"Gold is so old. Such a rich history.
An educated western mind cannot begin to understand it!
We live in a time of closed thought and controlled perception.
How could we have known that two thirds of humanity
would still think of gold as wealth?
It’s not that they are right or wrong to think this way,
it’s that we want them to work for us! That is the problem!
And when they worked for us we paid them!
And who in the hell would have thought that they would have
used so much of that pay to buy gold! Some bought in tiny amounts
and some bought in large amounts. This started with the new
world trading order that came into being about six years ago.
By now that gold is so spread out it would take 20 years
and 5 small armies to get it back, I think." –Another
An educated western mind cannot begin to understand it!
We live in a time of closed thought and controlled perception.
How could we have known that two thirds of humanity
would still think of gold as wealth?
It’s not that they are right or wrong to think this way,
it’s that we want them to work for us! That is the problem!
And when they worked for us we paid them!
And who in the hell would have thought that they would have
used so much of that pay to buy gold! Some bought in tiny amounts
and some bought in large amounts. This started with the new
world trading order that came into being about six years ago.
By now that gold is so spread out it would take 20 years
and 5 small armies to get it back, I think." –Another
Much of the Western gold flowing eastbound to China and down to the Middle East and India passes through Switzerland on its journey. And just last week, Switzerland released its import-export numbers for the first quarter of this year (h/t Flore). More gold flows into Switzerland than out, probably because Switzerland is a good place to store gold, but most of it just flows through. Currently, according to the data, gold exports are about 80% of gold imports. Last year it was 90%, and the year before it was 70%. But what's most interesting is where the flow comes from and where it is going.
More than 50% of the flow, about 270 tonnes in the first 3 months of this year, or 90 tonnes per month, originated in the UK. Projected annually, that's about 2,150 tonnes per year flowing through Switzerland, of which half is coming out of London. For comparison, 2013 was a little higher with 2,777 tonnes flowing through Switzerland, and 2012 was a little lower with 1,570 tonnes, which was down from 2011's 1,819 tonnes.
I can't tell how much of the 2,777 tonnes came out of the UK last year because Switzerland only started including information on its trading partners in 2014, but if it was close to 50% like this year, that would be about 1,390 tonnes. Adding the first quarter of this year's 270 tonnes, that would be about 1,660 tonnes drained from London in 15 months. For comparison, GLD was drained of about 560 tonnes. If all of that gold drained from GLD made a stop in Switzerland to be recast as kilo bars, then one could imagine GLD accounting for roughly a third of the London drain.
Frank Knopers made this nice chart yesterday, for his Market Update site, of where the gold flow is coming from:
But what's more interesting than where it's coming from is where it's going. 438 of the 537 tonnes, or 82% of the gold that flowed through Switzerland in the last three months, went to Asia, India and the Middle East. 281 tonnes, or 52% of the flow, went to Hong Kong and mainland China alone.
Apparently Mr. Chang still likes his gold, very thank you. So not much has changed, except that structural support is now negative, for the dollar and for gold. By the way, did you know that the same year the CBs ended their 21-year gold selling spree, Saudi Arabia made the single largest one-off purchase of gold by a CB? I guess that whole "special-deal-to-buy-time-for-the-dying-$IMFS" thing is over. It's almost as if no one is trying to buy time anymore, so maybe something really big has changed. Meanwhile, the physical is loaded up and truckin', eastbound and down.
Sincerely,
FOFOA
778 comments:
«Oldest ‹Older 201 – 400 of 778 Newer› Newest»Michael dV:- Like you I'm amazed that the thing has kept going for so long ...and I put it down to Super-organism uber-tolerance.
When you think of all the blatant shenanigans going on over the last 15 odd yearswith Fiscal / Monetary policy, there's a hell of a lot of sheeple-tolerance in evidence.
I'm reminded of the lot of the French prior to the Revolution (who tolerated an enormous amount of "inequality" prior to finally revolting)
I think the S-O keeps taking it in the ass because it's not TOO bad currently ...and to initiate a change / systemic reset may well be a LOT worse.
The groundswell of Monetary Revolution is however evident methinks.
jojo
no matter how sudden the coming changes might arrive I think there will be huge inertia and an attempt by politicians to maintain the old ways. It would surprise me if there was not some attempt to steal wealth, tax the rich, get 'social justice and so on...even the pope seems to want a piece now.
We can see some of the advantages of gold but as far as the large part of the economy (which will be in fiat) the old ways will likely go on and the death of socialism will likely be long, slow and painful.
You have probably noticed that Euro area consumer price inflation has been substantially below 2% annually for a long time now. At each of the monthly press conference, Draghi reiterates his expectation that Euro area inflation will remain well below 2% for an extended period of time.
Contrary to what many here have tried to "teach" me, they seem to be pretty relaxed about their "below target" inflation rates. Recall that the European treaties mandate that the ECB pursue price stability. In the 1980s, the Bundesbank had spelled out that they were content with inflation rates below 2% annually and would consider that as price stability. In this spirit, when the Euro started in 1999, the ECB initially said they were aiming for "below 2%" HICP inflation.
Only in 2003, the ECB governing council announced that they would target inflation rates of "below, but close to 2% in the medium term".
What's up now? Draghi said he expected inflation well below 2% for an extended period of time. So he acknowledges his failure to implement the target of 2003, yet no action follows. Surprised?
I guess Blondie and myself not so much.
For me, the article by Christian Noyer cited here
comment 1
comment 2
comment 3
was one official confirmation that the ECB would eventually keep the Euro literally purchasing power stable, as in targeting 0% inflation in the medium run.
Now here is another statement by a BIS official to that effect. Jaime Caruana, formerly head of the CB of Spain, presently General Manager of the BIS: PDF file. That speech contains even more dynamite in the gears of the $IMFS:
The historical evidence indicates that deflations have often been associated with sustained growth in output. Surprisingly perhaps, the Great Depression was more the exception than the rule.
Then why the 2003 statement by the ECB? By 2003 it was clear that the dollar did not fail around 1999 to 2001 as some has initially predicted. Quite the contrary, the oil backing of the dollar required everyone to retain a trade surplus with respect to the U.S. and so the Euro could not be allowed to increase too much relative to the dollar. Hence an inflation target that was too high to be good policy. Once oil is available for currencies other than the dollar, the need of inflating is gone. Seems they expect another window of opportunity these years...
Have fun reading the Caruana piece.
Victor
Piripi had pointed me to this hit piece by Evans-Pritchard in the online Telegraph against the speech by Caruana.
As you are familiar with Another/FOA/FOFOA, you can easily see why Evans-Prichard misses the point in his criticism of Caruana.
1) If the Euro returns to a behaviour of benign deflation (or at least truly stable price level), it won't suffer from sudden swings in the price level as shown his nice chart. This is simply because the Eurosystem can use gold at a floating Euro price as the primary reserve, and so gold will be doing all the swings in the real price whereas the Euro can be managed to be purchasing power stable.
2) Since the Euro is fiat (as opposed to the dollar in 1930-1933), the Euro CBs can always counter a collapse in banking credit by purchasing the affected assets with Euro base money (CB based bailout). As long as this only applies to existing debt, it won't create inflation. But of course, it will prevent a chain reaction of credit collapse from being set off.
Victor
The commentary (1-200) suggests a fair degree of current disillusionment toward Gold ie: "How come the shelves are awash ...with PoG @$1300 and dropping ...and GOLD (reportedly) being squirrelled away at a record rate?"
It is (IMHO) possible to draw a similar Market-based analogy: "How come you and I (shrimps) can trade (with leverage) Forex and secure 40% (200% or whatever) profit in a matter of (sometimes) minutes whilst the Yield on 10Yr T-Bonds is 3.5% per Year?
There are clearly Wading-ponds (for us shrimps) ...and Oceans (for Giants)...in both the monetary arena AND the far more opaque World-of-Gold.
FWIW.
A bit like - The "Queen-Mary" doing day-trips on the Hudson - ie: totally impractical!
Hi Victor-
This is simply because the Eurosystem can use gold at a floating Euro price as the primary reserve, and so gold will be doing all the swings in the real price whereas the Euro can be managed to be purchasing power stable.
When I think about gold and its relationship to both currencies and goods (and services) across the economy, I start with the idea that gold is a thing -- just like goods are things. Goods are not credit or book keeping entries, they are things of value to be possessed and/or consumed. I remind myself it is in real goods and services including gold that we must balance trade both with our neighbors and between nations. Currency, that's grease to the skids. It's credit. It is not on the list of goods which includes gold. When I think of credit, this is simply a price signal which communicates the amount of credit needed to purchase that good. It is credit or more correctly, price signals from credit denominated prices that tells us -- not how much that item is worth to our community (if one can only see value in paper currency terms then one cannot see value at all), but rather the value of that good compared to other goods within the context of that specific environment. When I think of currency this way I see the relative values of goods (including gold) as mostly stable although certainly it remains dynamic within the demands for particular goods as the environment changes.
Using as much of your lense as I understand, real world goods will be stable when measured by the currency, yet this one real world good, gold, is going to wildly fluctuate in price against other real world goods making it the most volatile wealth reserve on could ever dream up! Gold -- the most volatile asset on Earth!
Why in the world would anyone want to store their wealth in such a volatile instrument? The answer is, I don't think they would. There would be absolutely no reason to buy and hold gold unless one didn't believe this new Freefiat system was going to work out -- in which case we're right back to Freegold using gold as our primary wealth reserve. If Freefiat were to establish itself, I imagine most everyone would divest themselves of physical gold because, what's the point? We finally have stable purchasing power in our currency. Heaven on Earth!
With a million different forces acting against just as many markets and our currency printers wielding only one tool for price management across markets, how could currency printers possibly hope to manage all prices across all markets, except gold?
@Woland,
I thought you might enjoy this program about the crisis in Ukraine. Your pal ZB and his book "The Grand Chessboard" are discussed.
+1 Aaron
@ Victor
1.) History shows us that all fiat currencies evolve and die eventually. The euro was created as “severed ” from the nation states in the Eurozone and it is so (for now at least, but it cannot last forever). There will come a time when the hungry collective will find a way to erode the euro`s purchasing power driving the gold reserves of the ECB system to zero.
2.) Medium-term, if fiat is to remain stable in purchasing power (given the production/consumption irregularities in the different parts of the world), much larger flow of gold will be required meaning there should be a corresponding party with opposite needs. E.g when Eurozone tightens selling gold another part of the world must simultaneously be easing its policy and acquiring it. This also means the spur/brake mechanism of gold availability will only function with a considerable time lag at best and maybe not at all without other banking/monetary/fiscal/regulatory (administrative) measures to smoothen the ride.
3.) If major calamity happens or if gold reserves deplete over time freefiat system dies. In pure freegold paradigm such events deplete the gold reserves slowly because the price jumps quickly limiting the outflow and the purchasing power of that fiat falls simultaneously.
In a nutshell, gold flowing in smaller amounts holds its value better while at the same time in case of a dire need it allows other physical stuff of lesser savings value and more use value to take a larger hit. To rely on one`s savings in case of a need is best of course but it doesn`t allow for coincidence of wants happening on a planetary scale and it creates vulnerability that can end the system by creating greater volatility than can be tolerated.
What Sam said.
Nice post Aaron!
That's the thing I've never gotten about FF...it totally forgets about the savers.
one more try
KP/Woland/others with interest in Ukraine
The interview Knotty Pine mentioned above is excellent, and it mentioned an earlier interview of Professor Stephen Cohen (whom Woland has mentioned a few times).
Each interview is about 1/2 hour and well worth your time if you have interest in this topic.
Interview with Prof. Stephen Cohen
Back up Stephen Cohen interview to beginning, link is starting at about minute 5 for some reason
My apologies for all the garbage comments
Thanks for the link to that interview Knotty Pine and Lisa for the repost. If you enjoyed the interview, Chris Martenson's piece from last Sunday is a nice follow-up with a similar theme.
Warning: Ukraine Is At A Flashpoint
ZH article about 'The Gold Cartel' a book with references to several FG themes such as mining forwards and CB leases and BB interaction. Sounds like one someone should read and report back on.
http://www.zerohedge.com/news/2014-05-10/gold-cartel-and-giant-credit-bubble
volunteers? speak up or I'll just assign it to someone randomly...I'll let you skip PE for a week....
Aaron. KP and I posted links to two different interviews. Double the fun.
Aaron,
thanks for machine-gunning down an army of straw men. We dealt with that a while ago.
Using as much of your lense as I understand, real world goods will be stable when measured by the currency, yet this one real world good, gold, is going to wildly fluctuate in price against other real world goods making it the most volatile wealth reserve on could ever dream up!
Well, nobody said gold would be the "most volatile" thing ever. Of course, not.
What do you think, why is the gold price in Euros free to fluctuate (contrary to the preconceptions of all the traditional hard money advocates)? This is because it is its real price that needs to fluctuate. The first big fluctuation will be a revaluation of the (real!) price of gold. In particular, gold relative to oil.
The nice thing about gold is that it is "useless" (so if its real price goes to the roof it doesn't affect the economy too much - perhaps some dentistry labs and some high end stereo systems manufacturers - who cares). The other interesting property is that "its price is arbitrary" (its price isn't strongly linked by any economic arbitrage to any other prices of goods and services in the economy) and so it can indeed go through the roof.
Oil is the opposite. It's most useful, and so its price (relative to wages, say) matters a lot. It's price is also far from arbitrary for it is linked to most other prices (because every process requires some energy) and so the oil price determines our living standard quite a bit.
In the dollar based system, the price of gold and that of oil are fixed (at a ratio of 12 to 15 barrels per ounce since WW2). This fixing is artificial and has to be achieved by a political agreement and by continuous active management. The fixing is highly unstable if you believe A/FOA/FOFOA's predictions about the paper gold market. There is no natural relationship between the two prices.
The Eurosystem is going to use the absence of any natural link and the fact that gold is "useless" and that its "price is arbitrary" to its maximum advantage. What they want to keep purchasing power stable is the currency itself (measured in real consumer goods and services ex gold). Why? Because that gives the economy security when people plan their investments, wage negotiations etc.
Gold, as we have leant from Jaques Rueff (via FOFOA actually), has to act as a spur and break. How can it act like that if its real price remains constant. It cannot!
If you take a look at the real price of gold during the time of the international gold standard, for example, (i.e. 1445 to 1922), you see that its real price indeed changed a lot. Over periods of 20 year or more, however, gold's real price was rather stable again.
That's exactly what you expect. Giants who store their wealth over generations, will prefer gold over currency. Why? Over long periods of time, counterparty risk and political risk in currency do matter. Secondly, if they wanted to hold huge sums of the currency itself for the long run (i.e. base money) in order to avoid the counterparty risk, the ECB would have to purchase gold and create Euros (for them to hold in order to avoid consumer price deflation). Same effect.
Shrimps, however, can of course save some gold coins for their grand children (inter-generational wealth). But if you save for a new car some 5 years down the line, you'd of course do that in currency. Why not? Over short periods of time, currency is stable (even if the ECB retained their inflation target of 2% which I am predicting will eventually be reduced to 0%) and counterparty risk is a lot less dramatic.
...
...
We finally have stable purchasing power in our currency.
Exactly. Just as it ought to be. Money is a medium of exchange, a store of value, and a unit of account. You just shouldn't use debt as your sole reserve. Final settlement needs to be in real assets. Gold is the focal point, but other real assets are possible (oil wells, land, direct ownership of companies, stocks) but only gold will always be enough and never overvalued (since its price is arbitrary).
Back to the expected fluctuations in the real price of gold. During 1445 to 1922, gold was the base money against which credit was written. So the real value of money fluctuated quite a bit. This meant there used to be periods of considerable inflation and considerable deflation. That's what's not easily compatible with the modern economy.
What I find most amusing is that when Blondie explained the role of gold here some two years ago, we concluded that the ECB would eventually reduce their inflation target down to zero.
Now the Euro area is in the process of doing precisely this, and you get quite frank statements by ECB and BIS officials to that effect. But people still have so much dollar system and gold-standard baggage that they nevertheless prefer to cover their eyes and plug their ears and don't listen when the source speaks to them.
Victor
One further consequence of the freefiat point of view.
According to orthodox FOFOA lore, the exorbitant privilege is given, not taken. So the absence of freegold as of today would have to be attributed to the "foolishness" of the savers who save in debt.
In the absence of geopolitics, I agree with that statement. The problem is, of course, that in the absence of geopolitics, the financial system in which debt is used as the primary reserve, would not have lasted much beyond 1922. In fact, it didn't. It went down the drain in the Great Depression 1929 onwards. Not bad for an automatic restoration of equilibrium, no?
Problem was the 1930s and WW2 that followed. Bretton Woods was then enacted by the single one dominant country past WW2 - not chosen by the free market or by consensus of all players. Foolish? No. Well played politics. This well played politics has continued to date, and still you cannot purchase any significant amount of crude oil for any currency other than dollars. In turn, the U.S. continue to receive a free inflow of real goods worth between 2% and 5% of GDP.
Why hasn't the transition to the new financial system happened yet? Because there have always been strong political interests against that move. Some we know from Another, some we can speculate about, and some we have no idea of.
In the late 1970s and 1980s during the Cold War, nobody in the West could afford to let the dollar collapse (by withdrawing the expriv which, as FOFOA stresses, is given, not taken). Why not? The dollar was the major trade currency, and moreover, the U.S. was essential in protecting Europe. Supporting the dollar can be seen as paying for that protection. The "Blessing Letter" nicely exemplifies this. It can now be read, with comments, on the Bundesbank website.
Then, after the end of the Cold War in the early 1990s, what do you do? Do you take away the expriv, now that the security threat is gone? No, not yet. You need a broad based trade currency first that can replace the dollar - otherwise you risk seriously destabilizing the entire world.
Then, do you take away the expriv and destroy the currency of your major ally that has protected you all these years? No, I guess, you don't. But when finally the inevitable happens and that currency dies on its own, you make sure that your newly designed system is ready to take over as smoothly as possible, don't you?
...
5/5/98 ANOTHER (THOUGHTS!)
** Is Europe (led behind the scenes by the BIS) an opponent to the United States?**
Sir, Yes, but not in the ways of war, as it is in the feelings of "pride" and "we go our own way". The downfall of the Russia, did allow for the Euro and all that it will build. They now see the debt of the US$, as a reserve money can be escaped! As even the US citizen will leave it's own workers to die as products are purchased "overseas", how much less will the world also flee the dollar! Opponents? No, I would say they are learners of the "American Way" as they embrace the "American Idea" of a "free world market economy".
*** If so which countries are in which camp? Your associate seems to feel that Asia is split between the United States which has Japan as an ally, and Europe which has China as an ally ( a notion I found particularly intriguing). Where is Britain in this? Japan? And most importantly, the Gulf States, particularly Saudi Arabia? **
Sir, I feel he is correct in this thought. Europe does grasp for a relationship with Asia as the US did have with the Japan. It would build a mighty economy on a foundation of oil and gold as backing for new money. As China and Arabia was once a part of the Europe economy, in a small way. They may now return with no fear of Russia. Britain? A lost nation. Japan? This one is "of the American Economy" and is to live and die by it! They will seek your Alaska oil before loss of face with gold. A dead Yen be a dead Japan.
**Along these lines, I too believe that currency movements will flow through Europe because the Euro currency will be gold backed. Where does that leave Japan with over $200 billion in dollar reserves, let alone its massive U.S. Treasuries' holding? **
Perhaps, they be like Korea? Rich in paper until the world says, "this paper, it is not good"!
***Your associate says that BIS helped China increase its gold holdings. Please tell me what the source of that information is, or is it simply a speculation on his part. ***
The BIS is the gold broker for all interbank sales/purchases. Bullion Banks are for sales to other entities. I think, at first, China was leverage against the oil producers. Then Arabia was allowed into BIS for Euro.
**One other item you might clarify for me is "Who is really behind BIS?**
Perhaps, "who control them"?
**The Swiss?
Yes.
**The eurocentral banks?
Yes.
**Who does BIS really represent?
"old world, gold economy, as viewed thru modern eyes" or "way to move from US$ without war".
**Why was Saudi Arabia just included in BIS?
answered.
**Has Saudi Arabia gone with Europe?
Yes.
Some (A,FOA) expected the dollar to go down right when the Euro got online, shortly after 1999, because they expected oil to switch to Euros. Well, I guess France pushed quite a bit in order to get Iraq implement the United Nations oil for food programme in Euros rather than dollars. Iraq even displayed a nice paper gain in currency compared with the dollar world.
Then came 9/11 and Iraq was attacked in 2003, and Euro settlement for Iraq oil was over before it had really begun. Well, Iraq could have been a starting point and a test balloon, but oil for Euros would have worked only if Saudi Arabia had switched as well. As of today, they haven't. Given the events since 2011, you might wonder why and when and why Another's comment about Saudi Arabia and the Euro above did not materialize.
Btw I am getting tired of repeating all this. It was written here by Blondie, partly costata, and myself in fall 2012 and later continued on NNW. A good part of that I cut-and-pasted to my own blog for conservation. I'll stop here and be gone for now.
Victor
Victor
If we separate the physical goods in three large groups:
1. Consumables (energy, food)
2. Capital goods (machinery)
3. Saving vehicles (gold, fine art)
and values in each and every category fluctuate against each other and within the group as well (according to the Supply vs Demand dynamics).
Why should there be on this blue earth a thing called currency (credit-debt-trust medium within society) to encompass them all in a „stable“ relationship when that can be naturally achieved as a consequence to freegold and not imposed or somehow artificially maintained by the will of a central bank or any other entity for that sake?
@ One Bad Adder
You said:The commentary (1-200) suggests a fair degree of current disillusionment toward Gold ie: "How come the shelves are awash ...with PoG @$1300 and dropping ...and GOLD (reportedly) being squirrelled away at a record rate?"
I don't buy that. The shrimp demand adds up rather fast. The collective shrimp demand across the world is what creates giants in the first place. You cant have in both ways. Shrimp demand on physical at the paper price is real.
Bright aurum,
Why should there be on this blue earth a thing called currency (credit-debt-trust medium within society) to encompass them all in a „stable“ relationship
There is no reason why that should be the case. This is why the inflation target of the ECB refers to the HICP.
Victor
Ah, and your when that can be naturally achieved as a consequence to freegold is rather obviously false. That's in fact why the gold exchange standard failed.
@ OBA
If every page view on this site equaled a purchase of an ounce of physical gold at the paper price, we would have 214 tons of gold by now. That is slightly less then the amount of physical that the central bank of Belgium holds.
And I've bought a few pounds of gold. As have a lot of other readers.
While we are at it. We also have this one:
A Eurosystem official [...] said [...] while buying Greek or Portuguese paper could help tame deflation there, the falling consumer prices in these countries were part of a natural adjustment of their economies to become more competitive, and were actually welcome.
Victor
@ Victor
In my opinion the fault line is this: “ Secondly, if they wanted to hold huge sums of the currency itself for the long run (i.e. base money) in order to avoid the counterpart risk, the ECB would have to purchase gold and create Euros (for them to hold in order to avoid consumer price deflation). Same effect.“
– it is too complicated and politically unpalatable.
Ozkam Razor solution:
Gold – for the washed few.
Currency – for the unwashed masses.
ECB policy – separate them in a peaceful way.
Solution:
1. create some inflation
2. check whether it falls between 0-2%
3. do corrections
4. repeat
Result : those who can and want do not save in other persons` debt. Gold flows to where it is needed most. Job done.
Bright aurum,
straw man:
– it is too complicated and politically unpalatable.
This is why the giants will hold predominantly gold, as I explained above. You are not contradicting anything I wrote above.
Issue 2:
1. create some inflation
The ECB can create that inflation only if they have monetary base and/or credit created in the banking system grow faster than GDP. They will not do that for a rather obvious reason. Was discussed here in fall 2012.
Victor
Victor, I appreciate the thorough response and my apologies for making you repeat yourself. I only put forth my questions because I'm still trying to understand your position and sometimes hearing that position using different words can help -- not only myself, but the others reading along with us.
I read the Reuters article you linked to and below is an excerpt from the same article that spoke loudest to me.
DEFLATION WORRIES
The ECB wants to keep inflation below but close to 2 percent over the medium term, but consumer price growth slowed to 0.5 percent year-on-year in March after staying in what Draghi called a "danger zone" of below 1 percent since October.
Low inflation is a problem not only because there is a risk it could turn into a stubborn cycle of falling prices, or deflation, but also because it makes it harder for euro zone countries to reduce huge public debt and become more competitive in the global economy.
This!
Aaron,
the problem I have with the excerpt you are quoting is that it was written by the journalist and not said by any ECB person. I do recommend that listen to the webcasts of the ECB press conferences since December last year for the original (rather than the tilted copy).
Victor
Victor The Cleaner:
I'm curious: do you, Blondie, and others of "freefiat" persuasion discuss about these topics actively anywhere? The last comment on the neural net writer forum is from months ago, and the last entry on your blog (assuming that "Some comments on money, finance and economics" is your blog) is over a year old. So, do y'all gather to chat about this publicly, or is it all private? Thanks.
Franco,
I do occasionally post new references here - just as I did yesterday. Blondie has left here AFAIK.
The only other current material I can offer you is to take a look at twitter: http://twitter.com/VictorCleaner
Among those I follow, you'll find many long term FOFOAns.
Victor
Victor the Cleaner said :
A Eurosystem official [...] said [...] while buying Greek or Portuguese paper could help tame deflation there, the falling consumer prices in these countries were part of a natural adjustment of their economies to become more competitive, and were actually welcome.
^Yes , we know this. Also, the currency of a county does not have to be devalued to have the natural undercutting effect. Wages just have to fall nominally, which they have in southern Europe, for employment to be competitively priced.
Why then, if the south has dug itself out of their trade deficits with a strong Euro, is Draghi jawboning for QE next month ?
What is the ECB these days ?
I may get this quote tattooed on my ass cheek first thing Monday morning....
"Gold is the only money the world has ever known" Sounds like a simple thought but it isn't .
Aaron
"deflation, but also because it makes it harder for euro zone countries to reduce huge public debt and become more competitive in the global economy."
^This is so pathetic. This Keynesian nonsense makes me bleed from the ears.
Defaulting on debt will give the Euro all the inflation (via velocity/devaluation) that it wants, to be "more competitive" in the global economy. This is the same variety of inflation that Bernanke said he can stop in 15 minutes.
M-
That was a sloppy cut n paste on my part. My goal was to point out Victor's Freefiat vision of the Euro is not so dissimilar from a gold standard short of Victor's qualification that the Euro has a flexible monetary base. I should have simply stated my point rather than relying on someone else's quote.
My whole point was that if the ECB tries to constrain credit to zero percent inflation as Victor believes they intend to do, entrepreneurship is dead. Who shall decide who is a speculator and who is an entrepreneur? Victor's model requires someone play this role.
I did a Bing search on Iraq-oil-for-food-Euro and this came up.
Iraq nets handsome profit by dumping dollar for euro
Faisal Islam, economics correspondent
The Observer, Saturday 15 February 2003
A bizarre political statement by Saddam Hussein has earned Iraq a windfall of hundreds of million of euros. In October 2000 Iraq insisted on dumping the US dollar - 'the currency of the enemy' - for the more multilateral euro.
The changeover was announced on almost exactly the same day that the euro reached its lowest ebb, buying just $0.82, and the G7 Finance Ministers were forced to bail out the currency. On Friday the euro had reached $1.08, up 30 per cent from that time.
Almost all of Iraq's oil exports under the United Nations oil-for-food programme have been paid in euros since 2001. Around 26 billion euros (£17.4bn) has been paid for 3.3 billion barrels of oil into an escrow account in New York.
The Iraqi account, held at BNP Paribas, has also been earning a higher rate of interest in euros than it would have in dollars.
At the time of the change the UN issued a report saying that the move could cost Iraq up to £270 million. Independent experts questioned the value of buying into a plummeting currency.
@ Victor
How will the ECB explain to the majority of the voting population of the Eurozone - struggling to make ends meet, that it is prudent to actively manage gold?
They will simply keep a low profile after the gold market is restored buying / selling for confidence reasons only. The commercial banks will be restrained/regulated much more actively than now.
The way to create inflation will be through direct, unsterillized base money creation as a complement to the Budget of the European Union.
Aaron,
My goal was to point out Victor's Freefiat vision of the Euro is not so dissimilar from a gold standard short of Victor's qualification that the Euro has a flexible monetary base.
Sorry, but this is utter nonsense.
Gold standard (US flavour, pre 1933):
1) Monetary base is gold, more or less fixed.
2) Bank lending is creating credit denominated in this base. Bank lending, i.e. credit volume, is not reserve constrained - never was. So the credit volume can grow quite a bit out of line compared with deposits and/or the quantity of base money. Credit induced inflation and credit bubbles are easily possible, think of the 1920s leading up to 1929.
3) Since the reserve (gold) is denominated in the same unit as the currency (credit denominated in dollars = fixed fraction of an ounce) and since the real price of the reserve always fluctuates, the purchasing power of the currency is not stable. Take a look at the historical consumer price index data for confirmation.
Euro:
1*) Monetary base is flexible.
2*) Bank lending will be constrained to grow in line with GDP, but not any faster for any longer period of time - otherwise you just create bubbles. Creating such credit bubbles has nothing to do with entrepreneurship. It just leads to misallocation of capital.
In particular, credit volume will be controlled by the ECB in some way. This has been understood by many for quite some time. If you google, you will find a lecture by George Soros at the Central European University (probably 2009) on the financial crisis. You can also read Richard Werner's book and you'll discover that explicit control of credit volume (but *not* of credit spreads and of course *not* of individual projects) was how Germany and Japan operated during the first years after WW2, roughly during the 1950s and early 1960s - the time of their "economic miracles". Not only CB officials but also people like Soros understand this.
3*) The Euro will be managed to be purchasing power stable, something that was not possible under the gold standard. It was explicitly the desire to smooth out the periods of strong inflation and deflation that lead the Fed to in effect sabotaging the "rules of the game" of the international gold standard in the early 1920s. We learnt this, again, from FOFOA in his fantastic "Once upon a time". I repeat. The Fed did not like the periods of inflation and deflation during the international gold standard. So they started, in effect, operating a gold exchange standard in the early 1920s, in order to keep the dollar closer to purchasing power stability. In 1922 (Genoa conference) this new reserve policy was made official at the international level.
Of course, as we now know, this gold exchange standard is unstable. The reason it is unstable is that reserves and currency are denominated in the same unit and so the spur and break function of gold is incompatible with a purchasing power stable currency. You can have only one of the two.
Only when you separate the reserve from currency, you can have both. The Euro area is the pioneer in implementing this idea. That's freegold. Freegold has nothing to do with the Debtors and the Savers. It has nothing to do with separating the MoE from the SoV. Quite the contrary. Once you decouple the reserve from the currency, your MoE can be managed to be a good SoV.
The key of freegold is to separate the reserve from the currency(ies).
You see from (1) to (3) vs. (1*) to (3*) above that what you call "freefiat" is not anything similar to the gold standard. It is in fact pretty much the opposite of it on all counts except for the spur and break function played by the reserve (gold).
...
...
My whole point was that if the ECB tries to constrain credit to zero percent inflation as Victor believes they intend to do, entrepreneurship is dead.
That's Paul Krugman speaking, isn't it?
If you scroll back, I quoted two statements, one by Jaime Caruana (General Manager of the BIS) and one by a Eurosystem official (speaking on the condition of anonymity) that contradict this foolish claim head on.
Caruana said that we know from history that low inflation and even mild deflation have coincided with the periods of the strongest economic growth.
The unnamed Euro area official said that the price deflation in the European periphery was needed in order for these countries to regain their competitiveness.
Of course, the GM of the BIS is an idiot, as are the members of the ECB governing council, too, and they would never tell people the truth either ... you see you need more and more absurd assumptions in order to defend your orthodox version of freegold.
Victor
PS: Btw, Aaron, your questions are of great help in focusing on the main issues in order to explain Blondie's understanding of freegold (aka "freefiat"). Thank you!
Michael dV (May 9, 2014 at 7:34 AM)
We are already in Production-Consumption problem and competitive devaluation is a consequence of it. http://en.wikipedia.org/wiki/Currency_War_of_2009%E2%80%9311
Freegold has nothing to do with the Debtors and the Savers. It has nothing to do with separating the MoE from the SoV.
LOL
Remember guys, we call it Freefiat because we'll save in fiat, both before and after this transition away from the broken $IMFS. #logically
From the top:
Gold is so old. Such a rich history.
An educated western mind cannot begin to understand it!
We live in a time of closed thought and controlled perception.
How could we have known that two thirds of humanity
would still think of gold as wealth?
Victor, now we just need to convince those two thirds of humanity that MoE and SoV shouldn't be separate!
...
Start tweeting... 1, 2, 3 NOW!
Good luck!
Hi Victor
It's nice to see you posting again, I was getting a bit bored with the comments.
“You have probably noticed that Euro area consumer price inflation has been substantially below 2% annually for a long time now.”
I haven't really been paying attention? How long is this “long time”? If we consider that it has been 17 years since Another and 43 years since 1971, I'm guessing this “long time” is not so long in the bigger scheme of things.
“So he acknowledges his failure to implement the target of 2003, yet no action follows. Surprised?
I guess Blondie and myself not so much.”
Heh. As Another was fond of saying, time will prove all things. My question is, are you not a bit premature in announcing your victory? ;)
Myself, I would be a lot more careful, given the glacial pace the international monetary system seems to be changing at.
“The ultimate safe asset, therefore, will be the currency itself. Markets and lenders will trust
those currencies that, whatever the circumstances, are managed with one overriding priority:
preserving price stability and the intrinsic value of the currency unit.”
Presumably this is the Noyer comment which you found significant. We have discussed it before, you and I. I am not going to get into the arguments again. I will simply say, I understand where you are coming from, and understand the theoretical possibility ( in the broad), but still disagree (especially in the bigger context as to practicability).
“What do you think, why is the gold price in Euros free to fluctuate (contrary to the preconceptions of all the traditional hard money advocates)? This is because it is its real price that needs to fluctuate.”
Yes, fluctuate relative to currency, and so both in reality fluctuate. Thing is fixed price gold does not work as settlement mechanism, hence the need for fluctuation.
“What they want to keep purchasing power stable is the currency itself (measured in real consumer goods and services ex gold).”
So you say, I disagree.
“Why? Because that gives the economy security when people plan their investments, wage negotiations etc.”
Well, your reasoning here falls short of the mark in proving your assumption. Technically any rate of inflation is possible to use to plan investments, etc. The key point is that this rate, whatever it is, must be stable. Recent history shows that economic planning is very feasible with rates above 0%, as long as there is stability. Practically large rates in either direction is firstly not that easy to plan with, and secondly has an effect on behaviour of market agents. This latter part we wish to avoid.
Let us for the moment consider the latter in terms of positive or negative. If we have 100% annual inflation then consumers tend to alter spending habits in shorter time preference, this is destabilizing. Considering savers, in this environment not much of that happens. If we have 100% annual deflation, then similarly consumers tend to alter spending habits for longer time preference, this also is destabilising. Considering savers, in this environment too much of that happens.
So the goldilocks zone is probably in the region of -10% to 10% of annual currency value change. In this zone consumer spending habits, and saving habits are affected only in small part.
However in consideration of this zone a second practical factor comes in, which you mentioned, that of wage negotiations. In terms of productivity of any one individual relative to the economy, three things are possible. Firstly that his productivity improves, secondly that it remains stagnant, and lastly that ir decreases. Let us consider each of these in terms of required adjustment at 10%, 0% and -10% respectively.
(continued)
(continued)
For 10% inflation, if his productivity improves in real terms, a wage hike of 10+% can be used to keep it equitable. If his productivity remains constant, then a 10% hike keeps it at par, and if he is less productive (but less than 10% less productive), a wage hike is still possible. A reduction of productivity of more than 10% would require a wage reduction in nominal terms. Thankfully such decline is rare.
At 0% inflation, his change in productivity would be directly translated to the required wage adjustment.
At 10% deflation, he would have to increase productivity by 10% for his wages to remain stagnant nominally. An even productivity level would mean wage decline of 10%, and a productivity decline would mean wage reduction of 10+%.
Whilst it may be true that You are intellectually able to rationalize and accept nominal reductions in wages, this is not the case for the general population. Wage negotiations which lead to nominal decline in remuneration are despised by the everyman.
In this environment the business most practical choice is to fire people, and rehire new ones at a lower wage rate. This is both inefficient and structurally problematic.
So of the three proffered rates, in practical terms inflation is preferred. You seem to forget this in your theoretical ivory tower logic. Reality however matters.
“Gold, as we have leant from Jaques Rueff (via FOFOA actually), has to act as a spur and break. How can it act like that if its real price remains constant. It cannot!”
Agreed.
“We finally have stable purchasing power in our currency.
Exactly. Just as it ought to be.”
Ought? Careful my friend, you are showing your inbuilt biases. Why is this the way it ought to be exactly? It has practically nothing to do with function as most income is spent a very short time after it is acquired. If you are goalseeking the world to fit your preconceived ideas you are almost certain to succeed, but not very certain to describe reality.
“Money is a medium of exchange, a store of value, and a unit of account.”
Is it? Is this like the Holy Trinity which may not be questioned? Why are you using such a loaded word anyways? The things we use have certain functions they need to fulfil. No need exists which subscribes to those three requisites in practice. Though some, of the hard money crowd, would certainly like one to think so.
“Then, do you take away the expriv and destroy the currency of your major ally that has protected you all these years? No, I guess, you don't. But when finally the inevitable happens and that currency dies on its own, you make sure that your newly designed system is ready to take over as smoothly as possible, don't you?”
No argument with your comment ending here.
On the whole I maintain that while I see FF being theoretically feasible( roughly, there are a few things that bother me), it is not practically feasible.
TF
My goodness. First I'm a Keynesian and now I sound like Paul Krugman? Outrageous!
You're welcome, Victor. I still can't wrap my head around this Freefiat thing, but you are welcome all the same. ;D
Regarding price signals (from GTH2)...
You see, it's not the fluctuating gold price that is needed for price signal transmission… it is the exact opposite! It is the price of everything else that fluctuates, transmitting signals, and it is gold that remains stable enough to sequester the savers as a group and get them out of the way of the Superorganism so it can do its job! Gold does not need to beat investment returns. Born investors will not be drawn to gold, and we don't want them to be, because they are a fickle bunch which makes them an important component in the Superoganism's price signal transmission system. The savers just need to let them be, which is why I ended that post with "Let It Be" by the Beatles.
So "properly functioning gold" is not wildly fluctuating gold, it is steadily rising gold, not better than investments in the long run, and not worse than currency in the short run. This is not a hard money fantasy, it is a Freegold reality. It is not the result of stable money as Blondie says, it is simply the result of a revalued physical-only gold market.
Regarding spur and brake (from GTH2)...
Really, the only way for gold to fall in Freegold is for supply to exceed demand at some price. And if that excess supply isn't coming out of the ground, then it must be coming from dishoarders. The alternative is that demand drops, but that would be the disaster scenario. Since we're assuming a global economic growth rate greater than ~1.5% (greater than the expansion rate of the gold stock), we can assume a steady to growing demand for gold at all times, which leaves us with supply shocks as the only possible cause for a declining price. So let's look at some possible causes for supply shocks.
An aging community would be one. We tend to save during our productive years and then spend that savings in our retirement years. So imagine a dying society with such a low birthrate that every year the percentage of retired people grows. If this was a closed society like North Korea, then the real price of gold would fall as gold supply constantly exceeded demand. But in the real world it won't, because another society with more productive workers than elderly dishoarders will supply real goods to this aging community for its gold.
This is a good example of how the spur and brake is not a function of wild gold price fluctuations. Would you expect in this hypothetical dying society, where nearly everyone is simply dishoarding their gold until they die goldless, that the (real) price of gold would drop forcing them to get out of their Barcaloungers and build some factories, or at least greet people at Walmart? I wouldn't, because the spur isn't a punishing decline in the price of gold. It is much more subtle than that. And without young, productive workers to require an inflow of gold, all of the gold in this dying zone can theoretically flow out without ever declining in price until it is gone and no one else remains.
You've heard of the carrot and the stick? The Japanese have a similar saying, a whip and a candy. Two forms of motivation, punishment and reward. Rather than being the declining price of gold which punishes everyone saving in gold, the spur is simply the growing opportunity for easy profits that lures only the marginal gold saver (net-producer) into expansionary and/or different entrepreneurial pursuits with his ongoing surplus income, not necessarily selling gold to build a factory, but rather redirecting his current surplus income back into production. In fact, the opportunity to profit might even cause the migration of younger workers into our hypothetical aging society as long as culture, language and immigration laws weren't an obstacle.
"Bank lending will be constrained to grow in line with GDP, but not any faster for any longer period of time - otherwise you just create bubbles."
"In particular, credit volume will be controlled by the ECB in some way."
MF,
Wage negotiations which lead to anything but nominal increase in remuneration are despised by the everyman.
FYP?
Matrix,
Still looking only at the cold hard numbers and ignoring fickle humans with their changing emotions/actions?
If only Social Studies were as predictable as the Physical Sciences - life would be so much easier.
http://youtu.be/NK9aAQ_oH6k
DP,
Exactly friend.
Freefiat businessplan:
1) Make currency purchasing power stable forever.
2) Get rid of malinvestment and bubbles forever by deploying our glorious central planning powers.
3) Make people accept yearly nominal wage declines.
4) If needed spike drinking water with sedatives to prevent unwanted human reactions to above points.
5) ...
6) Profit. Finally we achieve holy grail of combined MoE, UoA and SoV.
Victor VS MF
MF: "Whilst it may be true that You are intellectually able to rationalize and accept nominal reductions in wages, this is not the case for the general population. Wage negotiations which lead to nominal decline in remuneration are despised by the everyman"
I am not so sure that this matters either way(+ or -10%), especially in the western world. What are western deadbeats going to do if they think their wages are being cut ? Take to the streets ? Nah.
Plus, in a deflationary environment, or in a 0% inflation environment , it wont be hard for people to understand why their wages are going up/down nominally.
What consumers really like, is falling gas prices. If energy prices are falling, people are happy no matter what.
tEON,
I do agree the SDR is as you say, not a "common man fiat" MoE, but it is still a form of fiat.
I think the point I was trying to make (if I remember it) is that fiat is not actually destroyed by freegold, as in "paper burning in an epic inferno".
It only burns as it is defined today. When something is redefined in a paradigm shift it's old definition is destroyed, even as it's new definition may flourish.
It seems to be a point of contention for newbies who seem conflicted on how gold can and should function.
But I am "lost in old comments" not seeing all these many new ones after "the 200". I am old and my eyes do not see the teeny tiny print of the comment counter ...
M
It's not that simple. In a deflationary environment debts increase in real terms. This was one of the problem with the old gold standard. If 'money' is too hard it leads to social problems. And even 0% is too hard when there is economic growth. If and when we get to the point where there is no real growth in the economy, then one can consider a 0% rate.
Are you oblivious to union action? Large numbers of people do in fact get quite upset if they see declines in wages, or as DP so poignantly pointed out, even if their salaries are not rising fast enough in nominal terms.
Yes, in theory it shouldn't matter, only real purchasing power should, but in practice it does matter.
TF
Hi Victor,
You make some very interesting points but I tend to believe that your theory doesn't take into account the bad side of human nature.
"Bank lending will be constrained to grow in line with GDP, but not any faster for any longer period of time - otherwise you just create bubbles."
This precludes the fact, someone may (successfully) argue - behind closed doors, that, said, bubbles may be less a caustic response than the benefit involving straying from credit 'management' in-line with GDP. Can it be argued that way? of course - "The devil can quote the scriptures for his own purposes". We've been here before - repeatedly. We've seen the Fed, numerous times, justify a path that is in direct opposition to logic and reality... without responsibility for their actions coming back to haunt them. Are the Euro Central Bankers some how immune to these "Bizzaro - committee-derived" moves? where the Yanks are more prone to it?
"In particular, credit volume will be controlled by the ECB in some way."
I see this as improbable and close to impossible. "Power corrupts and absolute power...". Even the most stalwart, honest and well-meaning Central Banker would find the restraint required for credit creation to establish stability - impossible. This is human nature, no? It can be, temporarily, mitigated, as in the Euro (nation-state division) but the temptation will always exist with strict money-creation regulation eventually skirted for implausible (all relative, btw) and plausibly valid reasons. "Nature finds a way" or "Why does a dog lick its balls?". The playing field for granting Credit would be tainted via corruption and bribery (before being 'limited') filtered down to member banks. If the ECB has the power to create bubbles through rationalized arguments ("in some way") it, eventually, will find a reason to. Too many regulations, too much power in one set of hands. A recipe for failure.
Granted you may have nailed the ECB's un-published thesis. Just as the IMF's may be SDRs. But, also, it sounds unsustainable in the longer term (from my limited knowledge).
Best,
All this good discussion reminds me it is time to make another contribution to our host.
Thank you one and all.
Sometimes "nominal reductions in wages" are required for Freefiat to function? I can not see human emotion allowing this to happen. If a periodic reduction in wages is necessary for Freefiat the world would chew it up and spit it out.
I admit this concept is above my pay grade but the actions and motivations of humans is not. I just seems like Freefiat has to be forced onto the world while Freegold is just the next evolutionary step.
The question we should be asking regarding freefiat, isn't so much whether it would be an ideal currency management system, or even if it will work. But rather, will it be.
There is a simple flaw in logic in assuming that what ANY currency manager does in the "here and now" will be what they do at any point in the future.
With this thought in mind I would ask everyone, do you expect the ECB to maintain the 0-2% rate though the transition from the current monetary paradigm to the next? And if not, then how can one possibly assume to know that they would do in the hereafter, precisely what they are doing now.
For the Euro itself is not a constant. It was in fact, created as a reaction to the dollar. The mere presence of the dollar dictates the actions of the Euro in the "here and now". It would be foolish to assume that in the dollars absence, the Euro would be managed the same way. To me, this line of thinking really minimizes the event of the transition. It ignores its impact, not just on the currency, but also on the psyche of the ones who occupy (to quote a long lost troll) "the human plane".
In my estimation, the proponents of freefiat are seeing the world as they would like, rather than how it most likely will be.
@ MF
"In a deflationary environment debts increase in real terms. "
For past debts yes. But in a slightly deflationary environment, there will be less incentives to go into debt in the first place.
" If 'money' is too hard it leads to social problems. "
Yes. But easy money, on a long enough timeline, leads to world wars. Sure, we can have longer periods of seemingly good times (like the 32 year long easy money trip we are on right now), but the longer we are on this trip just means it will be equally as bad when it ends. Like after the 1929 easy money crash, we got world war. I'd say that is worse then anything a slightly deflationary and more volatile business cycle would result in.
M
When one is on one end of the spectrum, the horrors of the other does not seem so bad.
You would prefer we continue the cycle of hard money,soft money, hard money,.... , that we have been in for centuries instead of escape it via freegold?
TF
Ps. And no, it is the end of hard money regimes that lead to wars, which is why we do not expect a war at the end of the current soft money regime.
burningfiat,
Remember guys, we call it Freefiat because we'll save in fiat, both before and after this transition away from the broken $IMFS. #logically
As a statement about what I explained above, this is a plain lie. Burningfiat, this behaviour is below you. You don't need this. For comparison, I wrote above
If you take a look at the real price of gold during the time of the international gold standard, for example, (i.e. 1445 to 1922), you see that its real price indeed changed a lot. Over periods of 20 year or more, however, gold's real price was rather stable again.
That's exactly what you expect. Giants who store their wealth over generations, will prefer gold over currency. Why? Over long periods of time, counterparty risk and political risk in currency do matter. Secondly, if they wanted to hold huge sums of the currency itself for the long run (i.e. base money) in order to avoid the counterparty risk, the ECB would have to purchase gold and create Euros (for them to hold in order to avoid consumer price deflation). Same effect.
Shrimps, however, can of course save some gold coins for their grand children (inter-generational wealth). But if you save for a new car some 5 years down the line, you'd of course do that in currency. Why not? Over short periods of time, currency is stable (even if the ECB retained their inflation target of 2% which I am predicting will eventually be reduced to 0%) and counterparty risk is a lot less dramatic.
That's not too difficult to understand, is it? If you need to read it two or three times, please do so before you post.
...
...
And thanks for the following remark:
Gold is so old. Such a rich history.
An educated western mind cannot begin to understand it!
We live in a time of closed thought and controlled perception.
How could we have known that two thirds of humanity
would still think of gold as wealth?
This implies a very good question: What did Another and FOA say about the difference between orthodox freegold and Blondie's and my understanding of it?
(Before I get to that, I'd like to remark that this piece is not from the USA gold forum, but rather from the old Kitco forum, please see the entry
Date: Sun Apr 06 1997 20:25[via Notnick]
The Writer ( Thoughts! ):
at this page for the context. I don't think we are sure this was even written by the same person as the one whose thoughts were later posted under the ID "Another". But let's assume for now that it was indeed Another).
Perhaps you noticed that Another and FOA always refer to gold as "wealth" but never as "SoV". Why is this?
Well, wealth refers to all the special and expensive things that rich people acquire, people who have enough currency to spend in order to afford any lifestyle they want. Wealth that would be anything from prime real estate, fine art, vintage wine, collectible stamps and coins to vintage jewellery and gold.
"Store of Value" in contrast is a technical term that describes a property of currency, namely that the unit of currency retains its purchasing power.
So is gold "wealth" or is it "SoV"? Funny that Another and FOA have always called it "wealth", but not a single time they used the term "SoV". Why that?
Well, the items of "wealth" I listed above and "SoV" are two rather different concepts. "Wealth" items are meant to preserve value in the long run, over several generations, outside of currency and counterparty risk. In the short run, however, the real price of these items does indeed change quite a bit. There are some indexes describing the current auction price of vintage wines or of typical Sotheby's or Christie's auctions. You'll see that during the financial crisis, these indexes were a lot less stable in terms of purchasing power than, for example, the Euro. No surprise here. The collection of Van Gogh paintings is not subject to any price management that would render the auction prices purchasing power stable. The Euro, in contrast, is.
No surprise that Another and FOA always referred to gold as "wealth", but never as "SoV", is it?
Victor
@Victor
„2*) Bank lending will be constrained to grow in line with GDP, but not any faster for any longer period of time - otherwise you just create bubbles. Creating such credit bubbles has nothing to do with entrepreneurship. It just leads to misallocation of capital. „
Agreed.
But when that fails (and it always fails 100%) – There is gold.
„3*) The Euro will be managed to be purchasing power stable, something that was not possible under the gold standard. „
At first, this feat can be done at the initial equilibrium point after the reval. The conflict between debtors / savers will reset and will be played anew – equilibria always discontinue.
Freegold is temporary. Eventually people will become greedy and will forget the lessons of this „Great recession“. They will once again try to make others work for them as debt slaves, debtors will fight back through the political process (demanding easier money) and history will rime. When that happens – There is gold.
„2*) Bank lending will be constrained to grow in line with GDP, but not any faster for any longer period of time - otherwise you just create bubbles.“
Fine and it should end there for as long as it lasts. There is no need for the CBs to actively manage their currencies once general trade balance is achieved.
The outflow/inflow of gold in the CB vaults should be taken more as an indicator of other underlying problems that should be addressed meanwhile physical flow should be restrained through progressively higher price - the rubber band can stretch but within limits and as the stretch doubles, the tension quadruples.
„In particular, credit volume will be controlled by the ECB in some way.“
Yes. Hands off the gold PP dynamics for they are primarily saving – dishoarding mechanism based on the inclination of its participants (demand-supply). The additional currency tweak doesn't`t pay off the harm that can be done, besides currencies are credit-trust-debt based within society therefore their management implies other tools.
„Of course, as we now know, this gold exchange standard is unstable. The reason it is unstable is that reserves and currency are denominated in the same unit and so the spur and break function of gold is incompatible with a purchasing power stable currency. You can have only one of the two.Only when you separate the reserve from currency, you can have both.“
This can read:
Of course, as we now know, freefiat is unstable. The reason it is unstable is that when currency trumps over reserves they tend to leave as bad money (which pretends to be good) drives the good one out. And so the spur and break function of gold is incompatible with a purchasing power of a „stable“ currency because obviously credit-debt money prevails and continues unabated, lesson learned, fingers crossed. This way you can have only one of the two.
Where you have currency and gold in harmony is when each deals with its own field of expertise holding the other in check.
„Only when you separate the reserve from currency, you can have both.“
Indeed! You do it not only physically but functionally as well.
„Freegold has nothing to do with the Debtors and the Savers.“
No. It has everything to do with the Debtors and Savers and the choices they are free to exercise.
„It has nothing to do with separating the MoE from the SoV.“
It has that option implied and practised to a different degree (and time horizon) should currencies misbehave (which they always do).
„Once you decouple the reserve from the currency, your MoE can be managed to be a good SoV.“
Wishful thinking on.
Hi Victor,
I apologize for yanking your chain...
Good point about Wealth vs. SoV (of course I recognize that well-managed currency also act as SoV also over short to medium term, given no economic catastrophes)
@ burningfiat
"well-managed currency also act as SoV also over short to medium term"
Yap. It will be the first time ever but not yet.
http://stockcharts.com/h-sc/ui?s=$sugar:$xeu&p=D&yr=3&mn=0&dy=0&id=p86906318364
http://stockcharts.com/h-sc/ui?s=$brent:$xeu&p=D&yr=3&mn=0&dy=0&id=p86906318364
http://stockcharts.com/h-sc/ui?s=$wheat:$xeu&p=D&yr=3&mn=0&dy=0&id=p86906318364
http://stockcharts.com/h-sc/ui?s=$dax:$xeu&p=D&yr=3&mn=0&dy=0&id=p86906318364
http://stockcharts.com/h-sc/ui?s=$gold:$brent&p=D&yr=3&mn=0&dy=0&id=p86906318364
Another (Thoughts!) (Sat Mar 07 1998 13:25 - ID#60253)
[...]
During the span of ones life we must consider weather we really do experience changes or are we just experiencing a rebirth of old values from the past, repackaged for this modern world. In times past, real money did not earn interest unless it was lent out. Yet, it retained value relative to all things. Today, paper currency, also does not earn interest unless it is lent out. However, it does lose value against real things, over time. In this light one must also grasp that a currency unit, in hand, is "lent out already"! It is a credit, to be paid in the future. Truly, cash, outside the banking system is a receipt for "lent out money" that just doesn't earn interest!
Much of the discussion of today, evolves around; How does one recognize real money? My answer is, find the largest store of financial units, held by banks, that is not lent out and does not earn interest. It is by far, gold! There is no other unit, in the world today,that meets this criteria. Even with the current mobilization of bank gold, it is still the number one holding of "non paper credits" that is not lent for return! Some would point to it's price in US$ and say, it does not hold value relative to real things. That would be true, but gold, while allowed to be "freely convertible" into any currency, is not allowed to trade "freely". It's price is managed. It is "The" "political metal"!
[...]
Just in case you missed it, Another is saying that, but for the the systemically suppressed paper gold market and the credibility inflated dollar, gold is a store of value.
Since we assume that both the paper gold market and the dollar are running the course of their lives, it stands to reason the gold will be a store of value in freegold.
The argument that, Another didn't refer to gold as an SoV so it isn't one, is bogus. He is actually the only true SoV is that thing which is not lent.
Will that ever be currency? I sure hope not. Talk about an end to growth!
@ Mf
"Ps. And no, it is the end of hard money regimes that lead to wars, which is why we do not expect a war at the end of the current soft money regime. "
I meant that easy money leads to world wars. Sure the US was under a gold standard in the roaring 20's but it was still an easy money situation.
M
The US was not the causal factor for WW2, Germany was. Their cause for this was the resentment built up by the Treaty of Versailles, which was hard money repayment squeezing the life out of them, and the resentment built up for that. This partly explains their actions and resentment towards the Jews, who had good business acumen and decent savings, specifically in gold, whilst most of the rest of the population was not very well off financially.
Anyways, I feel we are going off on a tangent here.
TF
Burningfiat,
following up on your idea on the question of what did Another/FOA say about orthodox freegold vs. Blondie's understanding.
I explained above that Another/FOA always refer to gold as "wealth" as opposed to "SoV". But, of course, we can take a look at other questions, too.
How about the separation of SoV from MoE advertized by FOFOA? Where is that explained in the old archive...? You won't find it. They explain that gold's function is going to change (agree), that it will form the primary reserve (agree), that the dollar is going to fail from its past international role (agree) and from the instability in the gold exchange standard that continues to live on in the form of the paper gold market (agree). They explain that gold will be revalued against oil, i.e. in real terms, (agree) and that it's a good idea to hold gold through the transition (agree) because the dollar might get into rather serious trouble (agree). Do they explain that the SoV will be separated from the MoE? No, they don't.
Do they explain that the ECB will always inflate the Euro by at least 2% such that people will be encouraged to hold gold instead? No, they don't.
Do they explain that gold will always go up relative to currency and also relative to goods and services. No, they don't.
The excerpt from GTH2 that you cite is gibberish to me. You cannot explain that to anyone for it doesn't make any sense. If China is a net exporter into the U.S. and international clearing is in physical gold and you want a spur and break function, then you need to make Chinese products more expensive in the U.S. (expensive in relation to established local prices in the U.S.). Given that local prices in both countries are anchored relative to wages and the prices of raw materials, this implies that it is the real price of gold that will fluctuate in both countries in opposite directions (or the relative exchange rate of their fiat currencies, but under freegold that's saying basically the same in this situation).
MF and others claim that "freefiat" would require falling wages from time to time. That's another straw man. Nobody claimed this. Sorry, chaps, you are chasing ghosts.
MF,
If 'money' is too hard it leads to social problems.
FOFOA (presumably involuntarily) had a very nice response: You are complaining about austerity riots? Wait until you see the hyperinflation riots. I couldn't agree more. The Eurosystem seems to also understand this one.
What I find most remarkable is that we now have rather frank remarks by the General Manager of the BIS that contradict the FOFOAish interpretation of freegold. Yet, everyone here just explains to me how false this is (what the BIS GM says).
Victor
FOA (08/20/1999; 12:46:41 MDT - Msg ID: 11630)
Open Reply To Mr. M.
I must reply to this private letter that was sent to me. It was written to Cage Rattler by Mr. Martin Armstrong.
Date: Sun Aug 15 1999 07:28
Cage Rattler ("Gold was a store of value throughout ancient times, however money NEVER was!" - M Armstrong) ID#33182:
Copyright � 1999 Cage Rattler/Kitco Inc. All rights reserved
----------Dear Bob:
You are making the opposite mistake of Karl Marx. Marx assumed that everyone in the private sector was corrupt and therefore that property held in the hands of government would be fairly managed. Marx never accounted for human nature and it doesn't matter if control over money is
private or public, both have historically tended to exploit it for personal gain.
Money is ONLY a medium of exchange and it is NOT, and has NEVER BEEN a store of value. Gold in itself has been a store of value as demonstrated in Korea and Asia. Gold was a store of value throughout ancient times, however money NEVER was! These are two separate issues that should not be confused.-----------
From FOA.
To the contrary, Mr. M, these are two separate confusions that deal with the same issue! Your assumptions always conclude that the values established in a public "marketplace" represent the private views of the majority of people. In other words, if someone trades anything using the
marketplace price and using the accepted mediums, the mechanics of that trade must also represent the mind set of the person. Through out history, it rarely has. Your view is further skewed with the "control over money" issue. The world has always assumed that the "people" want someone to control the money, be it public or private.
When one looks closely into the private actions and reactions of people during various civilizations, the mindset of the majority (the average citizen) was always that we don't need "money at all". Just let us alone so we can trade our things. The modern argument of the Public vs Private "control" always found the banks as representative of the term "Private" and the government put forth as "public". The "free market citizen" was never considered as a viable contender to pick the trading medium.
Banks, long ago assumed the roll of making and controlling money for private interest because they saw that the "free citizen marketplace" seemed to always use gold to trade with You say:
-----Money is ONLY a medium of exchange and it is NOT, and has NEVER BEEN a store of value------
1 of 4
The problem with this is that in the old "free" marketplace, these people never thought of there use of gold as using "money"! It was only a "thing" that most of them found to be the best item to trade with. For them (again average people) gold held it's own particular independent store of value just like anything else they owned. Indeed, in their mind it wasn't the "medium of exchange" money concept of the bankers in a later time. I submit that even the term of "money" in the early bible was not in the same banker context. Back them it was more closely associated with a "thing of personal value" that could just as easily be "used" as traded. Therefore your statement,
---Gold was a store of value throughout ancient times, however money NEVER was!-----
does not present a valid conception for comparison. It was the banks that, in the assumed roll of creating money for commerce, decided to make and control the "CONTENT OF THEIR CREATED MONEY". In this action, by no means did they
represent the perceptions of people who can be depicted as the third party in this debate of control. Yes, banks were owned by private interest, but that should not imply that they presented the private viewpoint. Yes, the people did use the created money (both coin and paper receipt) for
trading, but the mindset of that early evolution did not hold that this "bank money" was solely a "medium of exchange" Rather it was a receipt for a tradeable item of use. The "medium" only concept came into play as the banks lent out more receipts than they had or they could not collect upon failed "real gold loans". That excess of gold receipts in circulation could then be perceived as the "medium of exchange modern banking concepts refer to". We then clearly proceeded to the era you next present ( as it is explained in reverse):
-------- The Greeks, Romans and everyone along the way ALWAYS and WITHOUT EXCEPTION played with the gold content of their coinage which led to Gresham's Law - good money drives out bad money. Whenever money was debased, older issues of higher metal content were hoarded. They then ceased to be MONEY (medium of exchange) and became a (STORE OF VALUE).--
With the clear viewpoint that I presented above, we can see that this next statement does not apply to a post contraction "free market trading arena". Rather it is the present conjecture, using the present thinking in a prosperity mode mindset that assumes the private and public terms as the only viewpoint. They are only two parts of a three part society.
-------If you think that a return to a gold standard in some way will eliminate these issues, you are wrong! No matter if it is the private sector or the public sector, whoever ends up in charge will always play games. -----------
2 of 4
Indeed, if a true free market in gold was established and all gold was coined and sold into the market place, games would still occur. However, new concepts for hard times would require mines to make all coins to conform to set standards and pay their taxes to governments with the same
(however high that might be). In addition, they would pay their help and buy supplies with the same. Private stores of gold (both government and private) could choose if they wanted their bullion coined or not for a fee. Yes, the value of gold would gold very high compared to real things, but it did that long ago, before banks called it a "medium". Anyone that owned gold would be rich. So what? Anyone today with a lot of cash is rich, again so what? Gold money is spent and loaned and in general always circulated. Just as in the early days before banks and gold was just another
thing of wealth, but not the only store of wealth in a persons portfolio of things. Yes, Banks and governments would fail and go bankrupt as they always did. Yet, the money supply would never be changed because of their failures. People that loan gold money would learn not to count that asset loan as part of the money supply as today.
Further on you state:
-----Gold is a store of value today - but it is NOT money. It is NOT acceptable to pay your VISA, rent or to buy food unless on a barter basis. Only dollars ( money ) is acceptable in the US, and now Russia while it may be yen, marks francs, deniers or whatever in other nations.-------
Again, you assume that gold is not money because it is not accepted as "the medium" in the Government / Bank operating economic system. I submit that this perception represents a short conclusion. If we extend the thought we find that no government or bank said that gold was not
money. They only decided to not "use" gold as "legal tender money". Both of these entities chose to pursue this route because they wanted to create more "money" than was in existence. Something they could not accomplish it using a money that possesed a "store of value".
As I pointed out, the "citizen" and their trading are the "private free market" that the world economy is and has always been based on. This market place does not need "more created money" as it worked fine using the old "store of value gold" as long as the market could increase or
decrease it's purchasing power as measured against all goods and services. Banks and governments fought hard to stop this function because it took power away from them and returned
it to the economy.
As a result, history proves how poor of a job government and bank paper money has done without using gold. Your description that follows is an excellent example of the battle between the first party governments and the second party banking systems. The third party private person will
be impacted from this abuse of the money system, however, our heart was never in it. Your words:
3 of 4
----- I simply disagree with your interpretation of 1929, the Fed and the wildcat banking era. Your view of anti-central bank was shared by Andrew Jackson who was bitter because he had lost money and was turned down for loan in his youth. When he became President, he destroyed the Bank of the United States and with no central control, the entire banking system quickly fell into trouble. There are countless "broken bank" notes that collectors can buy today from every little one-horse town in the country. Some were in the hands of local politicans who quickly exploited the system and bankrupted their communities. The Constitution specifically prohibited the States from issuing money and because of the hyperinflation of the 1700s.
You are also misinterpreting dictating private investments with restrictions of asset class and leverage. You now have a perfect example of your no interference policy for the private sector. Long Term Capital has just blown up by leveraging positions to the extent of $1 trillion. The
uncontrolled activity of this one hedge fund is going to disrupt the free markets everywhere in ways you have not yet even noticed. There needs to be a rule of law that establishes the basic guide lines. It should NOT expand into regulation of every aspect over investment. What an individual does with his own money is his own business. However, when institutional money is gathered and used
at the discretion of fund managers who buy into the latest hype like Russia, then allowing this type of investment to be carried out with ANY restrictions whatsoever, is extremely dangerous. LTCM is a significant threat to both bonds and stocks right now. A few other funds are now rumored to be in a similar position. Such unbridled leverage threatens to bring down a lot more than anyone
suspects. I think there will be investigations and a whole new set of regulations that will come out of this debacle. The Fed is currently calling around the street in an attempt to assess the damage. There will come a day when you will see that the proposal of that I have made to merely
regulate asset class will be far more attractive after the next set of regulations come storming out from all government bodies that will seek to restrict every aspect of investment. What they don't understand - they ultimately kill.
Your argument for no regulation will not even be seriously considered by any government body I have ever testified before. In reality, there may be no way out, because the people themselves will demand action because they have lost money in stocks caused by hedge funds in Russia and interest rates like LTCM. They will in the end bare the blame and a host of new regulations will spring forth in an effort to appease the people who demand government action.
Martin Armstrong
From FOA.
Sir, I have commented on your thoughts because it is important to present the flaw in this perception. Some of your analysis is in the context of a rebuilding of the government / banking financial system after a great contraction. It places little support to gold as a choice to preserve wealth during this event as gold will not be in demand.
I submit that you have misread the historical attraction to gold that private citizens impart upon this metal. The human factor always has and always will gravitate to using things as trading items. We were born a people of earth with senses that touch, see and feel for value Weather our trading things can be considered money, a medium of exchange, legal tender or a store of value, was never the issue. Governments and banks made them an issue so as to circumvent our value of trade for their benefit.
As such, when the next downturn threatens to destroy the perceived values created in fiat currencies and securities, people will then circumvent these modern concepts and return to trading the most convenient things. History, not modern computer research, has shown that we will return to gold.
Thank You for your time. FOA
Victor
No it is not a straw man. If you cannot see how 0% inflation necessitates reduction of wages, in different sectors at different times mostly, then you are being wilfully blind.
To be sure hyperinflation riots will be very bad too...that does not mean that hard money riots are irrelevant.
TF
Ps. Nicklesaver - thanks for looking up some quotes in contradiction, the claim was simply too extraordinary to be true.
Pps. I am fairly sure there is some fancy latin name for the logical fallacy perpetrated...it's probably called something like fallacy of irrelevance by exaggeration. Here is another example. Death is obviously worse than losing a limb...so you wouldn't mind me cutting of your limbs, would you victor? :P
Victor,
You have begun to acknowledge that gold will be held as wealth (at least you state it more clearly now in my PoV)... "orthodox" FG agree I guess!
http://fofoa.blogspot.com/2009/11/gold-is-wealth.html
Also, I don't think FOFOA ever "advertized" that MoE and SoV will be completely separated. It will be more like a continuum in perception of these property based on the timescale we're looking at. If we only hold Zimbabwean dollars (back in the HI days) for a second (perhaps engaging in HFT), I guess the zim-dollar could be looked at as a perfect SoV for that time-period. For the Euro of course that period is much longer, so long as we have confidence in its managers.
http://fofoa.blogspot.com/2009/10/gold-is-money-part-3.html
Obviously gold is viewed as the SoV par excellence.
BTW, that's another thing I like about FOFOA's FG version. He says, never get caught up in the words, understand the concept.
So for me, using the word wealth over SoV is just fine.
Saving medium par excellence could also be used?
For me, the GTH2 example of the aging population makes perfect sense. Of course a whole regional population could divest itself of all its gold without seriously affecting the real price of gold if there was enough saving demand in other parts of the world. And there always will be if the global economy is not in recession. In Freegold, Japanese gold-holding grandpas will not be forced to become entrepreneurs because of a punishing decline in golds real price.
I mainly quoted from GTH2 for the benefit of others as I respect that you have long since made clear that you either can't or won't understand this masterpiece.
/BF
Reductio ad absurdum
The Freefiat argument was the dollar argument in it's early stages was it not? Men have always tried to make their legal tender "as good as gold". I doubt there will come a day when we call something "as good as Euro" but many have marveled at the soundness of the dolllar.
All prices of all things do fluctuate, but today all things are mispriced (inadvertantly managed, or mis-managed perhaps) by infinite derivative supply.
Perhaps when the "paper burns" it will be this infinite derivative supply which burns. That may change the dynamics of price stability.
testing
Thank you Knotty Pine and Lisa for the links provided. and
(for your eyes only), please see, via Reuters, May 11, 2014:
"Schroeder says his Putin meeting helped free OSCE
Hostages"
Be sure to read the last 8 lines. They are, in my mind, very
important, and help underscore the "cognitive dissonance"
I am presently experiencing regarding the Merkel/Hollande
stance, and how it is (or isn't) in the long term interest of
their respective countries. {;<)>>
I recall about a year or two ago that FOFOA wrote a series of comments responding to the Freefiat view that I found very convincing. In them, FOFOA used an example of a natural disaster affecting the Eurozone and demonstrated that it made sense for the ECB to respond to such a disaster from a Freegold perspective rather than a Freefiat perspective. I also dimly recall that VTC never responded to this line of argumentation which I found surprising. Maybe someone more nimble than I could locate this extended comment from FOFOA and repost here for VTC to consider.
Andrew,
?
Thanks Andrew and DP, nice find!
A really enjoyable reread!
Seems this whole FG vs. FF discussion is only moving forward at snails pace (if moving at all)...
NS, I liked your point from yesterday that regarding ECB's behavior, pre- and post-transition are two very different animals. We can't just extrapolate one from the other (at least not without really good arguments).
Woland
Schroeder's comments you reference remind of Another's comments (which I cant locate) about one reason for the formation of the European Union being a way to prevent future war and destruction of the European countries
Hi Lisa:
Somewhere back in time, I made a comment that both Walter
Johnston (in the letter to his sons) and FOA, had stated that
one of the 2 core objectives of the BIS was the overthrow of
the Soviet Union, the other being the replacement ( upon its
"natural death" ) of the dollar reserve system. In my opinion,
that is a qualitatively different objective from destroying the
security of Russia, and its elimination as a significant power
in the world. I think what Another was referring to, in your
comment above, was more directed at an end to 200 years
of war among the "core" members of Europe, with Russia
considered as more peripheral. I may be wrong, as it has
happened once before. ;-) ( or so my wife tells me )
Woland
I'm sure you are correct. I was also remembering the original comment as referring to the core European countries, and meant that Schroeder's comments were "like-minded", in terms of wanting a peaceful relationship between Russia and Germany after the past atrocities of war.
MF,
No it is not a straw man. If you cannot see how 0% inflation necessitates reduction of wages, in different sectors at different times mostly, then you are being wilfully blind.
Look, as long as we have some kind of market economy, occasionally someone will get unemployed. Their wage declines by 100%. Yes, it happens all the time. If an industry becomes obsolete (manufacturing large quantities of cheap horse carts, say), the real wages in that area can easily drop faster than even FOFOA would inflate the currency, so they would also face nominally declining wages. Yes, even under orthodox freegold and as well with Blondie's understanding, this will happen to some.
There is, however, no reason why the average wage of the employed population would have to decline. Why would it? Even if consumer prices sometimes decline by 2% annually and at other times rise by 2%.
Perhaps you wish to consider that, historically, the increase in living standard has been achieved by wages growing faster (or declining more slowly) than average consumer prices. So the faster the living standard increases, the bigger the buffer between consumer prices and wages.
burning,
You have begun to acknowledge that gold will be held as wealth
Are you trying to be funny? I have been doing that myself all the time. I am aware though that, with the excpetion of the transition itself, we cannot rely on the real price of gold to increase every year. Probably not even during every five-year period. Why would that make gold a poor investment? It doesn't. (Neither are prime real estate, fine art, vintage cars nor thoroughbred horse guaranteed to go up in price all the time). Gold is your reserve for the long run. If you need to purchase a new car next year, you'll keep most of the required sum in currency.
...
Roacheforque,
The Freefiat argument was the dollar argument in it's early stages was it not? Men have always tried to make their legal tender "as good as gold".
I guess you have some reading to do. The Euro architecture avoids Triffin's dilemma, and so does not suffer from this problem. This is one of the key points of Blondie's argument. If you set gold free and use it as the reserve, you can make your MoE purchasing power stable (i.e. an SoV) without writing excessive amounts of currency to be held by gullible foreigners.
If you say that the problem of the dollar was that it wanted to be "as good as gold", then Blondie's view of the Euro does not suffer from this dilemma. The point is that the Euro is ***not*** fixed to the price of gold. This is the only way that you will have a change of preserving its purchasing power.
Burning, Aaron, FOFOA, Andrew - when you criticize Blondie's view, secretly you are all dreaming of gold as an absolute yardstick, something that always buys the same amount of real goods. That's goldbug romanticism! It is precisely what made the gold standard fail.
Why is this? Money (as in "currency") is largely credit, i.e. someone owes somebody something. I help you with the harvest ($100) and later, you owe me 20 baskets of eggs (20 * $5) during the winter. A credit contract works out only if the purchasing power of the unit in which it is denominated, does not change too much. If the $100 eventually buy only 10 baskets of eggs, I am in trouble. If you need to come up with 40 baskets of eggs rather than just 20, you are in trouble. You see that the unit of our currency should not exhibit any wild price swings or it will cause a lot of friction in the economy.
This is precisely what happened after WW1 when the currency was gold. As FOFOA explained in "Once Upon A Time", in 1920 the Fed started open market operations in order to prevent the dollar from experiencing too much inflation. The problem was that this inflation occurred because the dollar was linked to a weight of gold and gold's real price needed to drop inside the U.S. as a consequence of the economic dislocations caused by WW1.
You see, when there is a disaster, it is the real price of gold that needs to absorb the shock. You don't want your currency to be affected that much, simply because wages and food prices are tried to it. This is exactly the opposite of what Andrew seems to think when he writes
FOFOA used an example of a natural disaster affecting the Eurozone and demonstrated that it made sense for the ECB to respond to such a disaster from a Freegold perspective rather than a Freefiat perspective.
You want gold to absorb the shock (because it is "useless" and "its price is arbitrary"). If your currency has to absorb the shock, this will cause you a lot of extra trouble and friction.
In the 1920s, the Fed enacted open market operations in order to keep the dollar's purchasing power stable in spite of the shocks in international trade after WW1.
The problem of the dollar was not that "they tried to keep the dollar purchasing power stable", but rather that they kept the dollar linked to the reserve (gold).
...
burning,
ECB's behavior, pre- and post-transition are two very different animals. We can't just extrapolate one from the other (at least not without really good arguments).
This is why I keep explaining Blondie's point of view here. The trail forked in autumn 2012. You are somewhere down in the deep brushwood, but Blondie discovered a path that lead straight up a high mountain from which we have a clear view of the actor's next moves.
I hope you all have enough snippets of information now in order to go back along your branch of the train, back to the fork and then to discover the trail that leads uphill.
By now, you definitely have enough pieces of information in order to understand Blondie's point of view, and so I will stop responding to comments here unless there are some relevant events or new pieces of information.
Good luck to you all,
Victor
Victor
"Look, as long as we have some kind of market economy, occasionally someone will get unemployed. Their wage declines by 100%. Yes, it happens all the time."
Sure, but irrelevant.
" If an industry becomes obsolete (manufacturing large quantities of cheap horse carts, say), the real wages in that area can easily drop faster than even FOFOA would inflate the currency, so they would also face nominally declining wages. Yes, even under orthodox freegold and as well with Blondie's understanding, this will happen to some."
Yes.
Sometimes it happens that consumer preferences changes quickly, but mostly it is a case of slow shift in preference, till a cascade point is reached, or a lower stable level of consumption is reached reflecting new preferences.
When the latter happens, which is a pretty much bloody constant phenomenon, wage reductions in real terms are required.
Now in a inflationary environment this might simply mean wages remaining stagnant nominally. In either a 0% environment or a deflationary one, which with your latter link in first comment you seemed to seriously consider, nominal reductions are required.
I hope you do not live under the illusion that humans in the broad are rational. A 0% increase in a 2% inflationary environment, and a 2% decrease in a 0% environment are functionally equivalent ( assuming no fixed nominal debts), but people baulk much more at the latter than the former.
You may perhaps consider reading Thinking fast and slow by Daniel Kahneman, who expertly demonstrates such illogical bias in human thinking when it comes to equivalent economic considerations.
Social stability is as much a component of our collective illogic as it is of our collective logic.
If these two options are functionally equivalent, then preference for the one that achieves the most social stability is best practice.
“There is, however, no reason why the average wage of the employed population would have to decline. Why would it? Even if consumer prices sometimes decline by 2% annually and at other times rise by 2%.”
True, Average rates need not decrease if your measure HICP is an accurate reflection of cost of living. Bear in mind that average rates being stable is not equivalent to social stability and contentment. People take their own personal wage changes quite personally, as irrational as that may be. :P
TF
Would this be an unfair and massively over-simplifying summation?
Freefiat will see the use of free gold as a means of settling international trade imbalances, while domestic savers will choose to prolong their imbalances by continuing to save in the currency.
Well, thanks for stopping by Victor!
Good to hear you've not gone all-in in €500 notes just yet!
I can only urge you to reread this FOFOA 7-part comment (h/t DP):
http://fofoa.blogspot.com/2013/11/advance-warning.html?commentPage=2#c3204252362639658867
, which answers (from a FG PoV) all of the subjects you raise in your last three comments.
While I think I understand Blondies position, like FOFOA, I just don't agree with it (sorry, it seems artificial/mechanistic to me)...
I must say I kind of enjoy our half-yearly head-butts on the FG vs. FF debate here at FOFOA's, as it sharpens the arguments...
We agree on many things, but I fear we'll never be able to discuss the two lenses (FG/FF) open-mindedly enough (*) that we'll be able to either convince one another (~= win the argument) or even reach some sort of consensus.
But that's OK! We can just observe the coming transition and see who was (closest to being) right!
Good luck Victor!
(*) e.g. I don't feel you've ever given serious responses to the many FOFOA attemps to counter FF-thoughts. (be it GTH2 or other work)
DP, I think you may have just found the nexus.
Victor, what do you think about that?
"Freefiat will see the use of free gold as a means of settling international trade imbalances, while domestic savers will choose to prolong their imbalances by continuing to save in the currency."
@Victor
You wrote:
„You see, when there is a disaster, it is the real price of gold that needs to absorb the shock. You don't want your currency to be affected that much, simply because wages and food prices are tried to it.“
If it is a tiny lil` bit of a disaster, I`ll give you that one. The greater the magnitude the stronger the currency is affected. So in extremis it is in fact the currency that bears the brunt.
Again you wrote:
„You want gold to absorb the shock (because it is "useless" and "its price is arbitrary"). If your currency has to absorb the shock, this will cause you a lot of extra trouble and friction.“
Well, no. Gold is not useless in FG it will play the role the USBond plays today. So you ought not have unlimited QE today and large goldsales tomorrow for it is those most vulnerable in society that will take the brunt (those on fixed income) /if you do not trust me on this one ask Costata/.
Besides disasters and diseases are local 99% of the time and it is only logical that those who have it cure it. And they normally do not do it with martinis on the beach. So extra trouble and frictions are assured. Gold will buffer the tensions to a point and the effect will wear off quickly. Cheers
P.S.
"If you need to purchase a new car next year, you'll keep most of the required sum in currency."
A shorter timespan than in an earlier comment of yours.
I like the improvement.
Yes DP, sometimes keeping things simple is best. When has anyone here said currency cannot be a store of value? It likely will not be the focal point for long term savings, however. The gold I own is long term savings that will likely stay right where it is. Why would I choose to keep my long term savings in Fiat post transition? It's all about time.
DP,
Would this be an unfair and massively over-simplifying summation?
Not unfair, not over-simplifying, but plain false.
I said I was going to leave the discussion here, and so I am only giving you the starting point for your investigation, but not the answer.
Think about the following. Inside your currency area, you have someone with a need to borrow (perhaps an entrepreneur with a good idea, but no capital) and someone else with a surplus in currency. The latter has the choice to either purchase gold and ignore the entrepreneur or to lend him some currency. On the other hand, in the first case, someone else needs to sell some gold. Further, the entrepreneur also has the option to go to the bank and borrow currency (the bank just writes him new credit) rather than borrowing from the saver.
How are they going to decide? In which cases will the surplus be invested into gold and in which cases will it be lent? What about money supply in these cases?
What will be different when the borrower is not an entrepreneur, but rather a consumer who is unemployed, but likes to drive a red Ferrari?
Victor
Don't leave just yet Victor. I realize this may be a frustrating discussion having to repeat yourself, but I happen to think we're gaining some significant ground here if only to find we're unable to reconcile our differences.
Let me ask this.
In which cases will the surplus be invested into gold and in which cases will it be lent?
I imagine I should earn some interest on this loan of mine? Otherwise I would safely store my earnings in an asset with a preferences to avoid loses over the long term rather than short term currency gains.
I'm ready to loan my money, at interest, for the sake of short term profit. The ECB is going to manage the Euro to zero percent inflation.
Where do we find the interest to service my loan? Shall the lenders be made whole in aggregate through default for the purpose of managing zero percent inflation?
Sorry, I should restate that last sentence for clarification.
Shall (half of) the lenders be made whole in aggregate through default for the purpose of managing zero percent inflation?
This is what I meant when I said, My whole point was that if the ECB tries to constrain credit to zero percent inflation as Victor believes they intend to do, entrepreneurship is dead.
I guess I'm going into Twitter mode here, but if an economy hopes to be resilient, it has to allow for risk and the consequence of risk taking. Some endeavors will fail. Other endeavors will fail massively. There's no way around it. In that risk we find mild inflation as we have no hope of mitigating risk absolutely. If we try to mitigate risk through centrally managed policies, we are going to stifle entrepreneurship.
Aaron,
My whole point was that if the ECB tries to constrain credit to zero percent inflation as Victor believes they intend to do, entrepreneurship is dead.
Yeah, just as entrepreneurship was certainly dead all the time between 1445 and WW1 when banks operated only locally, often defaulted because there was no central bank to bail them out, and there was zero inflation in the long run, even mild deflation all the time. There was mild deflation simply because output grew and grew and there were no institutions sophisticated enough to create a proportional amount of new credit.
Who do you think built all the railroads? The steam engine? The steam driven ocean liners? The automatic weaving looms? The first generation oil empires (Rockefeller etc)? The combustion engine? The first air planes?
All this was built on equity, not on debt. It was built not with capital borrowed from the future, but rather with capital saved in the past.
What's today called the "industrial revolution" all happened during a time in which inflation was not only absent, but a time during which the leading countries, first England, then joined by Germany and finally by the U.S. all experienced consistent mild price deflation.
That's in fact just what's explained in the article by BIS General Manager Jaime Caruana that I linked in my first posting on the subject a few days ago.
Look, if you disregard history and disregard all the other observable facts, I do find it rather pointless discussing things with you.
Victor
I would also add, Victor, that my questions have the secondary goal of being a "great help in focusing on the main issues in order to explain Blondie's understanding of freegold (aka "freefiat")" so you better plant you ass here for a bit and keep talking. ;D
Look, if you disregard history and disregard all the other observable facts, I do find it rather pointless discussing things with you.
I understand. I will end the discussion here.
Before some of the sophists here make an effort to misunderstand me, let me clarify: During the time in question, there was no systemic inflation, but rather a mild systemic deflation. The price level, averaged over one decade was the same or slightly higher than the price level averaged over the following decade.
(As I keep stressing, from one year to the next, consumer price inflation and deflation could be considerable, but over 5 to 10 years, they averaged out)
Victor
VTC
We all have "some reading to do" as long as we are still breathing, but it doesn't change the fact that currency managers are forever struggling to achieve your freefiat ideal (at first) and forever failing (at last).
It has nothing to do with Triffin's dilemma, and though an artificial fix to gold fails as well, neither of us is advocating that, so it has no bearing on the matter either.
Your problem is (as with all currency managers) you want the Euro to be as "good as gold" meaning that you want it to actually serve golds SoV function, a somewhat redundant role for a fiat currency.
So if "doing some reading" is the cure for our errant concepts, here is how FOFOA explains it, and I have provided said reading below to make it even easier:
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.
Shorthand for the above, and an object lesson for all currency managers of the past: "You want your currency to be as good as gold." That is, to function as gold, as a store of value OBJECT, and all past attempts to do this (including artificial fixes) epically fail.
This is why FREEGOLD differs from all past failures in this regard (including theoretical failures such as freefiat).
In addition to FOFOAs explanation above, there are other problems with freefiat that involve the societal, historical aspect of gold as a store of value object that no currency can ever fulfill. It is a contradiction in terms.
But freefiat is an excellent topic of academic sophistry and the path you take to reach it is clearly a well read one, and I commend you for your research and studies that have led you to it.
I would certainly prefer it to the current dollar insanity if I had the choice, but alas that choice is not mine to make. Nor is it the EU's ...
@ Victor the cleaner
"There was mild deflation simply because output grew and grew and there were no institutions sophisticated enough to create a proportional amount of new credit."
Output in the way you are using it is a Keynesian term, full stop.
There was mild deflation because efficiency was improving. The goal of any economy is not output or even growth. The goal is efficiency and nothing else.
@ Victor
You wrote:
1.) „Inside your currency area, you have someone with a need to borrow (perhaps an entrepreneur with a good idea, but no capital) and someone else with a surplus in currency.“
2.) „How are they going to decide? In which cases will the surplus be invested into gold and in which cases will it be lent?“
3.) „All this was built on equity, not on debt. It was built not with capital borrowed from the future, but rather with capital saved in the past.“
1.) +2.)=3.)
„The latter has the choice to either purchase gold and ignore the entrepreneur or to lend him some currency.“
Yes. It is either gold or equity+risk (= hopefully more currency in the future) and we come full circle to 1.)
All this happens trough time. And time holds risks of its own.
Burning, Aaron, FOFOA, Andrew - when you criticize Blondie's view, secretly you are all dreaming of gold as an absolute yardstick, something that always buys the same amount of real goods. That's goldbug romanticism! It is precisely what made the gold standard fail.
This is absolute BS! FOFOA teaches that value is subjective. FOFOA teaches that in FG, gold will modulate in proportion to the currency. Both will modulate, neither one fixed or constrained in order to solidify the other. Gold will float on a market free of the factional reserve practices of the past. Fiat will be managed (barely) across the ebb and flow of surpluses and deficits. There will still be cycles, they just won't accumulate in one direction until the system busts. Nations will, on a longer time scale, shift back and forth between running surpluses and deficits. Gold will balance the accounts. If it doesn't, the currency that ignores it will see its perceived value fluctuate more, not less.
Please allow me to correct that statement:
Vtc - when you criticize FOFOA's view, secretly you are dreaming of fiat as an absolute yardstick, something that always buys the same amount of real goods. That's hard money socialist romanticism! It is precisely what made the gold standard fail.
Go start your own cult!
In medicine, doctors might look for a certain antibody in your body in order to confirm the existence of a virus. From the outside looking in one might wrongly conclude that the antibody is the bad thing to be controlled or eliminated.
Consumer prices are affected by an infinite number of variables. They cannot be accurately predicted, forecasted, or controlled. Central banks hardly control the prices of individual things. They also aren’t interested in doing so directly, though it may look that way from the surgical observation unit. Instead they monitor a basket of local consumer prices, not in an effort to control consumer prices, but in an effort to detect inflation or deflation in their currency itself.
A central bank wants to control the price of its currency. The inflation or deflation of the monetary unit itself. This is not an easy task. As much as this sounds like the same thing it is totally different than controlling consumer prices. In a freegold world (where currency isn’t hoarded as savings) this type of currency inflation will be more accurately detected in exchange rates with foreigners, not local prices. However, through trial and error, central banks have come up with a decent strategy for keeping their currency fairly stable. That strategy is to state an overall consumer price inflation goal (2% seems to suit human nature nicely) and then predictably tighten or loosen when things start running away in either direction. The ECB is designed best for this task (making them the most predictable) because they have no other obligations or interests.
So although CB’s use the price movement of a basket of consumer goods to detect currency instability, its not the individual price movements themselves that the CB fears. It’s the movements in value of the currency itself. Though in our pre-freegold world this method is like using a sledge hammer instead of a scalpel, a currency can stay fairly stable by being predictable, spurring consumption when they detect deflationary antibodies, and putting the brakes on consumption when they detect inflationary antibodies.
Thanks for choosing to respond, Victor.
In which cases will the surplus be invested into gold and in which cases will it be lent? What about money supply in these cases?
I guess surplus will be invested into gold when the saver feels that to them investing in debt is not worth the risk, and they don't have 100% confidence that the currency itself, or the banks they would need to keep it at, would be risk-free in real terms either. Conversely, they may choose to take the risk if they feel it is not very high and/or the reward on offer makes it feel worth taking. So this has quite a lot to do with events, emotions and perceptions through time, in addition to cool math.
Money supply will in both cases be moved from a saver to, presumably even in the case of a gold dishoarder, a consumer (either directly or secondarily via an investment in the debt of a consumer, one has to presume - why else dishoard, or borrow?). This of course does not avoid the reality that the same money will be double-counted by the borrower (then quickly the vendor of whatever they borrowed to consume) and also the lender, who still sincerely counts their asset as part of their savings.
If the borrower instead obtains their loan from a bank, then clearly the broad money supply expands.
In either scenario, money is going to flow through the economy at a higher velocity than would be the case in the absence of the loan.
What will be different when the borrower is not an entrepreneur, but rather a consumer who is unemployed, but likes to drive a red Ferrari?
Lenders of existing savings will have to be competitive with banks in their loan offers, and vice-versa. I imagine the prospective lender, whether it be a bank pulling demand from the future or a saver offering unspent demand from the past, will in each instance judge what the credibility of the borrower's plans are, along with the reward they would demand for their current perception of the risks involved.
It is quite interesting that the ECB appear to be keen on the idea to seed growth of an ABS market in Europe. Initially it would seem they wish to underwrite it by purchasing ABS in any upcoming QE operations that they deem necessary, or at least fostering the perception that this would be the asset class they would be likely to monetise if the eventuality arose that QE was finally deemed necessary. But I imagine their goal in this respect might be to develop confidence in such a market, ahead of allowing other actors to take over the reins. So my current feeling is that they would indeed wish to cultivate a healthier mix of bank loans and lending of savings.
If there were any market for ABS containing loans to unemployed consumers of Ferraris, I imagine it would need a high percentage of the capital structure in the most junior tranche, which would need to offer a significant yield. :-)
Found it. No fancy latin though.
http://en.wikipedia.org/wiki/False_dilemma
"Burning, Aaron, FOFOA, Andrew - when you criticize Blondie's view, secretly you are all dreaming of gold as an absolute yardstick, something that always buys the same amount of real goods. That's goldbug romanticism! It is precisely what made the gold standard fail."
Another good example.
Lol.
TF
http://en.wikipedia.org/wiki/Fallacy_of_the_single_cause
Like arguing that the price of will gold ride on its use as a reserve only.
Of course, if that were to happen, forget about $55k gold. Not with all that dishoarding by the savers.
Hi DP;
With respect to the ECB re: ABS purchases, see;
Saudi Gazette, 13 May 2014
"Jacques de Larosiere: 'Modest" banker with an influential
voice"
(I came across this via Robert Pringle's Centralbanking.com)
http://www.zerohedge.com/news/2014-05-13/investor-survey-explains-why-investors-remain-side-lined
There's a graph about midway down the page, "What is most important," in which the author notes:
"When asked what is most important to them the survey showed that, by a wide margin, the majority are more focused on loss avoidance rather than chasing stock market returns."
Perhaps another market crash is the monetary antidote people need to find a new vehicle to store their purchasing power. Perhaps gold? We wait to see how the herd rumbles...
Now he is proposing a scheme to securitize —repackage and sell to insurers, pension funds and possibly even the ECB — loans made in the go-go years that have turned into a dead weight on banks’ finances. The declared aim is to make it easier for the banks, once unburdened, to lend to credit-starved small and medium-sized companies.
HA!
Cheerz! %<];o)8
NS
dishoarding?
Yes I too will dishoard some but not all gold.
I suspect there will be selling of gold by many HMS who see a gold bull market peaking.
Giants won't need to sell. Shrimps will all likely sell some....but enough to crash the price in the face of a buyer who can buy all offered at a price that only makes the currency it is purchased in stronger? Not seeing that so clearly.
DP,
on the ABS market. I agree that securitized loans to businesses backed by reasonable collateral would mean that more surplus savings and less credit created by banks would be available in order to fund businesses. That's useful because it makes that funding less dependent on the banks (which have too big a share of the business financing in Europe and which are the least stable members of the financial world).
I don't think that the use of ABS in QE is the reason they are bringing this subject up.
The "problem" right now is not that the banks are unsound and cannot lend to small businesses, i.e. it is not the supply of such loans, but the problem is rather the demand for such loans. Before the crisis, a huge amount of resources was misdirected, and now the economies just need time to adapt to reality, find new viable projects and find a new equilibrium.
I also don't think that all the credit volume will come back that used to exist before the crisis. Quite the contrary, there will be an overall deleveraging and the ECB expects this and supports it.
Finally, neither bank loans nor corporate debt are required in order to return to growth and fuller employment. Companies can always be funded by equity, i.e. by capital supplied by the owners as opposed to capital borrowed from third parties. I also find it plausible that the world AG operates with way more equity and much less debt than the old system.
I therefore put the word "problem" above in quotation marks. It is a new development, but not unexpected and not per se anything bad.
Aaron,
another way of debunking your claim is Fisher's exchange equation: MV=PQ. (M=money supply, V=velocity, P=price level, Y=real output)
If you restrict Fisher's equation to the part of the money supply that bids on consumer goods and services, to the consumer price level and to the real output of consumer goods and services, then velocity is empirically pretty much constant.
If the banks create credit and lend to consumers, you increase M on the left hand side, but Y is unchanged. Therefore, the price level increases. That's consumer price inflation.
If the banks create credit and lend to businesses, you increase M on the left hand side (because that company goes out and starts purchasing stuff and paying salaries), but you also increase Y. The inflationary effect on M from creating the credit is (partly or even over-) compensated by the increase in real GDP Y. Yes, the relative prices along the supply chains do adjust when such credit is created, but there is no big net effect on the consumer price level.
So the ECB can very well aim for an average rate of 0% inflation in the medium term, and this won't limit bank lending to businesses at all, simply because the latter isn't inflationary.
Now some will jump in and call me stupid for using MV=PY. Well, honestly, if you choose to remain clueless, I couldn't care less, but in case someone here is interested, they might take a look at Richard Werner's book and articles and learn in which situations the equation applies and in which it doesn't.
Finally, some of you have heard of Antal Fekete's work on commercial ("real") bills in order to fund businesses. Before WW1 this was a major way of funding the purchase of supplies and of funding international trade, and, no, this sort of credit creation to businesses was not inherently inflationary. Finally, no, the mechanism does not depend on the bills being denominated in gold. Bills in Euros would work equally well.
...
Nickel,
Of course, if that were to happen, forget about $55k gold. Not with all that dishoarding by the savers.
I can well imagine that you are here because someone promised you $55k gold. But you need to understand that there are others who are honestly interested in understanding the monetary system. So if you would please not disrupt the discussion with bogus claims such as this one:
Like arguing that the price of will gold ride on its use as a reserve only.
Non sequitur. What would you do if you discover that your portfolio is full of stuff denominated in dollars, Yen, pounds?
Since the Euro area had a balanced current account all the time from 1999 to 2012 and a surplus since, there are simply not many Euros abroad (on a net basis). So there will be Euros only for a privileged and lucky few. The rest will either need a different escape route, or they will try to buy Euros and then the ECB has to print and purchase additional gold in order to sterilize that huge inflow of capital. Either way, these funds will eventually be directed towards gold.
Yes, of course, it will be the reserve function (replacing the excess reserves presently held in dollar or pounds) that drives the real price of gold up. Yes, of course, this can easily get you into the range of E10k to E100k. Whether the ECB eventually targets 2% inflation or whether they target 0% is probably not going to make a big difference to that revaluation.
Post transition, indeed many will dishoard. And that will of course send the gold price on some sort of roller coaster ride. Who is going to dishoard? Shrimps like Michael probably won't matter that much, but the giants do. I don't think about the ultra wealthy families here - they'll probably hold on to most of their gold. But central banks and governments perhaps won't. There are a lot of existing imbalances to cushion off and also plenty of accounts to settle.
Today I am definitely having this problem.
Victor
Victor, I would like to first thank you for putting forth the time and willingness to continue the discussion. We all lead busy lives and what not. I for one have learned quite a bit from your perspective.
I would like to hear your thoughts on what I believe to be the major flaw in your premise, that is, credit constraint based on intended use of that credit.
Let's put ourselves within the environment of Freegold. No more banking bailouts or subsidies. Banking now earns fees on the service they provide, namely, sound banking.
If I happen to be running one of these banks, I am going to place one thing above all else as my primary criterion to decide whether or not to offer a loan to a borrower and that one criterion is, credibility. The borrower's ability to repay the loan. To think this concept through, let's pick an example that you can relate to. How about, "the borrower is not an entrepreneur, but rather a consumer who is unemployed, but likes to drive a red Ferrari?"
Let us imagine this borrower is living off of past savings. He has no need for a job today. Let us also imagine this borrower that owns a Ferrari is quite bright. He has an idea for the next backyard nuclear fusion box. As a bank loan officer, I'm going to give him a loan at interest. To be honest, I don't care if he's going to spend it on beer on a weekend getaway. If that's what he needs to relax as he designs the next backyard nuclear power station and he has a means to repay the loan to me earning a profit for my bank while helping him? I'm good brah!
You are suggesting banks should constrain credit based on the worthiness of the investment. I just don't get it. Why should banks assume the moral judgement to decide which loans are worthy and which loans are not based on the idea or principle they pursue?
Shouldn't the bank place precedence on the borrower's credibility to repay above all else? Isn't that what the banks are for? To provide credit to those that have credibility?
--Aaron
One step further.
As a bank loan officer, I'm going to give him a loan at interest. To be honest, I don't care if he's going to spend it on beer on a weekend getaway. If that's what he wants.
As a lending officer, it is not my job to decide which loan is productive and which is not. My job is to determine if my borrower is likely to repay my loan.
Just a few months ago there was a guy on Main Street that opened a new store selling bongs and bowls for smoking marijuana. Imagine if our loan officer was anti-marijuana and as such chose not to grant the loan. He would have lost out on a great market opportunity. The public would have lost out on a great market opportunity. The bank would have lost out on a great market opportunity,
@ MDV
"Shrimps will all likely sell some....but enough to crash the price in the face of a buyer who can buy all offered at a price that only makes the currency it is purchased in stronger? Not seeing that so clearly. "
If we are talking physical, recall the stock/flow. Even if lots of selling hit the market, unlike paper, the price would be stable.
@ VDC
"
So the ECB can very well aim for an average rate of 0% inflation "
I've never been one to buy into this modern monetarist/Keynesian arbitrary 2% MOE inflation target. I always thought that MOE expansion/contraction should be controlled by the market somehow. Freegold should in theory, make all MOE's more stable.
Nobody is clarifying if they mean that the MOE should expand/contract volumetrically , or if it should expand/contract based on what we know now as price inflation. For example, expand M1 by 2% no matter what or just expand M1 so we get 2% price inflation (what they are trying to do now)
http://en.wikipedia.org/wiki/International_status_and_usage_of_the_euro#Reserve_currency_status
I think there is a very small difference between what FG and FF expect from the ECB, a 2% difference to be precise :-).
The expectation from Giants is exactly the same, that Giants will save in gold.
But the expectation from the general public is vastly different.
FF expects that people will save in banks, while FG expects that people will save in Gold. Vtc correct me if I am wrong, because that is one of my problems with FF.
Another major point of contention is how gold will behave AG. FG expects gold price to be more or less stable, obviously not as stable as Euros, but still quite a bit more stable than in the present times, or any time in the past. FG also expects that while Euros will lose value slowly (due to the 2% inflation), Gold will gain value over time (due to increased efficiency in production). FF expects that Euros will be rock stable. While Gold will be widely fluctuating.
Vtc I hope you agree with my comments above.
Now if we get rid of the 2% insignificance, we can actually talk about the real points of contention.
The first point of contention, ie will people save in banks or in gold. I think immediately after the crisis, people will be vary of saving in banks, as people would have lost money. In Europe those who had more than 100,000Euros, and elsewhere, simply because of devaluations. While Gold will become a default choice. Long term it becomes more unpredictable, as people will get used to stable banks and currency. But with Gold having very low taxation will be a good saving vehicle. So long term I don't see much difference between FF and FG.
I do think saving in Currency is a problem. When you save in currency you give your money to the Banks. The banks then use the money for loaning out. This is a great for growing business. But if the inflow is too high the Reserve Ratio must be increased, otherwise banks will have too much money, and will start lending them to the Sovereigns. This ends badly as we know. I would expect that the ECB will try to prevent this problem by having a higher inflation rate than zero, to reduce this problem. It will not be eliminated. Yes they could use Reserve Ratio increases only. I think that RR along with a 2% inflation rate will be more effective, than either alone.
Now for the final point of contention. I don't see how FF contends that Gold will be wildly fluctuating. We cannot get any information about this from history, because Gold was never as free as it would be AG. Also there was never a point in time when Giants were saving in gold openly. Also today there is much more gold than in the past. This means that after revaluation Gold will have a very high Capitalization. I think stability is directly proportional to Capitalization. So I would expect gold to be more stable than in the past. So it would not be wise to use the past experiences of gold to predict its stability or instability.
So this is my reading of the differences between FF and FG. I do not care what percentage of inflation ECB prefers. I do think 2% will be better than zero, but its not a big deal.
For the potwatchers .... the first 5 articles at ZH right at this moment are straight out of the FG handbook.
Russia de-dollarizing with trade partners (bye bye support)
Food Inflation (hello hyper)
China breaks art auction records at Christies (hello marginal utility)
More food inflation (despite CPI nonsense)
and finally ...
No QE from ECB
This is beginning to feel like that nauseating sensation that precedes a major paradigm puke.
I think in FG, gold will be competiting with the Fiat. Gold will not be as free as we expect and mines will be managed to control gold prices. Also Fiat will be managed by CBs to maintain inflation. But production has limitation so fiat cannot be allowed to inflate beyond a limit otherwise large number of people will start saving in gold and investment in fiat will get affected. So I have different opinion here. I think Euro may inflate at 2% but gold prices will be more or less (softly) tied with the value of Euros. Gold prices will mostly vary at mili/micro levels unless there is a big gold/selling or buying which will be very unlikely or extremely rare.
I am personally not a fan of inflation but I think FG is not going to change the 2% inflation target. Businesses love inflation.
I have posted here a couple times and have been reading the blog for a few years. This is off topic and I apologize if this is not relevant. Just a bit of a warning. I received box of and order for a purchase I made from APMEX of several 1 oz gold maples and the box was empty! The packing slip was there, but nothing else. It was poorly packaged, with only one piece of tape. I have ordered through them many times and have never had trouble. They always package thoroughly and safely. Has anyone else had such an experience? We will see how they resolve it, as I am now dealing with the claims department. This is the last time I am going to order this way. Local coin dealer from now on.
cody: I have never had a problem with APMEX. I hope your problem is resolved. How does one go about proving the package was empty on arrival?
Hi Indenture, I do not know how I prove it. I phoned them immediately while I was still in my car at the post office. There was no record of the weight of the package (to my knowledge) at the time of shipping or at the time of arrival. I ordered 5 ozs, and the package felt light when I picked it up. They told me they would review video of the packaging of my order and go from there. I am hoping that there is a record that the person simply forgot to include it (unlikely). My fear is that it was taken out during shipping. It was poorly packaged, which in itself is not like APMEX. In that case they said the claim could take weeks/months to resolve. They have a long record with me over years (not a first-time buyer with them). Hopefully this is a singular event and not a sign of the times. It was a real shocker to open up the box and find no coins inside!
"It was a real shocker to open up the box and find no coins inside!"
Uhhmm, yeah! I think it would feel like a kick in the ass
Crossing my fingers for ya :)
Cody
APMEX has always sent packages that require a lot of effort and sharp objects to open. I have always received large boxes which were glued tight. Inside is a smaller box with the goodies again always secure. No rattle or sound of any kind.
I have always received this kind of shipment. Even a crushed box would have been secure unless there was a breech in the outer cardboard.
It sounds like someone someone switched boxes.
Did it come in the usual large white box?
Aaron,
Why should banks assume the moral judgement to decide which loans are worthy and which loans are not based on the idea or principle they pursue?
There is no reason. They simply try to guess how likely it is that the loan will be repaid. I suppose it does not take any rocket science to figure out that the following criteria are most likely relevant for a loan to an individual
1) does the borrower own any significant assets?
2) is he willing to put up any collateral for the loan?
3) does he have an income?
4) can he expect any dividends or income from his business (if he is self employed)
Secondly, if you are the credit guy at the bank, and you have $1mm to lend, what would you prefer to do?
1) Give the $1mm to company that you know has been profitable and that plans to expand and buy new machines from that loan?
2) Give $500k each to two individuals who like to purchase expensive real estate and who are willing to secure the loans with that real estate?
3) Give $100k each to consumers with low salaries who have already maxed out their credit cards and who need to refinance?
If your institution is Too Big To Fail and you think the credit expansion still has a few years to run, then you select option (3) because you can get the highest interest rate.
If you are in Europe, and you know that neither your government nor the ECB will bail you out and that you have to bear the full credit risk yourself, it is pretty obvious that option (1) does have some charm, isn't it?
If you think this is unwarranted moral judgement, fine with me. I am just saying that this is perfectly plausible behaviour in the real world.
M,
I've never been one to buy into this modern monetarist/Keynesian arbitrary 2% MOE inflation target. I always thought that MOE expansion/contraction should be controlled by the market somehow.
Exactly. If you read the old comments by myself on Blondie's point of view, you'll notice that this is how I arrived at my conclusion that the ECB will eventually target 0%.
This is because it is the path of the least resistance. If they wanted to target 2% in the long run, they would have to keep expanding the relevant money supply (btw it is not M1, but rather base money plus credit created by the banks) faster than GDP forever.
Using bank credit like that is, unfortunately, impossible even in the dollar system because eventually you run into the ultimate credit crisis. Given that base money is only a tiny fraction of the relevant money supply, you wouldn't manage the required rate of expansion with base money alone.
As far as I understand, Blondie and costata think that once you end the Too Big To Fail regime of your commercial banks, credit growth will more or less automatically fall in line with GDP growth (at least on average over the business cycle). I have said that I prefer an explicit credit volume target by the ECB - but as far as your remark is concerned, this is a technicality. (My point is this: So far, the ECBs set the minimum reserve requirements for the banks. But we know that this is not effective in controlling credit volume because lending is not reserve constrained. So why not fix this provision. The CB could drop the minimum reserve requirements and simply set an explicit credit volume target.)
In any case, AG ("after gold" = after the transition), the ECB will find it rather difficult to create any non-zero inflation in the long run.
Victor
"In any case, AG ("after gold" = after the transition), the ECB will find it rather difficult to create any non-zero inflation in the long run."
Not really no...besides they would have enough political backing to run at inflation.
"Using bank credit like that[expanding the relevant money supply faster than GDP forever.] is, unfortunately, impossible even in the dollar system because eventually you run into the ultimate credit crisis."
Nope. The problem is the pileup of savings of credit, which ultimately exceeds what the real world can deliver. If your currency is simply a medium of exchange, then no such problem exists. Sure, you may have to lop off a zero every few decades for convenience, but this credit expansion can actually continue indefinitely( assuming it is moderate and not hyperinflationary - which has its own problems).
Btw, it is quite interesting to research the history of the 2% "target".
In the early 1980s when the high inflation of the late 1970s was slowly brought down (even Germany must have experienced some 7%+ inflation rates), the Bundesbank had to explain to what extent they wanted to keep fighting inflation and when they considered the job done. AFAIK they said when it's under 2% annually, then they'd consider that stable prices.
Once more in plain English. In the late 1970s and early 1980s, it was extremely hard to bring inflation under control. Apparently the Germans were happy when they managed to get it below 2%. That seems to be the significance of the 2% target. It explicitly wasn't any "Keynsian" insight that inflation was necessary for a smooth functioning of the economy.
The European treaties define the ECB mandate to implement price stability. No mention of any numerical target. When the ECB then took over in 1999, they simply continued to use the old Bundesbank formulation that HICP inflation below 2% was what they considered successful policy.
Only in 2003, the ECB governing council explicitly said that they would target an "HICP inflation rate of below, but close to 2% annually".
Victor
Somebody should update this so-last-decade info, pronto.
Its existence in this out-of-date state is messing with forward guidance and transmission of policy initiatives.
So...as a point of interest...
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Mises was incorrect here. It is possible if you seperate the store of value and medium of exchange functions. With a singular money doing both though, he is correct, and that was the context of his writings.
TF
Pps. It still remains true that there is no way of avoiding collapse of credit built on over-expansion of an industry(read : bubble), regardless of monetary system. My point was simply that systemic currency collapse could be avoided.
Hi Michael dV,
I agree with you on the usual way they package. I have bought a lot from them, and it is always extremely difficult to open one of their boxes. They are indeed usually in a white box, with another box inside and then a sealed padded envelope. This, however, was a brown box with adhesive (sticky) flaps and one single piece of clear tape about 2" long over one of the flaps. Bizarre and easy to open. The mailing label, etc. appear normal. I do not know how anyone could have switched boxes, as the mailing label appears original (unless it was re-created fraudulently). What is particularly bad about such a situation is there is no way to prove to them that I received it empty, other than I have a long history of buying from them without problems. Cheers to all and be careful.
Here's hoping you reach a favourable resolution Cody. Thanks for the heads up, that really sucks. Please post back how you go.
cody - was the package sent by registered mail?
Cody,
Thanks for the info. Pretty scary.
I actually made a "shrimp" gold order with Apmex recently. I am confident that APMEX will do the right thing with your situation. But just in case I now plan to video both the mailman delivering the package and my opening it. Not sure what else one can do.
Victor,
Firstly, this...
3) Give $100k each to consumers with low salaries who have already maxed out their credit cards and who need to refinance?
...is straight up imprudent lending. Imprudent lending is the problem in any monetary system, $IMFS or Freegold. This is the problem. Imprudent lending.
Secondly, these points..
Secondly, if you are the credit guy at the bank, and you have $1mm to lend, what would you prefer to do?
1) Give the $1mm to company that you know has been profitable and that plans to expand and buy new machines from that loan?
2) Give $500k each to two individuals who like to purchase expensive real estate and who are willing to secure the loans with that real estate?
...are not the points I was trying to make. They lend an explanation to your view so I appreciate you sharing them, but you have many times in the past discussed that in your thesis, there will be much less consumer credit as banks will focus (it sounds like almost entirely) on what you perceive to be as a productive loan. Loans that result in a higher M balanced out by a higher Y. I would suggest that many of those loans are actually MORE risky than the consumer-type loans that don't fit into your Freefiat world.
Let's change your first example from "company that you know has been profitable" to include one that wants to expand into a new market space or perhaps a start-up enterprise with some new product or idea. In order for that business loan to be repaid, the business unit needs to get off of the ground and become profitable. That's quite a bit of risk. Compare that to the homeowner that wants to put new siding on his house and buy a few new appliances. If that person has a stable job, he is more likely to repay your loan than the more risky one you gave to the start-up guys.
Consumer loans are not bad. Sometimes they carry less risk than business loans! If you want a successful bank, you want a good chunk of your portfolio to contain low risk loans. This is simple logic that I know you appreciate.
This scenario:
3) Give $100k each to consumers with low salaries who have already maxed out their credit cards and who need to refinance?
...proves nothing. No one should ever do this in any monetary system. This is imprudent lending and nothing more and THAT is the problem. Consumer loans are not the problem. Imprudent lending is the problem.
Thank you, Dim, for your good wishes. I will report back once I find resolution.
Hi Phil_O_Dendron, the package was USPS signature tracking, priority mail express. Picked it up at the post-office (I have a PO Box), it felt very light, got into my car and opened it and ... holy SH....
@nearlynapping, I think you are correct. They are a good company... but it never hurts to be ultra careful. APMEX claim that they video all orders being packed. In that case they should either see the order omitted from the box, or they will see the mistake with the ultra light packing job.
I'll check back with them tomorrow.
Now back to deeper thoughts ....
Cody - should have used Registered mail. It costs a little more but is safer.
About the 2% "target".
“The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro”.
“The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. In the pursuit of price stability, the ECB aims at maintaining inflation rates below, but close to, 2% over the medium term”.
The “world's annual gold production” to “world's cumulative gold production” ratio (flows-to-stock ratio) is “also below, but close to, 2% over the medium term”. Since 1950, the flows-to-stock ratio has varied approximately between 1.19% and 1.84%. And, specifically, in the last 15 years, this ratio has varied approximately between 1.42% and 1.84%.
So, with Freegold, if we have approximately 2% more gold in the world, it seems reasonable the overall global world inflation approaches that 2%.
In other words, the Eurosystem, with Freegold, would not have to change the definition of its main objective.
Interesting to see the Ag fix is being put asunder per the following release: The Beginning Of The End Of Precious Metals Manipulation: The London Silver Fix Is Officially Dead
Now, will the Ag bugs be happy with 'true' market price discovery? We shall soon see. And of course, the end of the Au fix is to follow (perhaps followed by the onset of FG; finally).
Phat,
I suspect it is a matter of "why fight a losing battle?"
-R
Wil
That's feasible. Though I believe 'true' price discovery will be more of a shock-and-awe event, to the downside. Near-term I believe we will move to the upside, luring in the unsuspecting, and then, boom, they will experience a rush of air whistling past them in free-fall towards 'true' price discovery. Them's some evil sons of guns.
And, recall our friend Bo Polny? From Jim Sinclair's site if I recall correctly. Well, on Kitco he's projecting $2000 Au in 2014. Does anyone recall the last projection? Yeah...
Just recently I had been wondering what happened to some of my favorite commenters. Costata is sorely missed with his astute observations of current events and how they fit into the gold trail.
Blondie was another that I held in high esteem. I vaguely recall some of the debate leading up to what is now being called "freefiat". I had considered Blondie to be a rock-solid FG disciple. He briefly even went by (and named his own blog) FOFOFOA. That created a little confusion and quickly came to an end.
Now I see a rehash of this whole "freefiat" thing. I have learned much since holding (apparently unwarranted) Blondie in such high esteem. Freefiat sounds a lot like James Rickards predicting SDRs as the next reserve currency.
Now we have VTC pushing this whole freefiat concept again. I envy VTC's sharp mind and coherent writing skills, but I'm thinking VTC = FOFOFOFOA ! - like Blondie getting lost in his endeavor to condense freegold into one short magic sentence. The beauty of Physical gold is that it cannot be manipulated or politicized once the current system dies or fades away. Human nature - the superorganism - has a long memory of what has worked and what has burned them in the past.
I like altering viewpoints. costata is seen occasionally at Srewtape files.
The idea behind this second option is to build the market in Europe for SME loans bundled as ABS, with a view to making it larger and more liquid to aid the flow of credit to the smaller firms that form the backbone of the euro zone economy.
I guess it all comes down to what your definition of a target is.
Is it the avg inflation rate that you hope to maintain? Or is it a limited range?
We understand that rate cannot be a literal constant. That would indicate a fiat rate rather than a market rate. It is the very essence of fixing the price of your currency, such that all other market indicators fall in line behind it. A pure fix would be to make it flat, or always the same. Just like in the old gold standard. I don't believe anyone, even the freefiat folks think that it will be flat, never changing at all.
The question then becomes, if we are willing to agree that the market will drive it, is there reason to believe that amplitude of the modulation of the rate will be so small as to be considered statistically flat, or of a lower degree of magnitude relative to the key market indicator, gold?
I have said this before with some graphs (somewhere on this blogs in past comments), that the modulation must have its center or avg, at least above zero by at least the amplitude. In other words, however much the inflation rate changes (from peak to peak) it must be targeted at least half that value above zero, or you would cross over zero into deflationary range.
This mean that if you target zero, you would have to avg being in deflationary range, about as much as you would be in inflationary range.
Now if the ECB says that they want to limit to a range of 2. And they dont want to go below zero, than your minimum avg would be 1%. Of course there is no such thing as a market that follows a perfect sign wave.
Markets are much noisier than that. And society has these things called spikes. These are signals that try to mess with that cycle in very bold ways. We could probably break them down into different categories, but the only ones we are interested in are the ones that we have seen in the past. Wars, social welfare, natural and un-natural disasters, government waste/corruption...use your imagination.
From where I stand, the bulk of these spikes are inflationary.
So it stands to reason, this is going to move your avg higher, and not closer to zero.
So we can very easily reason that a less than 2% rate would be a challenge to maintain, if you didn't find a way to deal with these spikes by an alternate means.
I think the freefiat meme is (and I know some will protest at the wording) that these spikes will be absorbed by the future gold market, making it the volatile indicator, thereby allowing the currency to maintain a statistically flat rate.
And the entire reasoning circles around the fact that the ECB, and by extension, the bundesbank (we got a history lesson earlier in comments) has consistently sought after the sub 2% rate over the last 40 years? And we are to expect that to simply be policy going forward (beyond the greatest transfer of perceived wealth the world has ever seen). We should expect a huge retreat in credit expansion. We should expect that the forces that are in play in the here and now, will not be there in the hereafter, so there won't even be any need for the ECB to limit inflation, that there just won't be any. Thats right, its not even that the ECB will need to target 2%, they won't have to because systemically, there wont be any inflation.
Just a question here.
Can anyone name a reason why the ECB would want to target a 2% rate while functioning in the dollar reserve world of the here and now, that they wouldn't have to do if gold was settling international imbalances?
I can. Its called trying to jump off the shortest cliff!
I see that Putin wants to Freefiat his ruble, and Xi his yuan. If Russia and China have as much gold as I believe they do, and follow the discipline of the ECB (which it appears they are in accord to do) then freefiat is certainly a larger initiative than the Euro.
Yes, these currencies are not "ready yet", but when we consider that (and I believe I posted Kosares interpretation of Another's key intent regarding free market "competition among currencies" a while back) systems are never static and yet change can be agonizingly slow ... my point here is that any currency can fashion itself to be "freefiat" if it simply treats its gold reserves, and manages monetary policy in the fashion of the ECB.
Therefore "freefiat" is certainly not limited to the Euro, and perhaps the ECB's currency management and reserve treatment (along with the Freegold "movement") are influential guides for the worlds currency managers to follow.
If that is the role of "freefiat' or of the Euro project, in essence to further prove the merits of freegold to the world, such that it is gradually adopted by all central banks in principle, more power to it.
But this does not, in my mind, replace the freegold concept - rather it acknowledges the currency element of freegold, and thereby compliments its broad acceptance.
In the context of price discovery though (to continue an earlier thought) I believe the most relevant understanding lies in the way that the dollar severely underprices ALL things by virture of "not taking them out of circulation" in its massive "hypercirculation of debt" manner.
Including oil.
So the inevitable physical plane price hyperinflation can be seen as an awakening to the nature of a "future production dependent" (debt based) currency structure, used to acquire present day, usable assets.
It will be a massive rush of "distant future to here and now present" reality reset.
For perspect above, I think the infamous exchange between FOA and Cavan man is highly instructive:
From my interaction with people of various far reaching world backgrounds, one thing is clear: Investors and regular workers with a Western slant do not grasp what wealth is. Overwhelmingly they see their currency and paper investment portfolios on an equal footing in value with the same "real things" that raise our living standards. Yet, in real life, they cannot be equal because these paper assets are only an exercise able future claim on our "real things in life".
Take my debate "Against" Goldhunter as an explanation example. His perception is typical in that the ---"prices bid for futures contracts are the market value of gold"---- (see msg#: 35427). These future contracts serve no more purpose in setting pricing function than do all modern paper assets we today hold as wealth.
In this larger sense, after rereading my post to him,,,,, one can see where the entire dollar world itself has become a "futures pricing arena" that "undervalues" almost every real usable item we function with in daily life. The dollar asset system, as we know it today is used as a value setting tool even though it,,,, like gold futures,,,, does not entail the removal of real goods from circulation.
But wait, you say,,, of course it does,,,, we buy and sell for our life's needs every day using dollars! Yes, this is true, Cavan Man but in that process we as an economic society only use a tiny fraction of this paper asset wealth to do that physical trading. As an example:
Look at the daily trading of gold futures and gold future "look alikes" in London as they trade in a huge volume multiple of the actual physical market. As this lopsided trading is a comparison valuation that understates the value of gold,,,,, so too does the collective acceptance that dollar assets are held as equal to life's physical needs,,,,,, also understates the real value of all things in our lives.
You see, a futures system that functions as our currency or currency contracts, values physical assets without taking these assets into our lives and by extension taking the assets out of the market. This is the current money world we live in. The dollar in your pocket is part of a much larger paper wealth system that has evolved into today's money system. A reserve system that is not tested against real "supply and demand" values. With these money futures we may leverage our perceived wealth by thinking we actually control "real assets" just by holding contracts or dollar denominated paper assets. In reality we only own claims on each other's ability to produce,,,,, just as a futures contract holder only holds a claim on another to produce physical. Expand this function to a level where today's dollar world is and we can grasp what others see in the real value of gold.
This is the reality of perception that Another speaks of when he said -----"your wealth, it not what your currency say it is"-----.
In a word, that little exchange is "priceless".
- R
Combine with this the "4 apples" lesson. When the first is bought, levaing only three, is the value of the remaining three not perceived as higher. When only one apple is left for the remaining hungry buyers, does it not command a higher bid?
Our dollar world does not have function in a true supply and demand corelation as illustrated by this simple example. It's gold counterpart (that paper gold futures market) being it's Karmic half, treats gold the same way.
We can get down to the last ounce of gold offered and the paper gold market still prices that ounce as if supply is unlimited.
Our dollar system, like our gold market, does not properly treat the scarcity of the here and now. It rather prices futures as if there is supply a plenty for as long as humanity can exist.
Not sustainable in a growing world of finite resources.
Currency = claim to unspecified amount of unspecified "stuff", later (or right now, if you like).
The fundamental and variable nature of this social construct is not, I suspect, going to change any time soon.
Which of these three paragraphs is more likely to be a premonition of an article from the future?
Today the world is receiving dollars and going without goods it would like to have. And because it is exporting dollars the US is selling less than it would like to. When the world is prosperous, which means that credit is being freely extended, it needs dollars because it is the one commodity that mankind has agreed to accept on balance in place of the goods it would rather have. It is merely a balancing item in the offsetting of credits against debits. It might be epigrammatically said that prosperity "makes" dollars and "unmakes" them instead of dollars making or unmaking prosperity.
or
Today the world is receiving euros and going without goods it would like to have. And because it is exporting euros Europe is selling less than it would like to. When the world is prosperous, which means that credit is being freely extended, it needs euros because it is the one commodity that mankind has agreed to accept on balance in place of the goods it would rather have. It is merely a balancing item in the offsetting of credits against debits. It might be epigrammatically said that prosperity "makes" euros and "unmakes" them instead of euros making or unmaking prosperity.
or
Today the world is receiving gold and going without goods it would like to have. And because it is receiving gold it is selling less than it would like to. When we are prosperous, which means that credit is being freely extended, we need gold because it is the one commodity that mankind has agreed to accept on balance in place of the goods it would rather have. It is merely a balancing item in the offsetting of credits against debits. It might be epigrammatically said that prosperity "makes" gold and "unmakes" it instead of gold making or unmaking prosperity.
Hint: Bear in mind that money is by definition credit, and that gold is not money.
FOFOA:
Organic versus Inorganic Savings
What I'd like to call "organic savings" is when economic actors net-produce (produce more than they consume). "Inorganic savings" is when the monetary authority in a currency zone increases its reserves. And here reserves mean gold or foreign currency reserves.
[…]
So "organic physical savings" would be gold in private hands which is the product of an economic actor producing more than she consumes and purchasing "useless physical wealth" (gold) with the excess currency left over from "underconsuming".
"Inorganic physical savings" on the other hand would be gold purchased by the CB by printing currency. "Inorganic paper savings" would be like the PBoC purchasing US Treasuries by printing yuan. "But wait" you say, "the PBoC purchases Treasuries with US dollars it received through trade." This is true, but it also printed yuan in exchange for those dollars regardless of your perspective on the mechanism driving that transaction. You see, if the Chinese exporter had bought those Treasuries for his own savings, no yuan would have been printed. That would have been "organic paper saving". But by exchanging printed yuan for the dollars the PBoC is making those savings "inorganic" and at the same time it is managing the exchange rate of its currency. This equates to the PBoC printing yuan to buy gold as a currency management tool in Freegold.
The reason I am making this distinction is that I plan to show you that, in Freegold, the CB's inorganic "saving" and "dishoarding" actions will generally be the opposite of (or countercyclical to) the net-actions of organic savers in its currency zone when it manages its currency. Freegold will be much more smooth and balanced (than the $IMFS) even without CB interference, but we all know that in the real world CBs gotta do something to justify their existence, right? So I hope to show that their natural response will actually smooth cycles out even more than they would be without the CBs. And that's with everyone acting in their own self-interest.
Pretty straight forward DP. A well devised and articulated question is so much easier to answer.
Thank You.
IMO it should have read "And because it is receiving gold it is buying less than it would like to."
But a C&P is a C&P, or it is something else.
With this adjustment now, I would say that it is indeed something else: correct! :o)
DP, I truly hope your 3rd is the future that awaits. Semantics and word choice notwithstanding, I have used the term "articficial" as the preferred antonym to natural or "organic" (though to some extent "derivative" replaces "artificial" in more specific uses).
Understanding that the dollar is a derivative of gold, and that the paper gold market (and all derivative markets) are merely a subset of the IMF$, a massive, dollar-based derivative pricing structure ... harkens back to the great work of Rob Kirby, and his determination of how the interest rate derivative "price grid" buoys the Treasury markets. This actually connects Kirby to FOA in a rather cool way, even though some have disparaged his work, for want of a better understanding.
We actually begin to see the entire IMF$ as a massive "price control grid" for ALL THINGS in our world today, and the control applied by derivative supply does misprice all things to the downside in any real world "organic" valuation.
This is a light bulb moment for me, because when the dollar derivative fails, the grid fails, and the "mispricing" fails.
Thus, in this context, we can truly view the coming hyperinflation actually as a coming "price correction" based on the failure of a global monetary based derivative price control mechanism.
The implications of which ... when plugged into past energy price manipulation thoughts and strategies for example, as well as present day "valuation anaomalies" begins to make perfect sense of our tilted monetary world of today.
Perhaps the essential question is: did we ever, or can we ever, have truly free markets which price goods organically for all??
But yes, your comparison of dollar/euro/gold in the above illustrates how fiat (including freefiat) can never replace gold as the SoV OBJECT that offsets credits against debits in a free market environment.
Such power has never been wielded before, this derivative paper dollar and it's macroeconomic application to all things challenges the organic plane of gold like no other.
But the superorganism will have the final say. Freegold is truly "superorganic".
Yes, "buying" is the more corelated effect.
I guess Freefiat has been around now for a couple of years, since 2012 I suppose. What does it say that the concept doesn't appear to be gaining any traction?
Victor has attempted in a way to show the soundness of the concept and claims to be on the true path, where we diverged sometime ago. Blondie threw in the towel and left discussion here back in 2012. I guess Blondie is really not cut out to be a trail guide. To be a successful guide you must be a leader.
So whose left? Well, it seems Gary (aka fake another), you know the psychopath that has haunted this blog over the years, has hitched his wagon to the Freefiat team. I think Victor claims that Costata is in pocket. So far I am counting 4 at the "real trail head" and all the rest of us in the woods somewhere. Only Victor has shown any attempt to bring us out of the woods. Meaning no disrespect to Victor, he really isn't another Another, FOA or FOFOA is he?
The bigger mystery, where is the public Freefiat blog? Oh yeah, there isn't one. If there is, it is a cobbled together and cryptic thing, certainly not designed for the casual explorer who happens to come along. What does this say about the people who proclaim Freefiat to be the holy grail? I leave that question out there for the reader to answer.
At some point a scholar will publish in order to validate his work. Opening one's scholarship to academic scrutiny and review is essential and is enthusiastically embraced by the researcher. He knows that in all likelihood his non-consensus theories will be aggressively tested and will be met with extreme skepticism initially. So his published work then requires defense. This process continues, publishing, then supporting counter attacks until consensus either embraces the work or flatly rejects it. You know, what FOFOA has been doing for over 5 years.
The few Freefiat proponents do not seem to be concerned with whether Freefiat is really a valid theory. They certainly aren't on fire to make their views accessible and widely disseminated. They also do not appear to be concerned with so many who have been led astray. I have yet to see an all inclusive, point by point
Perhaps there wouldn't be so much resistance to Freefiat here if the theory was actually sound? Perhaps there would be a Freefiat website that was attracting followers if the theory was sound? Perhaps there would be more scrutiny of Freefiat if the few proponents gave a shit whether their work was out there for us to see? Perhaps more would consider Freefiat if the main proponents had the credibility Another, FOA, and FOFOA have? We have a psychopath, an AWOL, and a couple of guys who mainly use Twitter to expound on their Freefiat ideas. Sorry, not my idea of a group that it on to something.
Finally, where is a 7 part, point by point counter of FOFOA and Freegold, like what appears in the comment section of last November's Advance Warning post? Perhaps Victor and Blondie, both who can write, might take up the challenge and start a blog where I can go to see them construct the Freefiat argument from scratch, more or less like FOFOA has on this blog.
Remember, FOFOA does not canvas the internet for blogs that need to know about Freegold. He waits for them to come here and publishes material for when then arrive. Victor for some reason wants to come here to espouse his views. I think he is wasting his time and burning up credibility that he has acquired over the many years he has posted here.
C'mon Victor, launch a blog with post one. I will read it daily and give you every opportunity to construct your Freefiat. You have a high bar to measure up to considering this blog. But, if you are on to something you will be able to pull it off.
Which comes first - the dollar or the saved dollar?
LDO, the dollar, right? You can't save what doesn't exist!
MMT makes it abundantly clear that dollars are created by US government spending them into existence, and extinguished by US citizens paying their taxes and/or some entity using their unspent dollars to buy a US Treasury bond. Taxes are a permanent destruction of that many dollars. Selling of a Tbond is a temporary destruction, before new ones must be recreated and put back on the stage to repay the principal at maturity (and hopefully they in turn will once again be quick-marched down the plug hole, as the saver chooses to "reinvest their dollars" in yet more US Treasury bonds).
But for you to save your dollar (or T bond that you might buy with it), it must first be spent into existence.
The upshot of this is that the US government is going to spend into existence whatever dollars it damn well likes, in an effort to ensure at least one chicken in every pot [no upper limit need apply], and it will follow up by trying to drain enough previously-created dollars out of the system that they get "the right amount of consumer price inflation" to meet that other mandate for price stability. So either they will have to come right out and take it from you in taxes, or pretend to be nice and hope that you'll choose to do the right thing and save in the monetary plane like a good little citizen.
Which comes first - the prosperity or the saved gold?
When we are prosperous, which means that credit is being freely extended, we need gold because it is the one commodity that mankind has agreed to accept on balance in place of the goods it would rather have.
If the prosperous hoard mainly the debts of others as their saving assets, in the monetary plane, more and more of the debtors will inevitably, eventually, become less prosperous… to the point they can no longer stay current on repayments. Over time, the community in aggregate will become less prosperous. It will become increasingly polarised into the haves [with 1000 chickens in every pot] and the have nots [with one scrawny chicken that is only one day past use-by in every pot]. If the prosperous instead spent the bulk of their surplus earnings on some non-debt asset, default would not be a big problem for them, and debt would not become a big problem for the community in aggregate.
Not forgetting that money is credit too - it just has the representative entity for an entire economic community as your counterparty, so it is not very likely that your money will completely disappear tomorrow in a default. But it is entirely possible that it might at times — since, y'know, shit happens all the time — be prevented from disappearing by instead shrinking in value, at the behest of TPTB. Socialising the losses of the community across the broad shoulders of all savers [of money].
For the greater good.
FOFOA:
I'm not necessarily implying that borrowing (bonds) and economic investments (stocks) won't exist. But those who net-produce and then funnel their savings into those antiquated financial instruments have and will always make somewhere between a much lesser and a massively negative contribution to society than the gold hoarders. I say massively negative because it is they, Dagen and Munger, that enable systemic malinvestment and incentivize the kind of lowering of prudent lending standards that almost brought the system down in 2008. By contrast, gold savers force banks to use their own capital when funding the debt-based consumption of the widgets left on the table. Paper investments pinched off by the sphincter that is Wall Street only encourage and enable banks to make too many loans, far beyond the weight (and prudence) of their capital.
So Munger and the Dingbat are wrong wrong wrong! You're a jerk if you save in paper, enabling the destruction of Western Civilization. Rational people everywhere have a moral obligation to buy ONLY physical gold with their savings. If you're capable of understanding the REAL world, you have a moral obligation to become rational. And I don't see how you become rational investing in Charlie Munger's paper. Even if it works, you're a jerk, just like ol' Chuck.
Reminder: when you as a private sector entity save currency, unless you're using it to restuff your mattresses, you're really hoarding the liabilities of your commercial bankers. What you do not demand them to settle on your behalf today [i.e.: "your savings"], they treat as though it were their own — because, in fact, it is.
Call their bluff.
Oops. "FOFOA:" was meant to be a link.
A Winner Takes the Gold
Hmmm...
DP said
"$IMF"
or
"FF"
or
"FG"
#3 for the win?
So the PBoC could switch from manipulating its currency down by soaking up the unwanted USD flowing in through its borders due to the trade surplus, matching them yuan-for-dollar with some printing of its own in order to suppress the natural rise of its CNY against USD in the markets… to instead soaking up EUR and matching them yuan-for-euro.
For a start, this just isn't going to happen because the Eurozone is not about to start running huge trade deficits with China I don't suppose, so there won't be any EUR to soak up in the same way as there have been USD. But let's ignore that detail for now and instead consider that, if they did choose to unnaturally push CNY lower against EUR, to elevate the prosperity of the Chinese people while pushing down on a cross of EUR onto the heads of the people of Euroland, the ECB could heroically lean against this by also choosing to print more EUR (pushing down on the exchange value of them) and buying the gold that the Chinese should have bought in the first place (pushing up on the exchange value of gold). This would pass the cross of thorns to be pressed down on the good people of Goldland — which, fortunately, are not particularly numerous so who cares about their prosperity?
For one thing, the Chinese are going to lose out … because if they had just bought the gold themselves, their hoarded EUR would not have gone down in value compared to the gold they should've chosen. [i.e.: gold would be a superior SoV]
What is so different about the Chinese "inorganically saving" dollars (or Tbonds, or euros) by expanding the monetary plane via their balance sheet, and the ECB doing the same thing by "inorganically saving" gold by expanding their balance sheet? Both of these actions have resulted in more money to circulate in the system, and no more "useful wealth" on the table to buy with it.
When a consumer in the private sector somewhere borrows, they are on the hook to put goods & services on the table in order to organically obtain the money in order to repay their loan.
We don't need another hero.
MMTers are right to say "the public sector can never run out of money!".
But when they print more money and inject it into the economy, there is no corresponding production put on the table.
They can only take back a proportion of it by taxing the vendors of the production that they consumed, and/or hoping that the saver at the end of the chain chooses to buy a bond from the Treasury with their surplus.
With the velocity of money in the US dropping perilously close to 1.0 these days - that's a lot of taxing and/or a lot of hoping?
Wishing a good weekend to Friends everywhere! ;-)
Matrixsentry
Fwiw, when the claim was first made, I asked costata directly on twitter whether he was in the FF camp, and he responded in the negative.
This could have changed in the meantime, but I doubt it.
He seems to be forging his own path, and as a good scholar is posting it for critical review, over at STFU, though it is happening at a glacial pace.
TF
Freefiat is a policy of disdain. Disdain for the FOFOA reader, as the general presentation comes down to OMG DO YOU EVEN #FFFTW, because the smart people get it, and they've graduated. You, dear reader, are lagging behind. :(
There's a structural disdain also, for the majority of currency users; yes, the debtors. Victor on freefiat: ''And it derails the entire “debtors and savers” picture because it implies that after the transition, we will see the complete triumph of the savers over the debtors.'
That's completely at odds with A/FOA's view of our 'human tribal' life. FOA's exchange with ORO in February 2000 is the classic case, and FOA wins hands down IMO. Hard money works great until people become involved. Or as FOA puts it in this post:
http://ubercraftorg.ipage.com/usagold/usagold-2000-02.html#25335
FOA: "ORO, this portion of your thinking needs to include the other side of the lending aspect,,,,,, people want and demand loans for sound, economically justifiable, profitable projects,,,, and they get them on sound lending principles. Still, some 90% of them can become only "at the margin" when demand changes. And typical of our human society, we all shift at once.
Truly, my friend, bank loans often fail because human events change the course of money dynamics,,,,,, and it does so in a way that is beyond the vision of any lender. Be the lenders you, me or a group of people as a bank, large portions of deals go bad just as much from human affairs as from "over lending".
After all, the entire economic structure of the world is nothing more than people dynamic ,,,,,,,,,"
Indeed it is, FOA.
MMTers are Keynesian sophists of the Mensa set. They cite the triumph of MMT in QE with no HI, claiming the theoretical victory. It's simply a psychological deficiency of the primitive human mind to reject "something for nothing" due to our primitive supply and demand instincts.
If we could just understand that wealth is decreed by the public sector and accept that, all would be well.
It's our primitive survival instincts that get in the way. Central bankers and governments, are slowly helping us see the light that "wealth is whatever government says it is, because society accepts government's decree".
Hopefully, I don't have to point out the problem with this to anyone here.
Its Mosler and his ilk that seem to have the easy money mental block, just as FOA admitted to once being a hard money goldbug.
Get practical MMTers ...
Manipulation? How so?
https://www.youtube.com/watch?v=OU1t3t4Bq-Q
Europe forced to cooperate.
Damned corporatist USSA!
Poor Condi and the rest of the neocons can't find anyone to play with these days. Here is a Bloomberg interview with a professional diplomat that provides a good overview of the situation in Ukraine.
......and the new 8 Billion Euro investor in Germany's largest
bank's recapitalization plan is.....................................Quatar.
(the odd man out in the GCC) (of course, NOBODY expects
the Spanish Inquisition either..........their chief weapon being
surprise)
Woland,
I thought it was fear...?
Cheers
technically, 1. fear, 2.surprise and 3. a fanatical devotion to the
Pope.
BTW, thanks KP for the link. VG {;<)>>
Three, no four weapons of attack,
1. fear, surprise, ruthless efficiency, an almost fanatical devotion to the Pope, nice red uniforms.... Oh damn
:-)
My energy thought du jour; with all the fracking gas happy
talk, and the export thereof, consider:
The U.S. has 100 nuclear plants, of varying ages, but only one
new one in planning stage, with completion several years from
now. In the meantime, the other 100 continue to "age",we can
hope "gracefully". What will replace them? Stay tuned..........
@ Woland Hopefully thorium, but I'm not holding my breath...not very good for making bombs.
http://www.peakprosperity.com/podcast/85431/kirk-sorensen-detailed-exploration-thoriums-potential-energy-source
Maybe this; http://www.peakprosperity.com/podcast/85431/kirk-sorensen-detailed-exploration-thoriums-potential-energy-source
Whatever its merits may be, a Thorium plant is a NEW plant.
We have only 1 new "conventional plant" in the pipeline. My
observation is directed at the time gap, as old plants are
required to be dismantled, or are kept online beyond their "sell
dates", with all the attendant risks that implies.
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