and have trade partners accept those as payment for delivery of real goods and services. So market participants have purchasing power in case of 1. Production capacity or 2. Gold.

Local currency regimes will be used by international market participants to acquire gold from their populations simply through bidding for it with currency(legal tender).

Exchanges such as the one Jim is involved with in Singapore are being set up all over the world to act as clearing houses for global trade, essentially creating a parallel/alternative system for global trade settlement to replace the current dollar based system.

It seems the western world will have to rely heavily on their gold holdings to maintain purchasing power(economic, military and political) on the international stage as they have essentially lost their production capacity to the east. The question then becomes who has the gold? With time it seems we'll get an answer to this question...

Maybe you can elaborate on Jim's timeline in one of your FOFOA posts?

Thank you for sharing your thoughts with your fellow man through the FOFOA blog. I'm sure you have brought enlightenment and encouraged people to think in new ways, previously unimaginable.

Regards
/Jonas

Polly Metallic said...

Jonas, I'm not sure why FOFOA would want to comment on the flawed world view and expectations of Jin Sinclair. The man means well but is so far out in the weeds these days that I seldom read his website anymore.

ampmfix said...

OBA and Edwardo: my attachment was at first meta-physical. Now it is rational (for all those reasons everybody knows) and still, meta-physical. That ancestral feeling is not replacing the logical reasons nor antagonizes them, it is an addition, and you bet it exists. Of course none of us can prove it's existence or it's non-existence, so a matter of opinion and feeling.

michael3c2000 said...

Since the fundamentals of gold are off the charts at this time, and there are so many good people pointing them out and at great length, as modern connections trend to be, here are short technical vids, 3 on gold..
http://www.321gold.com/editorials/sfs/hubbartt111513.html

michael3c2000 said...

Cooperation Among Central banks is multifaceted. For one, the deposits here: :http://www.goldmoney.com/research/research-archive/cooperation-between-central-banks?gmrefcode=gata

michael3c2000 said...

http://koosjansen.blogspot.com/2013/11/west-to-east-gold-distribution-update.html

Knotty Pine said...

@MatrixSentry

Thank you for the Aristotle links! Great reading especially in light of recent conversations!

Aristotle: "Having acknowledged this history, there is no point in rashly calling for us to repeat the mistakes of our
past. The problems that killed a fully-convertible Gold Standard back then are still with us today. But
take heart. The problem was not with the Gold itself. The problem was with the Gold Standard's fit
with the prevailing banking/financial "System." If we objectively face the cold hard reality, we realize
that we can't very well live with the lack of either one. But paradoxically, history shows us that the two
cannot sustainably coexist--at least not under the various system-designs tried in the past. In my usage
here, the "System" refers simply to the dynamic interaction between a currency and its users within the
context of evolving economic demands for development, commerce, and banking. (Even to the extent
of self-destruction, the System is notoriously good at giving the people what they want.) It is the subtle
changes to that system that I hope to spell out, revealing not only how Gold can survive society's
preference for the current self-serving System, but also how the System can tolerate/survive the
discipline of Gold. In fact, the diametrically-opposed System will not only survive in the face of Gold,
but will actually be made more functionally viable by Gold."

michael3c2000 said...

http://www.lewrockwell.com/2013/11/mac-slavo/there-is-no-fix/
December and January appear to be squarely in Mac Slavo's sights here, from TSHTF blog-
http://www.lewrockwell.com/2013/11/mac-slavo/there-is-no-fix/
Other events such as the debt ceiling and budget deadlines, Basel III implimentation and metals exchange milestones approach in the next two or three months too.

michael3c2000 said...

http://www.thedailybell.com/editorials/34736/Catherine-Austin-Fitts-Breaking-Through-the-Cloud-Cover/

Robert said...

Matrix said: "In my view, VtC wants to have his cake and eat it too. He wants to acknowledge Freegold, yet put his own unique stamp on it. He must split a hair to do so. He must massage and contort his argument to justify his foray into the brambles."

In my view, great! Isn't that why FOFOA started this blog? To find other people who want to join the discussion? It is not necessary that everyone agree about everything. Sometimes the only way to really learn is to throw out a new hypothesis, test it, debate it, and think about it. Let's not discourage original thinking on the ground that it violates FOFOA orthodoxy. Another and FOA did not claim to predict the future. They only gave us a perspective with which to view the world! If VtC wants to be able to say "I was the first who thought of this twist or that twist" -- so what?

DP said...

Amen, brother Robert!

Let's all commit to always listen to reason. And accept it.

Roacheforque said...

Says Jonas:
"There will no longer be any way for a country or regime (not even IMF) to to just print numbers and have trade partners accept those as payment for delivery of real goods and services."

The mechanism by which those printed numbers will fail to be accepted as a means of exchange for real goods and services is by far the most perplexing predicted change in the status quo to ever befall this blog.

Those printed number are "credit", 100% synonymous with "debt" and yet "credit" in the world today (or debt, interchageably) is vastly exclusive as the world's MoE.

As a store of value, those numbers are already, and have been for a time, undegoing the process of gradual divestiture at many levels.

But this process of debt "not being accepted" as means to exchange possession of goods and services has little precedent in our modern world.

That change could happen gradually, then suddenly, or just suddenly, in relative terms, but it will be a paradigm shift so dramatic, it can hardly be visualized even with the assistance of the flower of understanding.

It vexes me ...

One Bad Adder said...

@ampmfix: - For me it's the other way round ...morphing from the pragmatic viewpoint into an exploration of the esoteric ...but you're right, they're not mutually exclusive mate.
I think Another was more lenient of the esoteric side of things whereas FoA, Ari, FoFoA, VtC et-al were (are) more given to the rational approach IMHO.
Just getting into the 12th Planet - book-series promises to be interesting.

ampmfix said...

Interesting book... Cheers.

RevolutionOfNations said...

Roacheforque, for you and me there will be no change in this regard as we can use our currencies to buy what we want. But for nations with national currency regimes it will no longer be acceptable to keep producing cars, electronics etc and receive currency as a way to clear that trade with foreign trade partners. You see the transaction has then only taken place half way.

Let's say I give you a car and you give me your currency, unless I instantly(or within a short period of time) spend that currency with you to buy for a example a bunch of grain our trade with each other has not been properly cleared. You got your part of the deal and I only hold a promise from you to give me something back... Unless I promptly act on that promise and demand you give me something back, I'm stuck with a depreciating currency that eventually will be worthless.

So you see currency will be what circulates, what we can use for the here and now, but if trade deficits keep piling up you need some other way to clear that, that's where gold comes in. Either goods orservices are delivered or you'd eventually have to settle the trade in gold. If your counter party cannot come up with any of those two, it means he can no longer pay for what he bought and there will be no more cars shipped until he has cleared the previous trade in one of those two ways..

Just my thoughts. Exciting times ahead ;)

Anonymous said...

Roacheforque> yep, the epochal unwind of shadow banking/derivatives will demand reality sobering of equal magnitude, which has not been very much acknowledged here yet, apart from lipservice to ".. FG/RPG then 6months lite-mode hunker down followed by sunny capitalistic BAU for ever..", which is a sorry understatement of the scale of approaching societal tsunami. I'd not been surprised one bit if the mid-longer term outcome would be street level neocommunist path (post WWI grade stuff) for large part of the bottom drain impoverished west and mixed state capitalism model of the sinorussian realm with their linked "southern" developing partners. What a sardonic joke of history, made on all of us.

RevolutionOfNations said...

Remember gold is the only "currency", not owned or controlled by any currency regime. It is the only "free" currency. Trying to claim ownership of gold would be to declare war on the whole planet and that currency regime would eventually be doomed. This is what the free gold transition is about as I see it. National currency regimes loosing their grip on gold. Mind you, the consuming west is already settling their deficits in gold, by letting the eastern producers buy it with dollars at a big discount. Asia will get paid for all those years of producing goods when the currency reset occurs as their gold holdings will rise to represent payment for all previous trade deficits with the west. This is how China will turn their production based economy into a consumption based.

Anonymous said...

Well, that's understood and not disputed, the issue is how gradual (if at alll) the correction of debt and overall waste based society in the west could possibly be made as societal safe landing in realistic time horizont. As we have seen in Greece, few years ago the riots were just meters from storming the gov buildings, now after 4-5yrs they relapsed into apathy and taking their austerity pills regularly as good subservient patients. However, this could escalate anew with further intensity when pushed down another notch down, moreover many western countries are still yet to get the greek austerity scenario and compressed into say only 1-2yrs timeframe, i.e. in much more desctructive fashion. Simply, there has been enough widespread naivite/goodwill, system resiliancy, inertia from the good old days, cheap energy and "trust" among the domestic and int. partners so far. This "peacefull intermezzo" usually ends very abruptly only at the highest point of the crises. Whe who is thinking that from these encounters of greater historial events one afterwhile just gets up, brushes off some dust and goes joyfully after his business is often sorry mistaken.

byiamBYoung said...

Okay, bitcoin enthusiasts,

After watching the meteoric rise of the currency lately, I have become interested.

ON one hand, the chart for bitcoin is terrifying. It looks like a classic parabolic bubble.

On the other hand, this giant ramping seems to be China driven. You know, the China with billions of people that is increasingly vocal about undollering the world.

Then, there's this interesting analysis of Bitcoin (check the bottom line of the chat after paragraph one about the "primary global store of value" :D ).

So, I am nervously stroking the trigger on my investment bazooka. Part of me is screaming to stay away from the Bitcoin super bubble, because my buy-in will most surely delineate the top, and I would lose my investment in record time.

Over my other shoulder, though is a soft voice recommending that I put in a modest investment, just in case this thing expands 100 fold, as some are predicting.

As I ruminate my required couple of days waiting period before initiating the launch sequence, I thought I'd solicit comments from the smartest folks I know.

That's you guys.

So, am I stupid to jump in, or stupid to stay out?

Cheers

said...

BYoung, charts like that RARELY end up well in the short, medium or long rung. Bitcoin is the definition of the Greater Fool Theory. I suppose as a trade, buying at 500 and selling at 1000, it might be interesting. Anything else I feel is crazy.

Franco said...

mcmagicfly:

Nobody here disagrees with you that some day shit will hit the fan. What exactly is your point? I mean, aside from "one day shit will hit the fan".

Beer Holiday said...

Thanks for the links, BYB.

So Bitcoin is going to the moon :-)

I've been interested in BC for a while - I'm obviously kicking myself for not buying a few of the bloody things.

IMHO bitcoin is a nice experiment in what could happen to gold minus giant buying minus central bank buying minus a lot of history.

BC IMHO is a purely monetary object, and we are seeing a glimpse of FOFOA's waterfall effect in something much smaller than gold which nevertheless is operating as gold could in freegold.

All IMVHO FWIW etc. I'm still not getting any BC, ain't even close to the main game. But best of luck to those on that path - and well done

PS I even have a bet about BC vs gold with a friend who has heaps of them --- so I think he will remind me of the BC price AT EVERY OPPORTUNITY hehehe :-)

And now that BH has said this, it's presumably time to sell!

Franco said...

FOFOA said above: You will know wealth by this attribute: that it can be physically possessed.. So I'm thinking: with BTC, you don't actually possess anything, because there isn't anything to possess. So BTC cannot be wealth. It also cannot be a good medium of exchange (because transactions take too long to be confirmed). I have to conclude that BTC is good for nothing.

S P said...

Franco:
The point that some of us are making is to introduce some humility to this blog, even though the premise and general outline is correct.

Freegold has been put off for so long that there is no good way to introduce it that can save the system. The system itself can't be saved.

That's what Another hinted it when he said gold will go up but you won't be happy with the outcome. Well now it's ten times worse.

Having gold is going to be like being a slumlord, or being the richest person in a decrepit town. It's definitely better than the alternative of abject poverty. And it very well might get you time, survival, and an escape plan. But it isn't going to be like you think.

Modern, global, industrial civilization is breaking down.

said...

SP, when did he say you won't be happy with the outcome? He said if you didn't like the old system, you wouldn't like the new, but that is as much as I can recall.

Good thing for me, I happened to generally like the old system.

byiamBYoung said...

@BH,

Yes, I also have noticed that my assertions have marked significant market reversals.

Odd. I wish I could switch my convictions mid trend. I'd likely be rich right now.

Cheers

burningfiat said...

BYoung,

BTC seem historically, in its short life, to be prone to big crashes. Many times over 50-90% in magnitude. Why not "invest" in it after one of those has happened? Now seems a little risky!

For your sake I hope we are talking play-money and not selling of core gold holdings :D

Michael dV said...

Let's not forget that the USD$ is what backs most fiat. The ECB has gold too but most CBs have treasuries. China is linked to the dollar.
BTC may have some value due to widespread use, but I have to wonder how it's value will hold up in a dollar failure scenario.
For me I'll take my chances with real wealth. BTC could come out better than gold. I'll be happy without it.

michael3c2000 said...

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20131117000085&cid=1102
Bitcoins seen as leveraged speculative bubble, vulnerable to hackers and others

One Bad Adder said...

With nothing to go on other than gut-instinct $IRX looks decidedly similar to March '13 here and I'd not be at all surprised to see this thing go south from here.
byiamBYoung: Re BTC - Ha! ..was planning on loading up @$40 last (when?) July ...missed the boat then so will probably watch from the sidelines.

Beer Holiday said...

You know what the worst thing is about missing the BC boat?

All of my stoner friends telling how they got there bitcoins sub 20$ (strictly for there MoE function! ). I have no doubt that there are plenty of dudes out there who can't remember they have bitcoins. Hehe

Attitude_Check said...

for those considering bitcoins. the low risk way is to invest ~$300 in an small ASIC mining rig, and mine some bitcoins. If it busts your not out much, of course you wont make a pile of money all at once either.

DASK said...

Attitude..

Check out the miner margin graph: Here

was positive most of the year, and is now negative after many large ASIC groups came online and the difficulty increased. Estimated electricity costs now running 5x the mining fees, even after the last price spike. Something's gotta give.

RevolutionOfNations said...

I see people are falling over themselves trying to get into the bitcoin mania. I thought I'd add my main concerns with this so called virtual "currency".

1. Bitcoins lost, are lost forever. So base money will constantly erode until they are all lost. A central bank could buy them all, put them on a USB stick and throw it in a fire.

2. Who is the owner of the first bitcoins mined? Those you could mine millions of using just an old pentium. The one who mined the first ones will become the owner of the world's currency if this takes off. So who owns those? We don't know...

3. If bitcoin will be used for online trade, how can you increase liquidity to meet demand for currency as trade grows? Increasing liquidity is necessary for price stability, due to bitcoin's design this is currently impossible...

4. Bitcoins anonymous nature mean governments will loose their power due to inability to tax production and trade. Do you think they will volunteer giving up the power acquired through centuries? Or do you think they may pass a law to enforce the use of some form of taxable/traceable currency regime?

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

Sorry Jonas but IMHO that same arguments apply to gold.

Except for the BC settling international trade stuff - gold will do that not BC...

Here's how I see it - China was the economic powerhouse until Communism screwed them. Since Mao passed they've spent every single year acquiring as much gold as possible- not Bitcoins .

So I'm a payed up fan of freegold and that won't change, but I appreciate the rise of BC, and credit where it is due.

Were all trying to understand this crazy world :-)

Good luck, we'll need it.

Edit: to fix my terrible grammar and selling.

Beer Holiday said...

Second edit: Not just China but Europe and producers. Also great to see your comments mate!

RevolutionOfNations said...

Beer Holiday. This is why we are not sending lumps of metal around to each other but use currency. Currencies have none of these shortcomings and can be made abundant as trade expands. This is a good thing, no? The only problem with currency is lacking store of value. This is the problem gold solves.

Gold is not a currency as much as a store of value, and for this function it has worked just fine throughout the ages of humanity and will continue to serve this function. Why invent the wheel again, when the old one works so well?

Roacheforque said...

I wish I had gotten into gold at $35 and ounce ...

I wish I had gotten into BTC at $35

I wish ....

Beer Holiday said...

Yeah, I agree! But gold can't function correctly today, because it's still tied to concept of money, fractional reserve lending of gold, and gold derivitives.

So in freegold we need that to end, Occam's razor would suggest a collapse of the gold markets, ultimately closing the gold market. This is the year of the window yeah?

I wonder what other freegolders think.

Beer Holiday said...

Secondly, I think this is why BC will outperform gold (until a revaluation) - because it isn't constrained by an expanding pool of paper bitcoins.

RevolutionOfNations said...

Beer Holiday, ask yourself what function Bitcoin is supposed to perform. Does it perform that function well? I think in both the case of currency and store of value there are much better alternatives readily available. So what improvement does Bitcoin bring? As freegolder don't you think Bitcoin will succumb to the same problem as the old gold standard? Namely trying to be a currency and a store of value all in one...

Beer Holiday said...

Jonas - I think BC performs silver's job much better than silver does and we are seeing that play out. In the mean time I'm waiting for gold to kick arse, and I'm, convinced that it will.

BCs are wealth items - the are anonymous, finite, easily transferable wealth item i.e better than silver/ fine art etc. But nowhere near as valuable as gold in freegold. Just IMHO as always.

As freegolder don't you think Bitcoin will succumb to the same problem as the old gold standard?

Your lost in the weeds at this point, if you don't mind me saying.

There doesn't have to be a reserve currency per se and we are NOT going back to the gold standard.

Maybe reread FOA's gold trail, sorry to sound like a nob but that's what this blog is about- seeing what stuff looks like after abandoning that baggage (again IMHO)

DP said...

it isn't constrained by an expanding pool of paper bitcoins

Don't you worry, BH, in time someone will have the innovative idea that rectifies this deficiency.

How can we have a truly great global currency that you can't even bank on?

Beer Holiday said...

Just for clarity - BC are purely a wealth item for the sake of the argument! Just ask my stoner friends since silk road closed down.

RevolutionOfNations said...

Beer Holiday, Silver's job?? As conductor of electricity, medical applications or nanotech?? I don't see Bitcoin performing any of those functions. Silver is more like Oil, Food or any other commodity... The value lies in its utility... Like food has value through it's innate ability to to sustain organic life...

I think the separation of currency from its function as a store of value is central in the free gold concept. Don't you?

fnord88 said...

"Secondly, I think this is why BC will outperform gold (until a revaluation) "

Lol...bitcoin has already outperformed gold, even after revaluation. I bought my gold 5 years ago, and my bitcoins 2 years ago. Gold will never go high enough to give me the same kind of return. Bitcoin is better than gold for many reasons, a few being:
* You can cross borders with millions in bitcoin...try that with cash or gold
* You can send millions to somebody almost instantly(pay no fee it can take up to an hour, pay a $10 fee it is done in seconds). Try shipping millions in gold......instantly.
* You can send somebody $20 internationally , with no fees...try that with any other international money order
* It is infinitely divisible, gold is not...or at least, not easily.
* It is more secure than gold, if you are technically minded
* You can back your money up, have multiply copies of the same wealth.

The internet is doing to banking what it has done to every industry it touches. I don't think bitcoin will last long term, because it does have issues ( the blockchain is a bitch). But if you really think money is going to go back in time, and not forwards, you are all kidding yourselves.
Plus you can buy Gold for bitcoins.

fnord88 said...

Please note that above i am not pushing bitcoin or recommending you buy them. These prices do seem insane to somebody who bought at less than $10, and as much as i like bitcoin, i'm not sure i would have the stones to buy them now. Indeed many of mine have been swapped for ounces of the shiny stuff. I'm just a bit incredulous at some of the ignorant comments that abound about bitcoin. It has many interesting uses, and WILL have a massive impact on money, finance, banking and taxation going forward. It has already changed the world. With a market cap of $5 billion. Gold is good, I agree with you all. But don't get so blinded by your love of an idea that you fail to see the world is changing around you, and foundations which 5 years ago seemed rock solid, are now shown to be built on shifting sand. Scientists may have just found the gene that enables perfect regeneration, including regrowing limbs. Even death and taxes may not be so certain ;)

RevolutionOfNations said...

fnord88, how do you see the role of government, taxation and legislation develop in that context as Bitcoin gets adopted on a larger scale?

Just curious about your thoughts.

Beer Holiday said...

I think the separation of currency from its function as a store of value is central in the free gold concept. Don't you?

Bitcoin doesn't have any use at all, so I'd prefer if people save in it. What if people saved in rice, that would kind of suck for people who eat rice?

Silver is underrated - it's actually a really useful element (highest reflectivity of the elements etc) - I wish we'd stop keeping it in bank vaults.

IMHO Here's FOFOA's partial answer or that question:

http://www.youtube.com/watch?v=au3wfKFIXVo

Maybe we can agree to disagree? We both like freegold, this is a sideshow! Hope to see you around.

Peter said...

Yes!

Bitcoin the free-trading asset is winning today as a store of value because a few people are banking on it eventually becoming a global currency.

Gold the global currency is losing because all but a few people have over-banked it as just a global currency, seeing no need for it as an asset.

Maybe this time it's different? People won't bank currency?

Anand Srivastava said...

Franco:

BTC cannot be wealth in a world where the network can go down. IMHO we have passed that point. The network if it ever goes down (as a whole, not minor parts of it); it will be a catastrophic event, possibly enough to wipe out humanity as a whole, or at least push us into a Mad Max type world.

Yes it is easier to lose your BTC wealth, than gold. But that is not a very big negative IMO.

I agree that it cannot be a good UoA, but it can be a good MoE.

Regarding Transaction Confirmation Delay, following is a very good comment from Satoshi, the originator.

Instant non-repudiability is not a feature, but it's still much faster than existing systems. Paper cheques can bounce up to a week or two later. Credit card transactions can be contested up to 60 to 180 days later. Bitcoin transactions can be sufficiently irreversible in an hour or two.


Some more comment from the same site
What this signifies is that though Bitcoin can be used loosely as a payment protocol, it's main purpose is to serve as a currency. Other systems can/will probably be built around the Bitcoin protocol that are willing to take a small part of the risk in order to deliver instant verifications. Bank-like entities, those that store coins on other person's behalf can locally clear funds if they are trusted. Ripple is seen as also potentially filling this niche.

From a different perspective, digital services can easily shield themselves from this risk even if the payment is double-spent, since they can revoke the service soon afterword with very little loss.

Bitcoin is not optimal (though lets not forget it's pretty damn good regardless) for small, instant clearing of transactions between two anonymous persons where one party could quickly revoke the transaction and run off with the goods in 10mins, but the fact that you can clear a $200,000 USD transaction using Bitcoin with a 0.5 cent fee in as soon 10 minutes is certainly nothing to scoff at.


When you do compare bitcoin transactions, please do so with current systems. Yes you can build those systems with Bitcoins as well.

I think bitcoins are better than gold in some sense, as they are far more liquid compared to gold. To convert gold to cash, you must carry it to the nearest coin shop. To use Bitcoins, you just need the network. And if you are buying online, it is faster than anything else.

In the future Bitcoins can be somewhere between gold and currency. You keep enough money for a couple of months in currency, keep another 6 months or so in Bitcoins, and the rest in gold. Yes for that, bitcoin value will need to be somewhat stable. I guess this will require some huge appreciation of bitcoin value. I am not sure if that will happen. So yes long term viability of bitcoins is suspect. Till reval, it should be the next best thing (next to gold). So if you need some way to store excess money for use during the crisis, bitcoins should be the best option. So some Euros, some bitcoins, in addition to other things that you absolutely need for survival. Gold for after reval.

Anand Srivastava said...

The comments in the above is from the following link
http://www.reddit.com/r/Bitcoin/comments/1a26pa/if_it_takes_15_20_minutes_to_confirm_a/

fnord88 said...

No Beer Holiday, whilst we both believe in freegold, i do not consider this to be just a side show. All freegold is going to do is show stupid westerners what billions of Indians, Chinese, Jews and most of the dead people throughout history already know/knew. It is essentially a reversion to the mean(with some modern twists, twists which were reasoned out long before the internet was even dreamt of). Bitcoin doing to finance what napster did to the music industry, that is what is going to be the more important of the changes going foward. Most of the people on the planet don't have a bank account. With gold and crypto currency, why would they ever need one? Why do any of us need them? A trillion dollar industry that gives what 'value added' exactly? Crowd funded micro loans are spreading everywhere, fastest in the 3rd world, as are crowd funded charities. Banking is beginning its paradigm shift, especially in trust, etc etc. Dunno, as important an idea as i have though freegold is for the last 3 or 4 years, and as much as i still believe it is inevitable, i just think in 20 years time, the gold revaluation will be thought of as a small thing, barely worth mentioning, is a sea of rapid, mind boggling change.

Either way though, should be a fun ride :)

One Bad Adder said...

BTC - Gold comparison is (IMHO) a Chalk - Cheese thing - not so BTC - Currency, BTC - Silver ...or even BTC - $XAU...
...where Bitcoin is currently showing them all a clean pair of heels.
Making a comparison with Gold to any or all of the above is not thinking Giant-like kiddies ;-)

Beer Holiday said...

@fnord88 yeah who knows!

Your post reminds me of this youtube vid by James Wolfensohn (former president of the world bank)

http://www.youtube.com/watch?v=6a0zhc1y_Ns

I think freegold is your best option to prepare for this stuff, and we're all trying to understand it and prepare accordingly I guess...

Cheers - BH

Beer Holiday said...

PS you should skip like 6 mins of the above like sorry about that...

fnord88 said...

Jonas i'm not really sure to be honest. I'm not even sure it will be bitcoin instead of a superior, yet to be invented crypto coin. It's not the product which counts, so it speak, but the idea and technology behind it. As to what happens with taxation etc i'm not sure. Technology works both ways, so governments will have many options, taxing point of sale (online or in flesh), is still pretty feasible etc. Or, perhaps even more likely, the west will clamp down on it, and make it useless in their countries, whilst the rest of the world just moves on. The point kind of is, from my perspective, that when tech finishes screwing with the finance industry the same way it has screwed with others, the outcome will be VERY hard to predict. But lets face it, banking and finance are 20th century models in a brave new world. Perhaps this is not really about a belief in bitcoin or cypto currency for me, but a belief that the connected revolution is only just getting started. Or maybe it's just because i made money and would prefer to think i'm smart not just lucky. lol not sure, but one way or another, governments are going to have some adapting to do vis a vis revenue, bitcoin or not.

fnord88 said...

Christ i just wrote a lot. Sorry guys, usually i just lurk.

Beer Holiday said...

All good! Head up that this antipodean is off to bed :-)

RevolutionOfNations said...

fnord88, "belief that the connected revolution is only just getting started".

Yes I agree, those red lines on the map of the world trying to box people into governmental pens, as some sort of cattle are disappearing thanks to our internet connected world. One step closer to singularity... Though I think we're not yet ready for it... Most likely we'll have some sort of free trade zones with a kind of government to govern the governments involved in order to ensure those involved play by the same rules.

I think people have to realize that the coming turmoil is also an amazing opportunity to build a new society. We should start working on shaping that new world together instead of fretting about loosing things from the past. Too many of us fear change instead of embracing it. Too many are stuck in thought patterns of the past.

Too few use imagination, dreams and creativity, the tools we so desperately need to create our new world. Imagine a world for the people by the people.. I pray we won't let our governments create that world for us..

michael3c2000 said...

http://truthingold.blogspot.com/2013/11/the-cmes-comex-goldsilver-inventory.html
Sunday, November 17, 2013
An Analysis Of The CME's Comex Gold/Silver Inventory Report Legal Disclaimer
Dave Kranzler - Excerpts reprinted by permission under Fair Use Clause of International Copyright Law:
" "The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only." - CME legal disclaimer placed on the Comex daily gold and silver warehouse stock reports

I wanted to elaborate on Friday's post to make it crystal clear to everyone WHY the CME suddenly slapped that disclaimer on the Comex gold/silver warehouse inventory reports. It seemed to me that the CME might be liable for legal claims - when the Comex ultimately defaults - which seek damages based on the argument that the Plaintiff relied on the CME reports in making a decision to invest in a gold/silver futures contract prior to the date that the disclaimer first appeared.

What I'm really trying to ferret out here is exactly why the CME waited five years after acquiring the Comex before applying the disclaimer to the inventory report. My assessment is that, per my article Friday, given the extreme decline in gold inventory on the Comex the beginning of the year, the CME - by invoking the disclaimer - is worried about the reliability of the gold/silver inventory reports. Recall that the reports are generated based on paper reports submitted by banks who operate the Comex vaults. In other words, the CME is relying on the reliability of these reports without actually verifying that the content of the reports is based on a provable fact - i.e. that the inventory reported by the banks exists as reported without doing an independent physical audit to verify that the reports are legally valid..."

"...It is clear to me, and to my friend who is an attorney, that the CME's lawyers determined it was necessary at this point in time to invoke the disclaimer because the risk of fraud is clear and present with regard to the reports being submitted by JP Morgan, HSBC and Scotia in relation to the extreme and unprecedented rate of decline in the reported Comex gold and silver inventory. And this particular disclaimer gives the CME a shield of legal protection that extends all the way back to its date of acquisition.

The bottom line here is that it is highly probable that the real inventory that is sitting in the gold and silver vaults of JP Morgan, HSBC and Scotia is quite a bit less than the inventory being reported in the daily stock reports. This conclusion, of course, is consistent with the type of fraudulent behavior for which these banks have already been successfully prosecuted and/or forced to settle. What it implies is that the Comex may indeed be closer to default than any of us can possibly understand..."

D.Kranzler makes a good case that NYC is the site of more than just the sale of the JPM tower and vault to the Chinese.

Anonymous said...

Re: bitcoins, in the for what it is worth category, here is a comment by Yves Smith of Naked Capitalism as her preface to an article she links to about BC in Bloomberg:

"I am being proven wrong on this, or maybe not. I’ve viewed Bitcoin as prosecution futures, as in the authorities would see it as a way to launder money and evade taxes (an acquaintance involved in that effort could get Trichet on the phone). The US has had a substantial and powerful “terrorist funding” effort, as in extensive efforts devoted at the highest levels to investigate terrorist money networks (I don’t kid myself that this effort no doubt has catching ordinary tax cheats as a fully-anticipated side benefit). So I had assumed they would want to stomp out Bitcoins.

But they can still be prosecution futures. The authorities may indeed view Bitcoin as the perfect medium for tax cheats and money launderers. What better way to catch them than allow Bitcoin to flourish and monitor it aggressively?"

Ken_C said...


michael3c2000 said...

"The bottom line here is that it is highly probable that the real inventory that is sitting in the gold and silver vaults of JP Morgan, HSBC and Scotia is quite a bit less than the inventory being reported in the daily stock reports."

I am trying to play Devil's Advocate here. Given that some (most/all?) of the TBTF banks are the duplicitious fraudsters that we know that they can be what would be the implications if the actual inventories were MORE than reported.
Not that I believe they are but just suppose the inventories are much larger than the reports. Would there be any new and improved fraud/scam that the banks could perpetrate on readers that take the opposite view.
i.e. How can we mislead the Muppets once again so that we can steal what remains of their wealth?

Anonymous said...

More in the FWIW category re: bitcoins. Dave Harrison of the Trade With Dave blog has a further comment re: bitcoins that, in his typical opaque way of annoyingly snarky writing that never explains anything and just throws out hints and unsupported conclusions, suggests that under current US money laundering rules, the federales may be able to claim ownership of all BCs because of the "mixing" that occurs in the exchange of honestly used BCs with those used for nefarious purposes:

"You see, with Bitcoin there’s something called the Blockchain, triple entry accounting, Ricardian contracts and “the receipt is the transaction.” With Alec Baldwin’s chief sponsor, Capital One, there’s something called “The Purchase Eraser” that is promoted as an online tool designed to erase credit card transactions presumably for hotel stays from your credit card record. Hmmm?

It’s hard to say if Alec will commit career hari kari if MSNBC hits the purchase eraser for Up Late, but he’s certainly threatening to hit the button. When it comes to the blockchain however a public record of all transactions (that is unless you have the latest edition of the upcoming “Dark Wallet” with the built in “trustless mixing” there will be no erasing anything. Then the only question remaining is if you “mix” your bitcoins in a “know thy customer” paradigm are you an unintentional money launderer?"

http://tradewithdave.com/?p=19188

RevolutionOfNations said...

Type in google search "Global Currency Reset", see how far you can type before Google suggests it to you... This is how you know they know.. They're running out of time.

Jeff said...

http://www.pbs.org/newshour/art/blog/2013/11/record-shattering-auctions-begs-the-question-what-does-this-all-mean.html

t au said...

re : bitcoins

IMHO -

Plus ça change, plus c’est la même chose.

http://en.wikipedia.org/wiki/File:Jan_Brueghel_the_Younger,_Satire_on_Tulip_Mania,_c._1640.jpg

I’ll forego the potential “profits and security” of bitcoins – simple me, I’m good with the physical precious.

Franco said...

Jonas said:

"A central bank could buy them all, put them on a USB stick and throw it in a fire."

I have an even better idea: let's say the US government wants to destroy BTC. So they put a call to the Fed to buy every BTC that's for sale, and do it over the course of, say, a month, raising the price in USD to thousands. Then not throw the USB stick in the fire, but sell them back, all of it, and all at once. Just destroy the bid stack. The Fed could do that with impunity, because it's all anonymous, and it's all unregulated. There are no circuit breakers. If after collapsing the price the first time, a new wave of buying begins, then rinse and repeat until everybody who wants to play with BTC has gotten burned and wants no more with it.

Anonymous said...

The meta-point of my two prior posts re: bitcoin is that the legal regime relating to BC is in flux and uncertain, and we know that the supposed "anonymity" of the digital currency attracts itsuse for illegal purposes. You don't know what legal issues you are buying into.

RevolutionOfNations said...

Franco, Yes, I guess there's nothing that says the "president's working group on financial markets" are forbidden to manipulate bitcoin.. After all they have more dollars than any of us out there(unlimited). But Bitcoin was never a dollar game unless some people out there were using it to get dollars..

Franco said...

OK, I have a question for the people who know: when we talk about the structural support that foreign central banks lend to the USD-based system, are we talking about long-term treasury bonds only? What about short-term treasury debt? What about "government agency" bonds? What about corporate bonds? Thanks.

Sam said...

@Franco

I would say that any dollars and dollar debt instruments held as an asset by a surplus foreign nation supports the system. This support keeps goods and services flowing without causing prices to adjust and end the imbalance of trade.

michael3c2000 said...

@Devil's Advocate -
http://jessescrossroadscafe.blogspot.com/2013/11/gold-daily-and-silver-weekly-charts-cap_15.html
While I agree hyoeralgorithmic psyops and mindgames are manipulating economic perceptions aka "MOPE/Management of Perception Economics" in an epic orgy of ostentation, Comex claims per ounce of leperous, barbarous gold have contracted a STD.
The WallSt masters of dead man's hand have played fast and loose enough for the cards to build a house of bubbles. They're showed their hand playing in the big leagues without their fig leaves, naked, short of tangible equity, overplaying their hand, groping for each others leverage and more exposed to natural rhythms and cycles than the bare-backed Fruit Bat. http://batcon.org/index.php/media-and-info/e-newsletter.html?task=_viewArticle&ArticleID=1292

Anonymous said...

If Bitcoin is one of the major future currencies, and the Fed just confiscated how many coins from the Silk road, then the US is in what position compared to other countries....?

It may not be a good assumption that the U.S.G is negative on BTC.

As for everyone else, if you are tired of "gold manipulation" maybe BTC is a better place to be rather than waiting 20, 30, 50 years for Freegold Valhalla.

Sam said...

bitcoin is not a currency. It is an asset being used as a really hard medium of exchange. It will fail in its long term goal of being a medium of exchange but I do wish good luck to all gamblers speculating on this experiment.

byiamBYoung said...

Whoah. SInce I posited my Bitcoin question yesterday, it has surged over $200.00 to $775.00.

Tulips? I don't know. But this mania sure is something to watch.

Cheers

byiamBYoung said...

Make that $800.00.

Moonshot?

Cheers

Anonymous said...

So Gold going from $2k to $50k is Freegold, but BTC going from $40 to $1000 is a bubble? If Gold was slicing through $5k right now due to massive adoption and interest, would you think that is a bubble or your beliefs confirmed?

BTC Bubble maybe, but right now its looking more like FreeBTC than FreeGold in terms of worldwide adoption of a new currency...

MatrixSentry said...

Try to possess a bitcoin. Try to pass a bitcoin without a connection to the internet.

How many bitcoins do the world's central banks possess?

Bitcoins are one Helluva speculative trade, for sure. Piss pour reserve asset. Certainly not wealth. They have no place on a saver's asset sheet.

byiamBYoung said...

Now $836.00.

SOV? No, I wouldn't say so.

Bubble? Paradigm shift? Hmmmm.

Time for popcorn!

byiamBYoung said...

No, $865.00.

I can't look away!

tEON said...

Is there a way to 'short' BC?

byiamBYoung said...

$900.00.

I feel dizzy!

Anonymous said...

MatrixSentry,

Try to transport $100k in Gold over international borders. Try to walk around with $100k in Gold in your pocket. Try to sell or buy Gold with no roundtrip fees. Try to send Gold over your phone. Yeah one is physical and one is digital, what is your point?

Maybe the future currency won't be CB initiated, maybe it will be everyone else on the planet. Or maybe it will be in parallel? Or maybe it will be a bubble and be gone tomorrow. Maybe the world is sick of central banks, governments, and rich families and wants something new.

How many bitcoins does the USG have? How many does China have? How do you know?

byiamBYoung said...

Now down to $740.00!

I feel seasick!

byiamBYoung said...

$688.00!

Where's my parachute!?

Roacheforque said...

Gold has endured for thousands of years.
Bitcoin?

Time is the master of all.

byiamBYoung said...

$620.00!

Everyone to the lifeboats!

said...

Tulip mania! LOL at the people who thought bitcoin would ever be anything more than a pump and dump scheme. You can't beat the giants. They produce everything you need and/or they have all the guns. Either way, you better be on their side.

michael3c2000 said...

Just bypass the giants. 3D print your chocolate bitcoin candies. Why bother with imports from Asia where foreign conglomerates own half the factories? .

michael3c2000 said...

Russia deploys advanced defense systems
http://rt.com/news/russia-radar-jammer-drones-864/

One Bad Adder said...

Trawling around the RT site (Tks michael3c) - came up with this current Bitcoin overview FWIW.

One Bad Adder said...

FoFoA: - Hyperlinks aren't working mate - this is the above- referenced article: -
http://rt.com/usa/bitcoin-legitimate-senate-hearing-931/

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