Thursday, June 26, 2014

Fiat 33

"Sir, I would say, "Old World Order" to return.
To understand/explain better: A very easy way
to view this "order", would be to simply say that
the American Experience is reaching the end! As we know,
world war two left Europe and the world economy destroyed.
Many thinkers of that period thought that the world was about
to enter a decades long depression as it worked to rebuild real
assets lost in the conflict. It was this war that so impacted the
idea of looking positively toward the future. The past ideals of
building solid, enduring, long term wealth were lost in the
conception of a whole generation possibly doing without! In
these fertile grounds people escaped reality with the New Idea
of long term debt, being held as a money asset. Yes, here was
born the American Experience that comes to maturity today."


In 1933, President Roosevelt issued Executive Order 6102 "forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States." That restriction stood for 41 years until it was lifted in 1974 by an act of Congress "to permit United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad."

In 1935, the United States Treasury had 9,000 tonnes of gold, 8,998 to be exact. Then, in 1971, when President Nixon officially closed the gold window, the US Treasury was back down to 9,000 tonnes, 9,070 to be exact. In the middle of that 36-year span, US Treasury gold hit its peak at 20,663 tonnes.

I know I haven't written a post in a while, but my plan right now is to write a series of posts, this being the first, that will hopefully paint a nice big picture for you of what Freegold is all about. I've had the idea for a while now to write a post about what, precisely, constitutes the overvaluation of the dollar today, as that relates directly to the deflation versus currency collapse/hyperinflation debate.

In order to see how the dollar can collapse against the physical plane of real goods and services, you must understand how and why it is overvalued today, not just in the monetary plane with its monumental overhang of "financial savings", but also in the very real physical plane of production and trade. In the end, you might be surprised to discover how the dollar would still collapse in value even if we could hypothetically erase, block or sterilize the massive overhang of dollars and "financial wealth" that has accumulated in the monetary plane from rushing out into the physical plane.

As it turned out, this topic was much bigger in scope than I could possibly tackle in one post. In fact, I believe it encompasses virtually everything required for understanding what Freegold is truly about. And again, in the end, I think you may be surprised to discover how simple it really is, but it's going to take me a little while to get there.

I don't know how long or how many posts it will take me to explain what I have in mind. I'm not working off an outline. But here's a bit of a spoiler for those of you who are impatient, don't like to read, or don't care about understanding it deeply and would rather just have an abstract that can be easily dismissed so you can get back to tradable technical analysis.

Freegold is all about gradual, natural and automatic adjustment mechanisms in the modern world of fiat currencies. An adjustment mechanism is quite simply anything that periodically corrects physical plane imbalances. In economics, the term adjustment mechanism is often used to describe the flow of gold between different countries back when gold was used as base money in those countries. But this is not at all what Freegold is about, so I am using the term in a much broader context that applies at any scale, from the global scale on down to the individual.

Whenever you buy a gold coin, or even a coffee at Starbucks for that matter, that's a simple example of an adjustment mechanism at the individual level. Monetary plane balances (like "financial wealth", the "idea of long term debt being held as a money asset", or even cash in your wallet) represent physical plane imbalances. Whenever monetary balances are reduced, real world imbalances are reduced. Likewise, when monetary balances are accumulated, physical plane imbalances increase. It's a simple concept and a simple view.

The flow of money within a common currency zone, like the United States for example, is the most basic and automatic adjustment mechanism. Other adjustment mechanisms include changes in wages and in the prices of various goods and services in general and in different locales, and the movement of people and capital from one location to another.

Wherever multiple currencies interact, like on planet Earth for example, changes in the exchange rate between them are the primary adjustment mechanism. Fixing, pegging or otherwise manipulating the exchange rate of different currencies does, in fact, preclude other adjustment mechanisms and causes imbalances to accumulate, often to the point that abrupt adjustment becomes unavoidable, economically disruptive and financially destructive, in other words, painful.

Currency collapse and hyperinflation are natural but not gradual adjustment mechanisms, as are controlled devaluations. Floating exchange rates are a more gradual adjustment mechanism between different currency zones.

These adjustment mechanisms have always been with us, so the real change in Freegold is the "gradual, natural and automatic" part. Gradual (or ongoing) is self-explanatory, but what I mean by "natural and automatic" is that these ongoing adjustments will be allowed to happen or made by choice, not forced or induced by a central bank, because such ongoing adjustments will be in the self-interest of anyone in a position to choose, on any scale.

I know that some of you are skeptical about what I am saying. You're probably thinking that Freegold relies somehow on gold and whether or not it is embraced by the masses. But here's another thing that will probably surprise you in the end. Gold has little to do with "Freegold the monetary system"! Gold is not a key part of the monetary adjustment mechanisms in Freegold. The price and physical movements of gold won't even matter to the monetary system. Any movements of gold in price, ownership or location will be irrelevant to the monetary system of the future.

Freegold is the true unshackling of gold from the monetary system. In Freegold, a properly functioning monetary system requires nothing of gold. In Freegold, the international monetary system won't require gold to change price or location in order for it (the new IMFS) to function. That's why it's called Freegold. Gold is finally and truly set free from its shackles to the monetary system.

There is an idea floating around that, because gold and money used to be directly linked, that Freegold essentially means the opposite, an inverse link between gold and money, such that an oscillating price of gold will have a damping or stabilizing effect on the monetary system. But Freegold is neither a direct nor inverse link, it is the complete severance of gold from its former duties as part of the monetary system.

To understand the complete severance of gold, it is helpful to understand how gold interacted with the monetary system in the past. Before WWI, gold was base money in the monetary system. That is, it was commercial bank reserves. And as such, the flow of gold worked as an adjustment mechanism even between different countries without changing the exchange rate of different currencies.

It worked like this. Say you have one country with a strong economy that is running a trade surplus with another country that has a weaker economy. Some surplus amount of goods and services flows from the stronger to the weaker, and net monetary payments flow from the weaker to the stronger economy. Gold was a hard base money that couldn't be created at will, so the flow described led to a surplus in the base money stock and thereby an increase in the effective money supply—the effective money supply is the aggregate of commercial bank liabilities (credit money) and base money circulating outside of the commercial banking system—of the stronger economy, and a deficit in the effective money supply of the weaker economy.

Changes in the money supply corresponded to demand for goods and services from each country, so eventually the trade flow reversed and the imbalance corrected. It didn't matter that the two countries used different credit money currencies because the base money was the same currency, gold. So as money flowed, even across different currency zones, change in the local effective money supply and its corollary—demand—was the adjustment mechanism.

That was before WWI. After WWII, it was quite different. Gold was no longer base money reserves in the commercial banking system. Instead, it was reserves in the central banking system, and central bank liabilities were base money reserves in the commercial banking system. This was a big difference in terms of adjustment mechanisms between different currency zones. Gold still flowed, but its flow had the exact opposite effect—it effectively blocked the adjustment mechanism from working on the economies in different currency zones because its flow was a de facto manipulation of the exchange rates of the currencies.

This was deliberate, and it's what Another was talking about in the quote at the top of the post. Following WWII, productive capacity in Europe had been devastated and needed to be rebuilt. The Bretton Woods monetary system was the first fully negotiated international system of fixed and/or pegged exchange rates between various currencies. This new monetary system (in concert with the World Bank and the subsequent Marshall Plan) effectively provided support for Europe while it rebuilt its productive capacity such that, as Another put it, a whole generation of Europeans wouldn't have to "do without" during the reconstruction process.

American productive capacity was in good shape following the war. After all, other than Pearl Harbor and a few minor attacks, the theaters of destruction were not on US soil. So, by fixing the exchange rates of European currencies to the dollar, Europe was able to maintain a standard of living that its devastated economy would otherwise have been unable to provide.

The only way this was possible was for Europe to run a trade deficit with the US while it rebuilt its own productive capacity following the war, and the agreement between the Allies, signed in Bretton Woods a year before the end of the war, created the mechanism that made this possible. Understand that there is no difference between "fixing" and "manipulating" when we're talking about exchange rates. "Fixing" and "pegging" are euphemisms for "manipulating". We often think of "exchange rate manipulation" as a unilateral act to gain some perceived advantage, but there is no effective difference whether it is unilateral or a bilateral or multilateral agreement. Bretton Woods was a coordinated system of manipulated exchange rates.

As I already mentioned above, there is a fundamental difference between gold being the reserve in the commercial banking system and gold being a reserve at the central bank level. The difference is the effect caused by the flow of gold. Gold did flow this way and that during the Bretton Woods years, but it wasn't an effective adjustment mechanism nor was it physical plane settlement. It was actually an anti-adjustment mechanism and a mere monetary plane operation to effect the desired exchange rate manipulation.

Here's a tough concept which I'll explain in greater detail later. At the central bank level, any change, up or down, in "foreign reserves including gold" is essentially a currency exchange rate manipulation. "Foreign reserves including gold" can be simply called "reserves" as opposed to "domestic assets" on any central bank's balance sheet. The asset side of every central bank's balance sheet contains two things, reserves and assets. "Assets" are denominated in the CB's own currency, and "reserves" are not. That's the critical difference between reserves and assets.

Any time the asset side of a CB's balance sheet increases or decreases through purchases or sales, its liabilities increase or decrease as well. This is simple accounting. So any time a CB purchases or sells reserves, it is effectively manipulating the exchange rate between its own liabilities and one or more foreign currencies including gold. Manipulating exchange rates is the sole purpose of CB reserves. It's a bold statement, I know, but I'll show you that it's true.

In Freegold, CB reserves will not change much if at all, just as you'd expect in an unmanipulated (clean) floating exchange rate regime. CB reserves will just sit there, unchanged, static, with a sign on them that reads "break glass in case of emergency." Below a prudent amount, CBs do need to accumulate reserves by weakening their currency (manipulating it lower) so that they have them later to strengthen (manipulate higher) their currency's exchange rate in case of an emergency. But beyond that prudent amount, CB reserves are not necessary, and any change in a CB's reserves will signal to all others that the CB is manipulating its currency's exchange rate one way or the other.

WWII was just such an emergency. We can tell, simply by looking at the gold flow during the Bretton Woods years, how long it took Europe to get back on its feet after the war.

"Fiat 33"

"Fiat 33" was a term that FOA used to describe the bifurcated dollar system after 1933. Inside the United States, the economy that represented the dollar, gold was no longer an option as a money asset for net producers. Executive Order 6102 criminalized the possession of monetary gold by any individual, partnership, association or corporation. Thus, fixing the exchange rate of European currencies to the dollar was ideal for "the New Idea of long term debt, being held as a money asset."

"As we know, world war two left Europe and the world economy destroyed. Many thinkers of that period thought that the world was about to enter a decades long depression as it worked to rebuild real assets lost in the conflict. It was this war that so impacted the idea of looking positively toward the future. The past ideals of building solid, enduring, long term wealth were lost in the conception of a whole generation possibly doing without! In these fertile grounds people escaped reality with the New Idea of long term debt, being held as a money asset. Yes, here was born the American Experience that comes to maturity today."

Bretton Woods was a negotiated, coordinated, multilateral exchange rate fix. America was the strongest economy at that time and it therefore had the strongest currency. A currency reflects its economy, and an economy that's capable of running a trade surplus (producing more than it consumes) is going to have a strong currency that will rise in its exchange rate with other weaker currencies. An economy that is not capable of producing more than it consumes will have a weak currency relative to stronger economies and its exchange rate will decline. By fixing the exchange rates of all weak European currencies to the strong American dollar, this adjustment mechanism was neutralized.

We tend to think of the dollar as "fixing" its exchange rate with gold during this time. But, in fact, that was not precisely the case. The dollar was actually defined as 1/35th of an ounce of gold, and the gold price was in fact fixed in London in pound sterling. The London gold fix was generally a simple reflection, via arbitrage, of the exchange rate between the pound and the dollar. So the dollar wasn't technically "fixed" to gold, it was simply defined as a certain weight in gold.

So the European currencies fixed their exchange rate with the dollar, which was defined as a certain weight in gold, and London fixed the exchange rate of its pound sterling to the price of "street gold" (another term favored by FOA which refers to the non-monetary physical gold marketplace). Now, the way you fix (manipulate) an exchange rate is to supplement either supply or demand so that supply equals demand at your desired price.

In the case of Bretton Woods, that meant either supplementing the supply of dollars and/or the demand for European currencies wherever dollars and the various European currencies were exchanged. This is exactly what happened. Theoretically, the US could have simply printed dollars and bought up 40 different foreign currencies to supplement dollar supply and foreign currency demand, or it could simply buy gold. Alternatively, the European CBs could have bought up their own currencies with their dollar reserves.

Well, the European central banks didn't have enough dollar reserves, but they did have gold! So the US printed dollars which it used to buy gold from the European CB who then used those dollars purchased with their gold reserves to supplement the supply of dollars and demand for their own currencies at the currency exchanges keeping their exchange rates locked at the desired level. This exchange rate manipulation gave Europeans and their currencies the same purchasing power as the strong dollar, even though their economies were war-torn and needed to be rebuilt.

FOA made the distinction between "fiat 33 cash" and "the more golden foreign cash." On the surface, the distinction seems quite simple. Dollars within the United States were not redeemable in gold after 1933, but dollars held by foreigners were. Still, your average foreign exporter couldn't send his surplus dollars to the Fed in exchange for gold. That official exchange window was only open to foreign CBs. But foreigners could exchange their dollars for their local European currency—at the fixed exchange rate—and then buy gold on the open market in Europe where it was still legal to do so, and where London did its best to keep the price of "street gold" fixed to the pound which was fixed to the dollar which was defined as a certain weight in gold. Is your head spinning yet?

The thing is, this wasn't even an issue until the European economy got back on its feet and was finally able to start running a surplus (producing more than it consumes) once again. That was around 1958.

The numbers above tell a story. A lot of European gold was moved to London and the US for safekeeping during the war, and the incomplete accounting of the time shows it as belonging to the Bank of England and the US Treasury. As you can see, perhaps close to 10,000 tonnes were moved to New York and Fort Knox by 1940. Following the war, the US number drops a bit, but the numbers that I think tell the real story are 1935, 1952, 1957 and 1971.

In 1935, US gold is at about 9,000 tonnes. In 1952 it peaks at over 20,000 tonnes and sort of plateaus for five years through 1957. Then it begins a dramatic 14-year decline back to 9,000 tonnes at which point the Bretton Woods gold exchange system abruptly ends. Notice that the US Treasury is listed as having almost the same amount of gold in both 1940 and 1956, about 20,000 tonnes. The difference is that, in 1940, the US was holding half of that gold for safekeeping on Europe's behalf, but by 1957, the US owned it all.

The numbers tell me that Europe must have run a significant trade deficit with the US from 1945 until about 1952. Then, from 1952 through 1957, trade between Europe and the US was roughly balanced, requiring only minimal exchange rate intervention. But by 1958, Europe was back on its feet and running a surplus.

This meant the opposite of the previous situation. The European CBs now had to supplement the supply of European currencies and the demand for dollars in order to keep the exchange rates fixed at their established levels. This meant printing European currencies and using them to buy dollars from their European exporters.

It wasn't clear at that time that this US deficit situation would carry on indefinitely, so it sufficed perfectly well for exchange rate manipulation purposes for those European CBs to just accumulate dollars. In fact, according to the agreement at Bretton Woods, dollars and gold were equal. But the agreement also required, under specified circumstances, the repurchase of foreign-held balances if requested by the CB holding the balance.

The CB being asked to repurchase its own currency had the option "to pay either in the currency of the member making the request or in gold." The IMF worked kind of like a multilateral "currency swap" facilitator, and with the IMF, such repurchases of one's own currency above a specified amount were obligatory, and usually had to be paid for in gold. This repurchase of one's own currency as it built up abroad was a good practice which kept the aggregate monetary base from exploding. Every bilateral repurchase reduced the monetary base—and therefore the balance sheets—of both CBs.

I think it's a fair assumption that the initial transfers of gold from the US Treasury back to the ownership of European CBs in the late 50s were essentially a bookkeeping exercise to keep the dollar monetary base at a reasonable level. After all, the gold didn't physically move, only its allocation at the Fed depository changed. But something else quickly changed that situation. That something else was the reality underlying FOA's "fiat 33" concept.


There wasn't much pressure in the West on the price of "street gold" fixed in London at about £12.4 per troy ounce which was equal to $35 during these years. The reason is that Europe as a whole was net-consuming and therefore not saving, and in America saving in gold was prohibited—American net producers earned "fiat 33" and it worked out spectacularly for them.

There are stories of gold trading as high as double the London price in certain places in India and China during the 40s, and of some Saudis taking advantage of this arbitrage opportunity. But much of the gold flowing to the Saudis at $35 per ounce came out of the US gold stockpile via Saudi Aramco rather than from the London "street gold" market.

So what we have during these years are two major players running surpluses in the West, America and Saudi Arabia. American net producers earned "fiat 33" and grew accustomed to "the New Idea of long term debt being held as a money asset," while the Saudis received a little bit of Europe's gold via official channels that passed through the US Treasury. But this situation changed once Europe was back on its feet and started net producing in 1958.


The purpose of this post is to give you a new perspective on the Bretton Woods gold flow, the transformation of the dollar, and the early years of "the American Experience that comes to maturity today." There are often many different ways to view an event, none of which is necessarily more correct than another.

For example, the transfer of gold ownership to the US Treasury following WWII could be viewed as the United States printing dollars and buying European currencies (which Europe then had to repurchase with gold) in order to support the weaker European currencies while weakening its own. Or it could be viewed as the European CBs buying dollars from the US with their gold reserves in order to flood the exchange with easy dollars. Or it could be viewed as a necessary concession for the $13B in loans and grants the US gave to Europe between 1948 and 1951.

In any case, 1948 through 1952 was the fastest period of growth in European history. Industrial goods production increased by 35%, and agricultural production surpassed pre-war levels. The poverty and starvation in Europe at the end of the war quickly ended, and Europe entered what the French called "Thirty Glorious Years" of economic growth. 1952 also marked the absolute peak in US gold, and 1958 marked the beginning of its decline.

Sometimes viewing something in a new light reveals a deeper truth about what actually transpired. There is debate about how much of Europe's quick recovery should be credited to the Marshall Plan loans and grant. I say it doesn't matter. Perhaps it gave Europe's economy a turbo boost, but Europe was rebuilding regardless. What matters is that the fixed (manipulated) exchange rates agreed upon in Bretton Woods elevated the European standard of living above what its economy was capable of producing during those early post-war years.

It is precisely the same mechanism, official exchange rate manipulation, aka structural support, that later elevated America's standard of living above what its economy was otherwise producing. The big difference, and why no one ever called it an "exorbitant privilege" for Europe in the late 40s and early 50s, was that Europe was in a state of emergency, poverty and starvation when it began for them, and America, on the other hand, was the strongest economy in the world when Europe began supporting the dollar's exchange rate in 1958.

Another different perspective I want to share with you is that FOA's "fiat 33" concept has less to do with the official convertibility of the dollar than you probably thought. It has much more to do with "street gold" than with the official flows of "monetary gold" held by the CBs.

Buying gold with your surplus income is a choice and a preference. That's what it's really about. Practically speaking, there's no difference between an America where it's illegal to buy gold and an America where no one wants to buy gold.

As I said, the European CBs technically could have hoarded just dollars, not gold, and the Bretton Woods exchange rate manipulation scheme could have gone on indefinitely. But something else happened after 1958, after Europeans started net producing and saving once again in aggregate. Suddenly there was upward pressure on the price of "street gold" in London.

To manipulate the exchange rate between pound sterling and gold meant, as with currencies, to supplement the supply and/or demand of each such that they were equal at the desired price. And for the London gold fix, this suddenly meant supplying official gold reserves from the Bank of England (BOE).

Throughout the first decade and a half of Bretton Woods, the price of gold in London rarely moved more than a penny or two a day, and was easily kept within its desired range of about $35 to $35.20 without any problem. Then, on one day in 1960, the price of gold in London jumped $5 to $40 per ounce.

The irony of this situation was that the European CBs had to sell gold to the US Treasury during the early years of Bretton Woods while Europe was running a trade deficit, and now that Europe was back on its feet running a surplus, they had to sell gold to their own public (as well as to the Saudis who were no longer receiving official shipments via Saudi Aramco). But notice that the gold being purchased by net producers in Europe was not being purchased in dollars. It was being purchased in the local currencies wherever gold was sold, but those local currencies had the same purchasing power as dollars due to the fixed exchange rate regime.

The point here is that the distinction between FOA's "fiat 33 cash" and "the more golden foreign cash" is not so much about the dollar and its official convertibility at the central bank level (the gold window) as it is about the preference, choice and ability of individual net producers who want to buy "street gold" with their surplus income. As I said, the CBs would have been fine just buying dollars in terms of the agreed-upon exchange rate manipulation scheme, but because of the preference of non-American individuals for gold, the European CBs found themselves in a position of selling their gold reserves whether their economy was running a deficit or a surplus. So gold had to flow, and it had to flow from the US Treasury which still had almost half of all the CB "monetary gold" in the world.

That was the beginning of the London Gold Pool. The way the pool was to work was that the BOE would supplement the supply of physical gold as needed in the public "street gold" marketplace whenever the price started to rise. The BOE would then be reimbursed its gold from the pool according to each member's agreed percentage. The pool started with 240 tonnes of gold, and the contribution percentages were as follows:

US - 50% (120t)
Germany - 11% (27t)
England - 9% (22t)
Italy - 9% (22t)
France - 9% (22t)
Switzerland - 4% (9t)
Netherlands - 4% (9t)
Belgium - 4% (9t)

The gold pool started out with 240 tonnes in 1961. On its final day in 1968, the fix required 225 tonnes from the pool. The day before, 175 tonnes. The day after, they declared a bank holiday and closed the London gold market for two weeks.

All told, the gold pool reportedly lost 3,000 tonnes of CB gold to "the street". On paper, the US Treasury covered 50% of it, but in reality, it all came out of the US stockpile because the US owed gold to the other pool members due to the Bretton Woods fixed exchange rate regime. Gold rarely moves physical locations—it just changes ownership—but in this case the US actually had to fly several planeloads of gold over to London to cover its debt.

That was the end of the dollar—and all other fiat currencies by proxy—being defined as a certain weight in street gold. When the London gold market reopened, the price quickly rose from $35 to $44 per ounce. But even more significantly than that, in my opinion, is that when it reopened the London gold fix had switched from pound sterling to dollars. What better way to telegraph to the world that the dollar was no longer defined as a weight in gold? This switch of the gold fix from pounds to dollars is worth a little extra thought. It was quite remarkable, even if it was hardly noticed.

If you define the dollar as a certain weight and fineness of gold, then how can you even price gold in dollars? That would be like pricing dollars in quarters, in a public market with a daily fix. "Today the dollar is worth four quarters. Thank you, and we'll be back tomorrow with another daily fix." Switching the fix to dollars at the collapse of the gold pool was quite significant!

Of course not every individual net producer chooses to buy gold with all or even part of his or her own surplus earnings. All that matters is that gold is available for those who choose to buy it. The "fiat 33" distinction meant that gold demand did not stress the dollar within its own economy. But again, there's no practical difference between people not being allowed to buy gold and them no longer wanting to buy (or even thinking about buying) real physical gold.

"Fiat 33" laid the groundwork for a global monetary system that would not be stressed by gold demand from net producers. It worked until 1958.

Here's a question to ponder. Did "fiat 33" end in 1974 when E.O. 6102 was repealed? Or did the "fiat 33 distinction" end in 1971 when Nixon officially closed the gold window making all dollars irredeemable in gold? Is everyone in the world using "fiat 33" today, or is nobody using it since gold is now legally tradable everywhere?

There are at least two ways to look at it, aren't there?

"Freegold the monetary system" was a concept born from lessons learned during the Bretton Woods years. But I'd like to point out a couple of simple observations. First, notice that closing the gold window and essentially locking all CB gold in place, ending its flow, did not end the trade imbalance. The US deficit not only continued to this day, it expanded.

Second, since 1971, 85,000 tonnes of new gold has been mined, yet the world's central banks today hold 15% less monetary gold than they did in 1971. In 1971, the seven European former members of the London Gold Pool held a combined 15,660 tonnes. Today they hold a third less, 10,465 tonnes. Even Saudi Arabia's official gold reserves have increased by only 227 tonnes since 1971. So where did 90,000 tonnes of gold go, if not into the monetary system?

Yes, Freegold was a concept born from lessons learned during the Bretton Woods years, but from a monetary system perspective, it has little to do with gold. It's far more about something else. Freegold is about gradual, natural and automatic adjustment mechanisms in the modern world of fiat currencies, and in the international monetary system that means a clean, floating exchange rate regime, the opposite of Bretton Woods.

Agreement 44

I think that Bretton Woods was an honest, timely and noble effort. I think that each participating nation negotiated with honor and the best of intentions, each protecting its own interests while also pushing toward an agreement that took only 22 days to reach but lasted for 27 years. To get a real sense of the atmosphere at the end of the 22-day negotiation between 730 delegates representing 45 nations, please read Henry Morgenthau's closing address:
"I am gratified to announce that the Conference at Bretton Woods has completed successfully the task before it.

It was, as we knew when we began, a difficult task, involving complicated technical problems. We came to work out methods which would do away with the economic evils-the competitive currency devaluation and destructive impediments to trade-which preceded the present war. We have succeeded in that effort.

The actual details of a financial and monetary agreement may seem mysterious to the general public. Yet at the heart of it lie the most elementary bread and butter realities of daily life. What we have done here in Bretton Woods is to devise machinery by which men and women everywhere can exchange freely, on a fair and stable basis, the goods which they produce through fair labor. And we have taken the initial step through which the nations of the world will be able to help one another in economic development to their mutual advantage and for the enrichment of all.

The representatives of the forty-five nations faced differences of opinion frankly, and reached an agreement which is rooted in genuine understanding. None of the nations represented here has had altogether its own way. We have had to yield to one another not in respect to principles or essentials but in respect to methods and procedural details. The fact that we have done it in a spirit of good will and mutual trust, is, I believe, one of the hopeful and heartening portents of our time. Here is a sign blazoned upon the horizon, written large upon the threshold of the future-a sign for men in battle, for men at work in mines, and mills, and in the fields, and a sign for women whose hearts have been burdened and anxious lest the cancer of war assail yet another generation-a sign that the people of the earth are learning how to join hands and work in unity.

There is a curious notion that the protection of national interest and development of international cooperation are conflicting philosophies-that somehow or other men of different nations cannot work together without sacrificing the interests of their particular nation. There has been talk of this sort-and from people who ought to know better-concerning the international cooperative nature of the undertaking just completed at Bretton Woods. I am perfectly certain that no delegation to this Conference has lost sight for a moment of the particular national interest it was sent here to represent. The American delegation which I have the honor of leading has been, at all times, conscious of its primary obligation-the protection of American interests. And the other representatives here have been no less loyal or devoted to the welfare of their own people.

Yet none of us has found any incompatibility between devotion to our own country and joint action. Indeed, we have found on the contrary that the only genuine safeguard for our national interests lies in international cooperation. We have to recognize that the wisest and most effective way to protect our national interests is through international cooperation-that is to say, through united effort for the attainment of common goals. This has been the great lesson taught by the war, and is, I think, the great lesson of contemporary life-that the people of the earth are inseparably linked to one another by a deep, underlying community of purpose. This community of purpose is no less real and vital in peace than in war, and cooperation is no less essential to its fulfillment.

To seek the achievement of our aims separately through the planless, senseless rivalry that divided us in the past, or through the outright economic aggression which turned neighbors into enemies would be to invite ruin again upon us all. Worse, it would be once more to start our steps irretraceably down the steep, disastrous road to war. That sort of extreme nationalism belongs to an era that is dead.

Today the only enlightened form of national self-interest lies in international accord. At Bretton Woods we have taken practical steps toward putting this lesson into practice in monetary and economic fields.

I take it as an axiom that this war is ended; no people-therefore no government of the people-will again tolerate prolonged or wide-spread unemployment. A revival of international trade is indispensable if full employment is to be achieved in a peaceful world and with standards of living which will permit the realization of man's reasonable hopes.

What are the fundamental conditions under which the commerce among nations can once more flourish?

First, there must be a reasonable stable standard of international exchange to which all countries can adhere without sacrificing the freedom of action necessary to meet their internal economic problems.

This is the alternative to the desperate tactics of the past-competitive currency depreciation, excessive tariff barriers, uneconomic barter deals, multiple currency practices, and unnecessary exchange restrictions-by which governments vainly sought to maintain employment and uphold living standards. In the final analysis, these tactics only succeeded in contributing to world-wide depression and even war. The International Monetary Fund agreed upon at Bretton Woods will help remedy this situation.

Second, long-term financial aid must be made available at reasonable rates to those countries whose industry and agriculture have been destroyed by the ruthless torch of an invader or by the heroic scorched earth policy of their defenders.

Long-term funds must be made available also to promote sound industry and increase industrial and agricultural production in nations whose economic potentialities have not yet been developed. It is essential to us all that these nations play their full part in the exchange of goods throughout the world.

They must be enabled to produce and to sell if they are to be able to purchase and consume. The International Bank for Reconstruction and Development is designed to meet this need.

Objections to this Bank have been raised by some bankers and a few economists. The institution proposed by the Bretton Woods Conference would indeed limit the control which certain private bankers have in the past exercised over international finance. It would by no means restrict the investment sphere in which bankers could engage. On the contrary, it would expand greatly this sphere by enlarging the volume of international investment and would act as an enormously effective stabilizer and guarantor of loans which they might make. The chief purpose of the International Bank for Reconstruction and Development is to guarantee private loans made through the usual investment channels. It would make loans only when these could not be floated through the normal channels at reasonable rates. The effect would be to provide capital for those who need it at lower interest rates than in the past, and to drive only the usurious money lenders from the temple of international finance. For my own part, I cannot look upon the outcome with any sense of dismay. Capital, like any other commodity, should be free from monopoly control and available upon reasonable terms to those who would put it to use for the general welfare.

The delegates and technical staff at Bretton Woods have completed their portion of their job. They have sat down together and talked as friends, and have perfected plans to cope with the international monetary and financial problems which all their countries face in common. These proposals now must be submitted to the legislatures and the peoples of the participating nations. They will pass upon what has been accomplished here.

The results will be of vital importance to everyone in every country. In the last analysis, it will help determine whether or not people will have jobs and the amount of money they are to find in their weekly pay envelope. More important still, it concerns the kind of world in which our children are to grow to maturity. It concerns the opportunities which will await millions of young men when at last they can take off their uniforms and can come home to civilian jobs.

This monetary agreement is but one step, of course, in the broad program of international action necessary for the shaping of a free future. But it is an indispensable step in the vital test of our intentions. We are at a crossroad, and we must go one way or the other. The Conference at Bretton Woods has erected a signpost pointing down a highway broad enough for all men to walk in step and side by side. If they will set out together, there is nothing on earth that need stop them."

I also suggest reading and familiarizing yourself with the original Articles of Agreement of the IMF agreed upon in 1944. Here's the original document, and I recommend reading pages 11 – 59 of the pdf, or at least Articles IV (par values of currencies) and XVII (how to make amendments). XIX (explanation of terms like "reserves") and Schedule A (the specific quotas) are also worth a peek. Later, I'll be taking a closer look at one amendment in particular.

The goal of Bretton Woods was twofold. It was to establish an international monetary system that would foster growth and free trade, and to assist in the post-war reconstruction of Europe. The International Bank for Reconstruction and Development (World Bank) was created for the latter, and the IMF for the former.

The pre-war Depression-era years were marked by competitive currency devaluations and defensive trade restrictions like tariffs, both of which reduced international trade, inhibited growth, and even contributed to international tensions going into the war. The IMF Articles of Agreement were a reaction to the protectionist tactics of the 30s.

Fixed exchange rates were the most significant outcome of the Bretton Woods conference, and they were a direct response to the exchange rate manipulations (competitive devaluations) of the 30s. But I want you to take note of the fact that the solution they came up with for the problem of uncoordinated exchange rate manipulation was coordinated exchange rate manipulation.

From "A brief post on competitive devaluation" in The Economist:

"When the Depression struck, this gold standard became a noose around the necks of struggling economies. Economies with overvalued currencies struggled to compete in export markets and ran trade deficits which led to gold outflows."

Uncoordinated (competitive) devaluations overvalue your trading partner's currency which, unless he devalues in response (a currency war), eventually lead him to trade deficits and gold outflows. The Bretton Woods solution had the same effect. First it overvalued the European currencies which led to gold outflows while allowing them to run a trade deficit during reconstruction, and then it overvalued the US dollar beginning around 1958 which led to gold outflows and a trade deficit which continues to this day.

Yes, the dollar has been overvalued because its exchange rate has been supported by Europe and others since at least 1958. This has had a profound effect on America. It has transformed the US economy from what it was in the 50s into what it is today. This is the American experience that comes to maturity today.

"Using an overvalued dollar makes one feel as there is no inflation, even though there has been massive dollar currency inflation over the last twenty years (the real cause of price increases is when the exchange rate is allowed to balance a negative trade deficit)." (9/22/98)

"The exchange rates, almost like gold, block their path. However… the dollar of present operates in a world currency system without gold, that allows this currency to be exported without restraint… The result is a dirty float of exchange rates in that most Central Banks artificially keep the dollar flowing out of the US… Using this line of reasoning, we can see how a massive inflation of dollars over many years has built up. When something does come along that blocks that outflow of dollars and even causes it to reverse, the dollar will plunge on exchange rates and bring home all of the past buildup of price inflation." (10/20/98)

"Under such a system, world trade and exchange rates will balance more fairly… Let us see if this great economy can stand on its own feet with the yoke of paying its debts from "real production"? We may indeed get an answer to this dilemma." (8/2/99)

"The US became wealthier by importing things and paying for them with an exchange rate that is "out of whack"." (12/10/99)

"This is how the "dollar reserve process" inflates the money supply world wide as we (USA) run a trade deficit for our benifit. It keeps the dollar exchange rate higher than it would naturally be thus allowing a US citizen to buy goods at a cheaper price…" (2/26/00)

"We, America, promote the value of our dollar in and of itself. Mostly pointing to our goods, services and assets that dollars can buy. Of course, if you have followed this for long, you know the dollar and near dollar supply has shot to the nearest star and will never actually convert into these products in total. At least not at current exchange rates or internal price levels in the US.

So,,, we promote the dollar using a different format, by saying that foreigners can invest here, not buy, and find the best returns. This works as long as foreign CBs support our dollar as a reserve by saving it themselves. Making for a stable exchange rate… Their real reasons [for doing this] have been our topic for years now.

Eventually, as the dollar works its way toward becoming just a regular money, its exchange rate will tumble. Vastly aggravated by our world class trade deficit. A deficit, I might add, that has become structural to the function of our economy..." (2/15/01)

To be continued…


"A very easy way to view this… would be to simply
say that the American Experience is reaching the end!
Yes, here was born the American Experience
that comes to maturity today."


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burningfiat said...

Yay, finally a new FOFOA post! Thanks! Looking forward to reading this!

Aaron said...

The brief respite was well worth the wait. Fantastic post FOFOA -- another home run for the books.

Bye Bye dirty float -- hello freely floating exchange rates. Gold is for savers, not for central banks.

Better do your front running now while the front running is still good!

Michael dV said...

Eastbound finally down.

MatrixSentry said...

Wow, a gift! To those who for whatever reason will not read the massive material posted on this blog going back to 2008. "Everyone knows where we have been" only applies to those who have taken the time to look back to the beginning and to see how this $IMFS was born, the reason it was conceived, and how it functioned to serve the world.

The $IMFS was a brilliant workaround to a very serious problem that resulted from a disastrous world war. It worked as advertised and bootstrapped decimated countries back into productive participants in a global economy. It should have been wound down when the mission was accomplished, when productive balance between the US and Europe was re-established. Instead, the system went into reverse where the US dollar was being subsidized and supported.

I imagine few could have realized back then the ramifications of a fully recovered Europe that would generate a state of balanced trade or trade surpluses. They were standing amidst smouldering ruins and could have scarcely hoped for such a thing.

Heading for the donate button. Thanks FOFOA!

FoNoah said...

Bravo FOFOA, thank you.

In the end, you might be surprised to discover how the dollar would still collapse in value even if we could hypothetically erase, block or sterilize the massive overhang of dollars and "financial wealth" that has accumulated in the monetary plane from rushing out into the physical plane.

I don't fully understand this yet, but I sense (Another) major A-HA moment when I do. Can't wait for the next exciting installments....

FoNoah said...

Great vid and my favourite CCR song too Mr Freegoldtube.

Sam said...

Great first installment. We spend so much time trying to understand gold and monetary systems it's easy to forget the importance of the concept below:

"Freegold is the true unshackling of gold from the monetary system. In Freegold, a properly functioning monetary system requires nothing of gold. In Freegold, the international monetary system won't require gold to change price or location in order for it (the new IMFS) to function. That's why it's called Freegold. Gold is finally and truly set free from its shackles to the monetary system.

There is an idea floating around that, because gold and money used to be directly linked, that Freegold essentially means the opposite, an inverse link between gold and money, such that an oscillating price of gold will have a damping or stabilizing effect on the monetary system. But Freegold is neither a direct nor inverse link, it is the complete severance of gold from its former duties as part of the monetary system. "

Justin Goldjäger said...

Great article, don't forget to donate folks...

What do you all make of continued makeshift European support? Specifically, the Noway Sovereign Wealth Fund move?

Michael dV said...

I'll wait for the follow up but I'm curious as to how gold could not have a stabilizing effect on the monetary system seeing that it is held as an asset by the ECB.
I await being informed.

Sam said...


You left an important part out. FOFOA said "an oscillating price" of gold won't have a stabilizing effect on the monetary system. This is Freefiat nonsense. Gold can and will be used to stabilize a currency in an emergency situation. Any use beyond that would be an unnecessary currency manipulation. If a currency zone is forced to buy gold to settle trade imbalances this would mean the link to gold remains. Gold must be completely free to function.

DiverCity said...

"Practically speaking, there's no difference between an America where it's illegal to buy gold and an America where no one wants to buy gold." A very interesting thought that was important enough to mention twice in this post.

Nickelsaver said...

"Here's a tough concept which I'll explain in greater detail later. At the central bank level, any change, up or down, in "foreign reserves including gold" is essentially a currency exchange rate manipulation."

In this light, was the selling of ECB gold during the gold bull run of the 2000's, in fact a currency manipulation with the goal of continued support of the dollar? I had always thought of it as an operation meant to maintain the health of the Euro itself, relative to the dollar. And that this was in fact a way for the ECB to show the world how it would operate in the future aka in a Freegold system. But that does jibe with,

"Gold is not a key part of the monetary adjustment mechanisms in Freegold. The price and physical movements of gold won't even matter to the monetary system. Any movements of gold in price, ownership or location will be irrelevant to the monetary system of the future."

I am trying to reconcile that statement with my understanding of this.

Roacheforque said...

Another delightful petal plucked from the F.O.U. which provides the higher view through the FG lens.

Robert Mix said...

FOFOA serves up a heavy meal! "Fiat 33" will require at least another re-read. Great work! I very much look forward to the rest of the series.

Freegold (Au not being tied to "money") will also lead to more freedom.

FOFOA, please keep researching & writing, and we'll keep stacking. Freegold and freedom, what a beautiful friendship!

Motley Fool said...

Hi Fofoa

“I know that some of you are skeptical about what I am saying. You're probably thinking that Freegold relies somehow on gold and whether or not it is embraced by the masses. But here's another thing that will probably surprise you in the end. Gold has little to do with "Freegold the monetary system"! Gold is not a key part of the monetary adjustment mechanisms in Freegold. The price and physical movements of gold won't even matter to the monetary system. Any movements of gold in price, ownership or location will be irrelevant to the monetary system of the future. “

Everything you said up to this point was fine, however his is a bit hard to swallow. Would you mind defining “Freegold the monetary system”?

“Gold still flowed, but its flow had the exact opposite effect—it effectively blocked the adjustment mechanism from working on the economies in different currency zones because its flow was a de facto manipulation of the exchange rates of the currencies. “

More detail on this, and how it differed from the prior system would be nice.

“So, by fixing the exchange rates of European currencies to the dollar, Europe was able to maintain a standard of living that its devastated economy would otherwise have been unable to provide. “

Was 10,000 tonnes of gold not sufficient to provide their standard of living from 1945 to 1952? As this is another way of looking at it...while they were rebuilding they used previous wealth in gold to maintain standard of living. That they were able to rebuild in 7 years is truly remarkable. Thereafter trade was balanced for 5 years, requiring no gold, and then they bought back their gold with new products up to 1971. Of course this is in the context of the dollar being fixed at 1/35th of an ounce, but perhaps the context is irrelevant. I am probably missing something here, because your comments on european standard of living being increased post war makes sense to me, as does increase in US standard of living above what it should actually be, in terms of my experience.

“Here's a tough concept which I'll explain in greater detail later. At the central bank level, any change, up or down, in "foreign reserves including gold" is essentially a currency exchange rate manipulation. “

I will look forward to future detail.



Nickelsaver said...

"In the end, you might be surprised to discover how the dollar would still collapse in value even if we could hypothetically erase, block or sterilize the massive overhang of dollars and "financial wealth" that has accumulated in the monetary plane from rushing out into the physical plane."

To me this makes sense because the ROW wouldn't have any reason to support the dollar and the American Ex Priv once dollar debt held abroad was extinguished.

In fact, if you extinguish the debt in an instance, the dollar would quickly go into a hyperinflation feedback loop based on the actions of USG.

Jeff said...


How much Euro gold was sold vs how much credibility was established?

FOFOA: "You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid."

Eric C said...

Thanks for another interesting read. I have been here for a while and finally decided to take the step to support your sharing of your analysis with a contribution. Put those USDs to good use!

Sam said...

The act of saving must be a choice. Gold must be set free to become the ultimate form of savings. Therefore there are multiple flaws in the oxymoronic idea of forced savings in gold.

MF asked if FOFOA would define:“what is freegold the monetary system?”

I can't speak for FOFOA but we did say:

1) “Freegold is all about gradual, natural and automatic adjustment mechanisms in the modern world of fiat currencies”

2)“Wherever multiple currencies interact, like on planet Earth for example, changes in the exchange rate between them are the primary adjustment mechanism.”

Those of us that read this blog and hold gold have to remember we do so because of what role we think gold will play in the future, not what it is today. Right now, pre-revaluation, gold is a manipulated investment metal priced by paper derivatives. It’s not good for savers, has a poor track record vs inflation, and is more risk/reward than a stable savings vehicle.

Post-revaluation gold will be a wealth asset unencumbered by paper and valued by individual savers throughout the world. Once in this role it won’t be used by monetary authorities like it has been in the past. Again, this is because the act of saving must be a choice. Therefore no nation will force another nation to save (accept gold) as settlement. Instead they will use floating exchange rates as the primary adjustment mechanism for balancing trade.

Nickelsaver said...

thanks Jeff

Eric C said...


You say, "Any time the asset side of a CB's balance sheet increases or decreases through purchases or sales, its liabilities increase or decrease as well."

What about equity? Assets and liabilities don't change equally.

Sam said...


The rules for a proper balance sheet is: Assets = liabilities + equity. You don't gain or lose equity through "purchases or sales."

Lisa said...


If CBs won't be using gold to settle trade imbalances, why are certain countries accumulating large amounts of gold? Russia/China?

Likewise, why has there been a reshuffling of gold ownership to smaller and developing countries over the last decade?

What about the medieval fair example? Gold was used as final settlement for trade imbalances at the end of the fair.

I am not one of the sharpest knives in the drawer here, but I am struggling with how this new view fits with what I've learned here over the years.

Sent from my iPhone

Michael dV said...

Just jumping in here with one college level accounting course but…if an asset is marked up due to a change in value (increasing the 'asset' side, then an adjustment to the liability side would be 'increase in net worth' or 'shareholder equity'….some balancing figure is required to keep the formula correct. The term used depends upon the entity doing the bookkeeping. If it is the government however we now have no idea what it means as GAAP has apparently been suspended until they can get it to work again.

MatrixSentry said...

A suggestion if I may:

La Gloria Cubana Series R with a nice single malt scotch. then re-read Fiat 33. Repeat. Let that simmer a bit.

Like most FOFOA posts, they read different the 2nd and 3rd time through. Really enjoyed this one.

israelite said...

The words honest and noble can hardly apply to a man like Henry Morgenthau. The Morgenthau Plan, signed in Quebec in 1944, called for the virtual extermination of the German people following their defeat in WW2. Harry Dexter White, nee Weiss, was employed by Morgenthau and was later discovered to be a Soviet agent. When the feds looked into his past they found White/Weiss had no past prior to being employed by Morgenthau. It was Weiss who persuaded the US to send $ treasury plates to the Russians to print out salaries for US troops in Europe. Apparently the Russians printed out an extra couple of hundred $ millions, and it was the US who provided all the ink and paper. Hah. Bretton Woods was no noble effort. The man Keynes was himself a known paedophile who enjoyed travelling North Africa looking for cute young things, preferably boys.

Sam said...

"What about the medieval fair example? Gold was used as final settlement for trade imbalances at the end of the fair."

Medieval fairs only had one currency which was the scrip issued by the coordinator of the fair. Fairs also eventually had to come to an end which meant certain participants had to be forced into settlement by holding a wealth asset that would fetch them real value in the medium to long term (or next fair)

International trade has multiple currencies involved and can go on indefinitely. For these reasons I think it would be more practical, more efficient, more gradual and less disruptive, to settle imbalances by adjusting the individual currency values cleanly rather than forcing an entire nation of people to save in a medium to long term wealth asset. This is not to even mention the fact that said wealth asset can only function properly in the first place (maintain a stable value) if it is set free from the monetary system.

runninggloves said...

what would the size of the CBs balance sheets after this is said and done, in terms of gold and/or fiat

when gold gets priced high enough in fiat, would that also have an effect on energy, food, housing, and land prices in fiat? the question can also be rephrased as how will the prices of energy , food, housing and land fall in gold terms?

any thoughts?

Eric C said...

Hi Sam,

I appreciate all your comments over the time I have been reading.

You say, "The rules for a proper balance sheet is: Assets = liabilities + equity. You don't gain or lose equity through "purchases or sales."

If I sell a table I bought originally for 50 for 100, the transaction is receive cash 100, table -50, gain -50. The revenue/gain transactions are negative numbers while expenses are positive. A gain of 50 is an increase in equity of 50. That change officially happens when the books are closed but in a real sense the equity is created at the point of the transaction.

Blake said...

Interesting post, FOFOA. Like Lisa, I assumed trade would be settled in gold post-revaluation; this post posits that trade will be balanced naturally by free-floating exchange rates...

I look forward to further elucidation on this fundamental concept...

tEON said...

Thank you for the mind-expanding article FoFoA. This one has really stayed with me all day - I found it quite... dense (or perhaps that is how IT found ME). I can't seem to shake the concept of how nothing else really matters except the currency. It makes perfect sense. CBs needn't manipulate any market or commodity if you can control the medium it's denominated in. Gold, the oddball non-commodity, being demonetized doesn't reduce its importance - or even the exchange rate of the world's MoEs (why AU reval must be "floating".) It, instead, changes the entire game, although the structure remains, pretty much, exactly the same. Some guys are so smart - or maybe most are so easily prone to misdirection. Laphroaig Quarter cask and a re-read forthcoming...

Sam said...


The world needs revaluation, rather than a bull run of any degree, so that other commodities won't tag along and hurt the global economy

Sam said...

Hi Eric.

A CB's balance sheet can be a little confusing but I'll give it a shot. First let's re-establish that assets for a CB is anything of value they can't print which would include tables but is mainly foreign currency and gold. Their liabilities are all The currency they print. When they bought that table for 50 they printed 50 in liabilities to do so. Even Steven. When they later sold it for 100 they also recouped 100 in currency (reduced their liabilities).

Rather than buying or selling if this particular CB marked to market the table to 100 without selling it they would record the new found value on the liability side as equity.

Eric C said...

When the CB prints currency, wouldn't it be an asset and a liability? Notes are written to gain assets.

Canadarob said...

If gold is decoupled from the monetary system, what is going to stop government from printing currencies again?

FoNoah said...

Would the breaking of the derivative Gold markets, or (say) the ECB invoking the "nuclear option" be examples of how

....the dollar would still collapse in value even if we could hypothetically erase, block or sterilize the massive overhang of dollars and "financial wealth" that has accumulated in the monetary plane from rushing out into the physical plane?

Dim said...

Hi Canadarob,

If country A prints an abundance of currency to purchase goods from country B, then country B will have a lot of surplus currency (A). Country B will book the profits with gold by purchasing gold with currency A. Currency A gets weaker and the price of gold in terms of A gets higher.

How is that different from today? Today, we have a paper market which dictates the price- not physical trading.

Thanks to those that helped me out with this in the last thread.

Jeff said...

Hi Fonoah,

I can't speak for FOFOA but it seems to me the real problem with the dollar isn't the supply overhang but the fact that dollar supply does not, and cannot, create what the word needs, which is liquidity. Liquidity is demand driven, which is why all those supplysiders are running with the ball in the wrong direction, to paraphrase FOA. That's why the US can't break free of the paper gold market; gold is the last asset they have from which to wring liquidity.

FOFOA: "The second observation helps us answer the above causality question. And this is that "an unlimited supply of liquidity" does not create liquidity.

In plain English, it is impossible to be (unlimited liquidity) and not to be (the opposite - a situation of liquidity withdrawal) at the same time and in the same respect.

Our third observation (closely tied to the second) is that it is not the lender (supply) that creates "liquidity", but the borrower (demand). If systemic liquidity is being "withdrawn" (in reality it is disappearing into thin air, withdrawn is the causally-wrong way to look at it) at the same time "unlimited liquidity" is being offered, this is the only conclusion we can draw. That demand for more debt creates $IMFS liquidity, not supply. And perhaps demand is dead?"

FOA (4/28/99; 7:04:43MDT - Msg ID:5261)

I think the IMF gold sale has been worked out already. Any further public statements are just political posturing. The term "sales" is indeed misleading and true words like "leveraging assets to provide further loan guarantees" will never be used. Aristotle, gold is now the last asset and the US / IMF factions are going to have to make it rise to provide liquidity. As I said before, the BIS and its European / other allies have (for the past year or so) blocked any further lowering of the gold price. If the US wants to protect its remaining dollar reserve viability, (by maintaining all foreign dollar reserve debt) it now must allow it to depreciate against gold to provide liquidity.

That, my friend is the only avenue left for them! This will, as Another has pointed out, drive assets to the other new reserve system. As I mentioned to Christine, national entities will have a choice as will you and I and Christine. That being, stay with a falling dollar or move into Euros and gold.

Free choice is what it's all about, not conspiracy. FOA

Michael dV said...

THe difference between La Gloria Cubana and La Gloria Habana is extreme. The latter is Cuban. I'm sure the re-read would have been much better sitting on the beach with a real Cuban.

Sam said...

Hi Eric

Currency doesn't really function until it is spent. Most people think of the printing presses but 99.99% of currency is digital. The example you gave above would be the purchase of an asset (the note) and the addition of an equal liability (circulating currency). But if a CB just printed without spending the change to both sides of the balance sheet would be zero. Now why would a CB "print" digital cash without spending it? That would be like writing down a large number on a personal check but not giving it to anyone.

Currency is credit. The entity charged with the privilege of creating credit on a whim cannot hold that same credit as an asset and be taken seriously. Assume I'm the CB of Sam. Instead of anything fancy I issue little pieces of paper that say "I Sam promise to exchange this piece of paper with something of value". If I give that piece of paper to someone I've now got a liability and whatever they traded me in return would be my asset. However if I just write out and stack the pieces of paper in my closet I have neither a liability or an asset.....just a probable case of scitsophrenia

Canadarob said...

Thanks dim. That clears up alot of my lingering questions.......ill be back with more. Appreciate the info. I know it seems repetitive for some people here but you can read a ton of fofoa and still not quite get everything. Really appreciate others for taking time to clear stuff up for us late comers.

runninggloves said...

I remember that a house with land in vietnam before the communist took over was in the 100+TroyOz of metal, after 1975 when the vietcong took over; house went for about 18TroyOz

Let say for instance that the metal gets revalued @ X/TroyOz, what are the implications in terms of TroyOz for a typical house with land. If the typical house in the states is about 250k and gold really does hit 50k, that means 5 Oz for a House, but the chances of the house not getting bid up in the process in terms of fiat is quite hard to fathom. unless the whole place turns into a wasteland that is?

ein anderer said...

Great opener of a likely thrilling serial! Thank you, FOFOA. Donation button was hit!
My favorite phrase so far:
»In Freegold, a properly functioning monetary system requires nothing of gold.«
Wow, what a sentence. For me this was a sentence which felt like a bomb. It triggered the following exciting thought:

If the monetary system »requires nothing of gold«, it is as if gold—after all still existing!, after all existing in huge amounts!—becomes a silent, transcendental power, sitting aside and ruling the monetary system by its mere existence: like a powerful, but hidden king.

Sam said...

@running gloves

Did houses get bid up when Apple stock went from $5 to $500? Wealth transfers happen all the time. Most "gold owners" own paper proxies and won't realize any gains. If some super producers and third world nobodies get a windfall it won't change things much. There will likely be a lot more interesting things happening in the world at the same time.

Michael dV said...

running gloves
remember,except for you and me almost no one in the USA owns physical....and I'm keeping mum about mine.
Seriously, I know not a single person aside from a few I have coerced who own more than a wedding band.
I think people will assume this is something some foreigners are involved in (gold revaluations). I do expect a few folks to ask me..'hey didn't you say to buy gold' which I'll reply ..'I only wish I had followed my own advice.'
The main support for today's gold market is the fact that most people are willing to hold paper gold.
If you read Zero Hedge you'd get the impression that everyone is 'stackin'. Remember that site gets 300,000 visitors a month. Less than .1% of the population. Most of those are just reading the sexy tee shirt ads and yelling about the 'evil bankers'. I suspect many on that site are not savers. Those that are save in silver...'the people's metal'. Gold is 'too expensive'.
Trust me, very few people are going to be affected (in a good way) by a revaluation of the gold price.

runninggloves said...

When apple went from 5 to 500 the total market cap ended at about 600Billion give or take correct me if I am wrong.

With about 5.1Billion Oz of above ground gold now worth about 6.9Trillion, if that metal turns out to be worth about 50K/Oz, the market cap would end up being like 255Trillion.

600 Billion worth of assets can bid up something, but 255Trillion worth of assets can definitely bid up a lot more stuff.

The market cap for all traded equity last I heard is approx 65T. Now if gold appreciates by a factor of 8 to 10 against traded equity, that seems reasonable if all the shares are equally valued as all the bullion. But if all the gold is valued 4 to 5 times all the traded equity in the world after a 50 fold appreciation against shares; that will definitely be something.

Maybe I am not looking at this right, anybody who wants to chime in , please do.

Speaking of the third world, the windfall for people in India will turn out quite interesting

In addition
Gold, Oil and commodities is global Item, shares are also somewhat global with foreign depository receipts.
Real estate on the other hand seems pretty difficult to value against gold since living standards are a local/regional phenomenon, anybody considered a metric for land/buildings?

runninggloves said...

Speaking of paper proxies to gold, I have tried to find data on paper gold outstanding. Has anyone had any luck with that?

runninggloves said...

@ Micheal DV
I definitely agree that most people in the US do not hold physical after asking a bunch of folks for the past couple years, and thanks for bringing up page visit statistics for zerohedge; you are right about that 300k visits per month is actually alot lower than I expected.

Speaking of physical, I went to those "we buy gold shops" and checked them out, it seems that they pay half of melt for scrap gold. maybe once the people sold most of the gold to those "we buy gold shops" in the states, the scrap supply will be alot less. has anyone heard anything about the prevalence of we buy gold shops over in Europe?

Michael dV said...

while I do not have numbers on the total gold derivative market stock, fofoa has published some info about the flow. The Forex XAU is discussed in several posts. Try Checkmate or Legs. If I recall rightly 285 billion a day gets traded as XAU. The other markets like Comex, LBMA and GLD are much smaller in comparison. I dobn't think anyone really knows how much paper gold has been sold.
Fofoa has stated that he believes there is more physical than paper. In other words the bullion banks have been crazy but not so crazy that they promised more than exists (which I guess counts as restraint.).

FoNoah said...

Thanks for your comment Jeff. You have pointed us in the direction of "dollar liquidity" before. I still don't think I get it yet. (Even though I have read and re-read Fofoa's epic (18-part) comment on the subject here.

Sam - you are very good at explaining the difficult stuff. Can you perhaps help me with Jeff's comment above?

anand srivastava said...

In Freegold, a properly functioning monetary system requires nothing of gold.

Isn't it completely contradictory with RPG?

I do understand that most of the BoP will be balanced by citizens by buying gold on the free market, but it may not happen everywhere or at all times. If a particular currency becomes too successful, people may end up holding a lot of currency. In this case the people sold something to foreigners got foreign currency which the CB changed to local currency by printing it, now the CB holds the foreign currency. In this case the CB may not want to hold a log of foreign currency for long, it would prefer to buy Gold selling the foreign currency.

Similar reverse operations may be required by CBs that are holding in debt currency.

ein anderer said...

»If the US wants to protect its remaining dollar reserve viability, (by maintaining all foreign dollar reserve debt) it now must allow it to depreciate against gold to provide liquidity.«
What would happen if the US decides not to allow their dollar reserve viability to depreciate against gold to provide liquidity?

burningfiat said...

I like where you're taking this FOFOA! Looking forward to the next episode of this series!

Anand, please get this sentence to understand RPG:

I know this is a difficult concept to swallow, but value and currency are polar opposites, which is why, if gold is the reference point for value—which it is—it cannot function properly and also be an economic currency—or tied at a fixed parity (price) to currency in any way!

RPG is beautifully compatible with FOFOA's new thoughts on floating currencies IMHO!

I think this is the core fail in your understanding:

If a particular currency becomes too successful, people may end up holding a lot of currency. In this case the people sold something to foreigners got foreign currency which the CB changed to local currency by printing it, now the CB holds the foreign currency.

I guess we agree that currency's prime function will be MoE in a RPG-world. Then, in a completely floating currency market why should the CB buy foreign currency to supply local currency (=expanding balance sheet by reserve buying)??? That would be currency manipulation in a true floating forex market!
If it turns out that some currency is really popular on a global scale, it must be because it can be used to buy good stuff for a fair price. It will then be bid up according to flow and stuff will no longer be so cheap for foreigners to buy. Seems like a simple concept... Self-regulating even?
The CB gold buying/selling will only occur in emergencies (like post WW2 example) or perhaps to punish misbehaviour from other CB's that are not in on the whole idea of floating currency market.

But then again if some CB's are manipulating exchange rates the monetary system aren't really properly functioning in Freegold/RPG, is it?
So I guess FOFOA's sentence:

In Freegold, a properly functioning monetary system requires nothing of gold.

, holds true... exactly. FWIW...

Jeff said...


As Fonoah politely points out, I am no teacher, or conceptual blogger. FOA wrote the following in the context of CB loans, but even if the players change the game must go on or ?

FOA (07/24/99)

Today, all kinds of loan guarantees are used to back modern fiat dollar loans. If they default, someone (a national treasury) prints the money to buy the loan so no one loses anything. Usually, if the loan is guaranteed, the lending institution just lends more money to try and keep the business going. However, in real life, a fiat reserve system, just as in a gold money system, is always in a natural state of deflation as bad loans appear. So, in time, a paper money system always swells large enough to pass the point that it can create more liquidity (money).

That's what happened with the dollar reserve world. Every US treasury obligation held as a Central Bank reserve was used to create its maximum amount of liquidity. Sometime in the 80s or so they had to start borrowing against gold as debt defaults were destroying wealth faster than the dollar system could supply replacements.

We all worry so much about CBs lending gold reserves, my friend, every other reserve they hold is in the form of lent assets! I won't find any crisp, unlent dollar bills in any of their reserve hoards. The gold represented the last asset for the expansion of the world money supply. It's lent because they can fractionalise it just like a fiat currency. One ounce sold creates only one ounce of liquidity. One ounce lent, can create 90 ounces of paper gold and the dollar liquidity that provides. When they do actually sell it, most of it goes to other CBs. A "fact" supported by the WGC that no one wants to factor, because it destroys their argument about the CBs supplying physical to fill the deficit. Check it out, 300 tones or so over ten years is the net out reduction of gold reserves.

All of this bears out why this entire "new gold market" is SO important to the present dollar / IMF system. It's entirely a paper gold arena that really trades CB vault gold "as guarantees". Crash this Arena and the dollar is history as we know it.

FOFOA: There is one type of liquidity that is of absolute importance. And that is "international liquidity". It is the kind of liquidity that lubricates the cross-border flow of real, essential goods like heating oil, food and medicine. It is the very existence of this imperative for sufficient international liquidity that puts the greatest strain on a fiat currency system at the very end of its timeline while it desperately tries to push out "unlimited liquidity", but fails to do more than push on a string.

runninggloves said...

@ein anderer
why does a country's currency become the reserve?
was there ever a country that became the reserve without running big trade surpluses for a considerable amount of time?
if a country did not have the most products to offer compared to the rest of the world, why should others regard them as the reserve?

RJPadavona said...

Another excellent post, FOFOA! You write about monetary history from a perspective that exists nowhere else on the internet.

There seems to be a longstanding tradition of Western powers taking turns being in the driver's seat. One group runs deficits while the other runs a surplus, allowing their allies time to catch up and get their economies back on track. It seems rigged and crooked to most observers, but the result was more long term stability in the monetary system. As Another said "it was good business as the world gained a lot".

Can't argue with results, now can we?

With the advent of the euro, it looks like it's Europe's turn to take the lead role in monetary management for a while. But this time around, things will be a little different. As FOFOA mentions in this post, FG isn't all about the gold, it's all about the producers and the CB's ability to properly manage the currency.

In the modern era, Europe and America are no longer the only game in town. FG eliminates the US Exorbitant Privilege and puts all currency zones on more equal footing. But humans don't actually want to be equal, do they? If they did, communism would be the most successful and ideal form of government and people would be perfectly content with just "keeping up with The Joneses" instead of outperforming them.

So I suppose it's inevitable that at some point the new monetary system gets tampered with and the equal footing is lost. What then? It's a lot easier to maintain monetary stability when you have just a couple of players who share a long history and a common identity with each other than it is when the whole world is in on the action.

Post-FG we still watch together, yes?

Trust Your Mechanic

JJ said...


Because it was easier to hold what was promised to be = 1/35th

Sam said...


FOFOA said: “In Freegold, a properly functioning monetary system requires nothing of gold.

You said: “Isn't it completely contradictory with RPG?”

I feel like I am being pedantic but FOFOA’s quote said “requires” and so I feel like the statement is not contradictory. If gold purchases or sales are required by CB’s in order to maintain stability or balance trade then gold has not been set free. If it is not set free it will not function as the wealth reserve we all need it to be.

Let us all keep in mind that we live in a world with a FOREX market. That means any currency can be converted to any other currency at any time. That being said let’s just say you have foreign currency piling up, and you forgot about the FOREX market for a moment, why do you need to buy gold? Why not bid for additional goods and services that the foreign country has to offer? This would drive up prices in the debtor nation or looked at a different way it would cause the debtor nation to see their currency weaken. A weaker currency gives a real incentive to produce more and import less. Soon trade is balanced by prices. Prices that were established by letting the exchange rate between currencies float cleanly. No gold required

RJPadavona said...

I almost forgot. Awesome video, FGTube!

burningfiat said...

I second that, RJP. You're the best FGTube!

FoNoah said...

Thanks Jeff: I am revisiting Gold: The Ultimate Wealth Consolidator. It is relevant to what's being discussed here.

On a different subject altogether - one thing I can guarantee: There will be no support from Belgium for the USA tomorrow.

Michael dV said...

R G I'm not sure I understand your comment about the country with the reserve currency but Triffin observed correctly in 1960 that to continue to use a country's currency as a reserve that country MUST develop chronic trade deficits as the USA has. If the country is a net producer its currency never gets out into the world where it can be used.
The heart of the exorbitant privilege is to be able to import and yet still have your currency prized.
In a self leveling world, net importers would soon see their currencies go way down in value.

Lisa said...

FoNoah. Soccer not treasuries??

Eric C said...

Hi Sam,

An asset can be sold or purchased (gained) without any corresponding change in liabilities.

FOFOA says, "Any time the asset side of a CB's balance sheet increases or decreases through purchases or sales, its liabilities increase or decrease as well."

I would fully agree if it said "monetary purchases or sales of their issued currency" instead of "purchases or sales".

Monetary sales of other country's debt or sales of physical assets can create gains and losses (relative to the unit of account), which means the asset or liability side could change on only one side.

When you sell or buy back your own issued currency their is normally no gain or loss.


anand srivastava said...

Thanks for the replies.

Sam: I agree, "requires" does solve the contradiction nicely. So the system does not require gold, but it will inevitably use gold.

BTW regarding your example that the country could buy other stuff, rather than gold. But if the country doesn't need those other things, then it would be blocking them from going to the places that it needs to go. This would restrict the flow of goods to the right places. The purpose of gold is to be bought where money is surplus. That is the only way it will work. Yes most of the time CBs (of well managed currencies) will not need to buy Gold, but overtime people may start to rely on their banks more than gold, due to possibly laziness or chasing returns.

Burning Fiat:

The CBs will not be buying foreign currencies, but if a local entity does trade with a foreign entity. The foreign currency will be received in exchange for the good. Somebody must convert that foreign currency to local currency. That somebody must be the CB. The person may go out and buy gold with that currency. Now CB can buy gold from the international market with the foreign currency and sell the obtained gold in the local market, to extinguish the created local currency. This would be prudent action for the CB. Or most likely the Banks would do this themselves, without requiring the CBs to actually doing gold operations.

Ofcourse the buying and selling by the CB would be done only when the reserves build up to some high levels. And before actually buying the gold, the CB would convert the not-well managed currencies to well managed currencies.

Sam said...

"....the dollar would still collapse in value even if we could hypothetically erase, block or sterilize the massive overhang of dollars and "financial wealth" that has accumulated in the monetary plane from rushing out into the physical plane?"

FOFOA is hypothetically erasing the dollar's enormous "monetary plane" issues (trillions in dollar denominated debt and financial garbage) to show that the dollar is overvalued because of the current deficit in the "physical plane" (real stuff of value people want).

Currently the US has a huge deficit in the physical plane. If you agree with my comment to anand earlier you can see that when exchange rates are allowed to float to balance trade the US will see prices rise quiet a bit. If current physical plane imbalances were balanced on the forex the price inflation would be enough to send the dollar hyper as the USG prints to maintain itself.

Sam said...


Couple thoughts.

1) It doesn't take a CB to convert a convertible currency. It just takes a FOREX account.

2). Surplus money doesn't disappear when gold is bought. It transfers to the seller of the gold. Are you imagining central banks buying gold and retiring the surplus currency? This would be a currency manipulation leading to imbalances in trade. For what? Forced monetary price stability and physical plane imbalances? Why have imbalances followed by inevitable disruptions when we can have balance and functioning gradual adjustment mechanisms?

burningfiat said...

Anand said:

Somebody must convert that foreign currency to local currency. That somebody must be the CB.

Uhm, no. Please update yourself on what a true (or clean) floating currency regime really means. As long as foreign currency purchases have to go through the CB, it's not really a clean float. You might call it a dirty float or a fix or a peg (like the one China has been operating for years). If your currency is freely exchangeable on the FX, no CB involvement is needed in normal commerce with more than one currency. Also the CB's need not be active players in the FX market. That is unless the CB want to manipulate the exchange rate for some reason (e.g. Denmark or Switzerland).
Also, see Sam's No. 1 :)

anand srivastava said...


I am finding it difficult to wrap my mind around it :-).

So would CB not be required in international transactions?

I think this is what would happen. I sell goods to foreign entity. The foreign entity sends you foreign currency through a bank. The bank sends it to the local bank. The local bank converts the currency to local currency. So I get the equivalent local currency. What happens to the foreign currency, it would need to be sold somewhere and local currency obtained. The bank gave local currency so it needs the local currency. Should the bank hold the foreign currency with it, in hope that somebody will exchange it for local currency.

The above would be ok for in-balance countries. The banks could balance it out in interbank transactions. But what happens if the country is highly surplus. How does it work then? Something has to be brought in the country. Who decides what would be brought. I don't think Banks would want to get into the business of holding assets in hope that they would be needed in the future or buying gold from the foreign market. Would commercial banks hold gold as asset in freegold?

runninggloves said...

Ok whoever was not the reserve ran lots of trade deficits
Foreign currency (credits) came in and merchandise went out. The not so obvious part is export merchandise and import capital equipment. Once enough capital equipment gets imported. Why would the country continue exporting? In other words those who run deficits are actually importing finished goods while exporting equipment to make goods (capital. Expertise. Intermediate goods. You name it). The difficult part is to measure how much work ethic.factories.and other factors that contribute to the means of production is still around in the states. Once that level falls low enough. Which means the rest of the world has acquired most of the factors thst contribute to production. Why should they continue to feed the reserve currency. As the marginal capital imported is too low compared to the marginal finished product exported

Sam said...

"What happens to the foreign currency, it would need to be sold somewhere and local currency obtained"


It's liquid, it's quick, its modern, and wonderful. Just like the stock market if too much of one currency is being sold the price will fall until it balances out.

Michael dV said...

What the USA is dealing with right now is the result of being the creator of the reserve currency. For years we have been able to sell our debt rather than trade for our government to get the stuff it wants. The dollar was placed in vaults rather than spent and coming back to the USA where it would have caused inflation. It stayed strong.
Because it was strong American manufacturers could not compete with cheap labor markets and we lost our industry.
The government knew this would happen but that was the price we paid so that guys like Cheney could say: 'deficits don't matter'.
The government could borrow and spend and make fantastic promises and get votes without having to tax the people of the USA.
It was wonderful. We could buy oil for cheap because we had a strong dollar. The only problem was that, as Triffin foresaw, eventually we would not have any industrial base, we would use the privilege until we were drowning in debt and had no real economy left. That day is here.
Having the reserve is not awarded to the strongest economy. It was given to the USA because it was strong but it was a curse. It promise a future of foolish politicians and widespread unemployment.
Some countries were net importers and other net exporters. That did not matter to the system. The only country that HAD to be a net importer was the one with the reserve. It HAD to spend it's currency abroad or the rest of the world would have had to use something else as a reserve. Unless there was an excess of dollars abroad they could not be hoarded. Only if the USA spent more than it made could this happen.
In the beginning we could just give or loan the money out. After we got back to business as usual we got very comfortable with (relatively) free stuff.
Imagine if the world saved in your IOUs. Would you work?

Rory said...

The Economist has a word or two on this exact same topic. In fact, they even use the same Morgenthau quote:

runninggloves said...

We are in agreement, can we say that holding the reserve status meant the country is in the process of dishoarding/consuming the industrial base that was built/accumulated before the status has been acquired;

it appears that china is building up industrial base, but they have a long way to go before becoming fully industrialized. i dont remember any country taking reserve status before becoming fully developed.
one has to wonder, what does china have in mind with 4T worth of forex reserves? and for china to arrange currency swap agreements with various states seems to signal a change in the world monetary order.

if someone is convinced a different country will be the reserve, please elaborate

anybody , chime in.

Michael dV said...

I do not see another country having reserve currency status.
Export nations would soon find they were priced out of the market as their currency increased in value and their exports became too expensive. China could not possible want that.
I just don't think the world will give that privilege again.
Freegold is a far more elegant solution. The balances that prior systems denied the world can now be incorporated and nations can plan with a logical determination to produce to acquire wealth. Debt will be feared or at least used wisely as it will have to be repayed with the real pain of work or the sacrifice of real savings. Simply 'put it on my tab' won't be allowed again...ever I suspect.
The world has a chance to build a much better system, one that can work in a no growth environment too....which is huge.

Nickelsaver said...

In Freegold, a properly functioning monetary system requires nothing of gold.

I wonder if that can be understood better by stating what does make demands of gold?

Could it be said, In Freegold, a properly functioning balance sheet requires everything of gold? And if not, what would be the point of gold at all?

Furthermore, it must be that any properly functioning currency ought to be able to bid for gold, or gold bid for it as the litmus test of its strength. And while this may not be a requirement of the CB's reserves, it is certainly a requirement of the currency and gold in the open market. In this light, I think (perhaps I am wrong) would require clarification or qualification of FOFOA's statement.

Eric C said...

Equity only exists in the unit of account monetary plane. Assets can exist in the monetary and physical plane.

Sam said...

@Eric C

If we are still talking about CB's the physical assets they possess are less than 1%. Their realm is in the monetary plane.


The point of gold is for saving. CB's will hold gold because its universal value will stand behind their currencies like a million dollar house stands behind a $50,000 mortgage.

vizeet srivastava said...
Banks are already demanding Gold to be officially considered SoV for CRR/SLR consideration. If they succeed then probably next demand will be to allow people deposit gold in saving account instead of keeping it with themselves.

runninggloves said...

we can probably agree that reserve currency would be a gold substitute from the lens of international trade. wow, that brings a whole new meaning to paper gold.

either trade is settled in gold or fxrates between countries will have to will adjust freely.

so to go from reserve currency to no reserve within the international realm, we trade long term imbalances for short term volatility, which would sound too similar to central banking to free banking within the domestic economy.

that is a major paradigm shift

One Bad Adder said...

Our little Ratio chart is showing real determination here -$TYX:$IRX&p=W&b=5&g=0&id=p64537896655 - and if "trend" matters, I'd say we're getting close ...again .. DEflation / Hyper-INflation hang like the proverbial Sword.
Good post FoFoA.

tEON said...

Thanks so much FoFoA,
With the velocity of 'money' crawling and my business with it. I wanted to write something. I think this is a key major series you are writing. Another important layer of education. I have learned so much (I know I will leave out important points with my alcohol-addled brain). From;
1) Understanding Gold (only 1 or 2% even seem to 'get this far' to bother entering through the front door of the Blog - Goldbugs and Silverbugs) or the historical precedent regarding the fragility of paper. This is obvious to those who accept it - but, pretty much, unthinkable to most of your friends, family and co-workers.
2) Accepting the global importance of Oil
3) Understanding Gold is not a commodity (and why CBs and Elites hold it)
- dismissal of Silver's perceived importance
- become cognoscente of why Gold can be revalued without significant disruption to the marketplace
4) Accepting Gold is not supply/demand but stock/flow
- dismissing the current paper market price discovery not as simply flawed - to be repaired, but as necessarily dunsel <- like that T.O.S. fans? (this seems to be the line in the sand for most analysts who are always using it as their premiere bellwether guide of 'direction' attempting timing predictions with charts and data in a representation they should know, by now, is unrelated)
- accepting all other investments, outside of gold, are speculation as they are denominated in paper
5) Accepting that 'shrimp visible' signals are, largely, irrelevant (ceasing pot watching!! - except for fun :)
6) Coming to grips with currency's inevitable necessity as MoE
- including Gold's irrelevance in the monetary plane - prior rebirth - as the, significant, currency floats (or crashes) around an immovable object like a decaying orbital satellite.
Your AU will not alter its properties after any paradigm shift, but the currency denominating it may - potentially suffering massive devaluation. Gold, the veritable rock, that you save in will continue to sit there - it isn't magic beans - you won't use it to buy houses, land or art. You will use the critical MoE.
I keep saying to myself 'it' is getting closer... and closer... I wonder how long this can extend? Will it take a Stock Market crash to initiate? Russia? Middle East? Bond market? RE bubble burst? My limited imagination has trouble thinking we'll escape from 2014 without something happening...
Perhaps I can help the economy by buying a few non-perishables, after all it never hurts to have a little more stuff (Carlin-esque) at home.
Peace PGAs,

Eric C said...

Hi Sam,

Yes, I am still trying to understand the CB balance sheet. If the bank of Brazil bought 100 USD for 100 Brazil dollars and then sold 100 USD for 200 Brazil dollars, would this not create a gain? I will think about this over the weekend.

I am struggling to understand why a CB balance sheet is different than a business balance sheet. I think it has to do with using the currency of the CB in society. I do see they don't seem to have equity. Is this true across the board?

I am unclear about how a CB balance sheet works. Does anyone have any suggestions on reading here or elsewhere on this topic?


J said...


Oil producing countries, particularly in the GCC, could benefit if they would use bitcoin in oil trading, instead of dollars, Markaz’ research department argues.

One Bad Adder said...

Classic "Flight-to-the-Here-'n-Now" market action evident today - $IRX in the pits, long-end of the curve (Yield) popping up above trend, $PoG hit, however ...
Stocks keeping their head above water now.
We watch ...intently.

Michael dV said...

Just watched a YT video with Dr. J Tainter on complexity and collapse.
He made a comment the gold was form of energy concentration. A lot of 'sun light' goes into the procurement.
I have often though of the best way to store energy. Obviously batteries to drums of oil will do that. Cement is another way to store a lot of energy in a potential form.
I had not considered that gold would fit in that category but when I consider the diesel and manpower that goes into mining the average ounce I have to agree.
Gold is perhaps the best form of energy storage. It is obviously not reversible but to get the next ounce you will spend a lot of calories.

runninggloves said...

Is it possible to create another element that could replace gold for the SoV function? There are definitely many different cryptocurrencies floating around these days.

Sam said...


Well it would need to be something real so anything printable or "crypto" is out because of the temptation for cheating. It would need to be useless for anything but storing value so that the act of hoarding it doesn't hurt the rest of society (think silver, platinum, ect). It needs to be fungible and divisible or diamonds would work pretty well. Oh and it should last centuries without deteriorating. Who knows maybe someone will come up with something better than gold someday. The nice thing about this blog is we try to focus on where we are going not where we should go. I'd make a terrible activist. I hate holding signs and going door to door. There is a lot of evidence that people much smarter than all of us have been planning on using gold in a store of value role for the next monetary system for at least half a century now. They have been preparing and have hoards and hoards of physical gold. I'm going to just follow in their footsteps.

runninggloves said...

glad that you addressed the crypto issue

what if they decide that pensions, retirement accounts become collateral for sovereign debts? what i am saying the endgame is certainly coming, but the authorities just have some magical way of kicking this can down the road alot longer than we expect.... from bail ins, negative interest rates, who knows what other rabbits they can pull out of their hats

Bright aurum said...

The spring is being coiled from both ends inward. So much stored energy!$tyx:$spx&p=D&st=2007-02-02&en=(today)&id=p08180603647

J said...


I'm not here to detract from the topic at hand but..

"Well it would need to be something real so anything printable or "crypto" is out because of the temptation for cheating."

"crypto" prevents cheating. It allows for scarcity in the digital realm. I believe that they'll function side-by-side and it's quite fascinating to have wealth managers suggesting it's use in the oil trade and BIS Chairs suggesting that it could replace the pound in Scotland.

Something to keep on the radar..the world and technology is constantly changing.

kobajashi said...

And on another topic:

Did anybody read the last bis report?

A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.

The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI).

To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.

What do you think about it, knowing that from 15 to 18 juli there is also a meeting of the central banks of the BRICS.


Edwardo said...

There are manifold problems with crypto currency. One of them is that they can not be arbed. And another problem, which is discussed here as it relates specifically to Bitcoin, is not limited to that particular "crypto-currency".

The mooting of the idea that crypto currency ought to be used in the oil trade is fanciful but I have no doubt that someone, hopefully not Scotland, will try it and subsequently regret doing so.

MatrixSentry said...

In addition to the qualities required that Sam mentioned, the new SoV would have to accomplish quite a feat. It would have to convince all that hiding gold to come out into the light so that it could replace all that stock as the focal point wealth preservation. That is a lot of gold. Remember, only a small fraction of gold ever mined is accounted for in central banks and such.

Second, since 1971, 85,000 tonnes of new gold has been mined, yet the world's central banks today hold 15% less monetary gold than they did in 1971. In 1971, the seven European former members of the London Gold Pool held a combined 15,660 tonnes. Today they hold a third less, 10,465 tonnes. Even Saudi Arabia's official gold reserves have increased by only 227 tonnes since 1971. So where did 90,000 tonnes of gold go, if not into the monetary system?

Stock to flow ratio. A new focal point has a long road to hoe in order to replace gold.

JC said...

Notes on crypto-currencies,
-'crypto' is real, a unit of crypto-currency can only exist in one place at one time, they are discrete physical items.
-bitcoin is one such currency and the current focal point of the crypto-currencies.
-while units of bitcoin and many other of the crypto-currency units are limited by their nature, any number of new crypto-currencies can be 'printed' by anyone with ease.
-crypto-currency certainly seems here to stay but it is likely to remain a tiny niche compared to the big picture global store of value.

On the topic of where money and/or currency gets it's value I am reminded of the following, first FOFOA quotes Another, then some further expansion from FOFOA.

"Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

So it is the receiver of currency—not the giver—that determines its value.
. . . .
The measure of any money's store of value is a continuum of time. It is directly linked to demand and velocity."

Giants decide the big picture store of value, following their footsteps seems wise.

runninggloves said...

alright then, borrow fiat to buy crypto and physical?
question is at what fiat int rate and timeframe?

Joe Vanderbilt said...

First of all great post FOFOA, looking forward for the follow up!

Sorry for going a bit off topic but I thought of posting here something I wrote to a good friend of mine that asked me to comment on the "Pitchforks Are Coming" article. You might find it a good read and I'll be happy to be pointed out any flaws in my thinking.

I tried to keep it as simple as I could, he does not know much about these issues. And sorry for the bad English, its not my first language.

Interesting to see a billionaire take "our side"! :) But I think a few things he says does not make much sense, like raising your workers salaries so that they can afford to buy the stuff those same workers are producing... a company only remains in business if it has some profit, and that means that the value of what it produces must be higher than the costs to produce it (including salaries!). You cannot lift yourself up by pulling on your own bootstraps.

I agree that to a point a minimum wage is a good thing, it reduces poverty and inequality and the people that are helped this way may end up having the chance to recover, stop having the need for this benefit and make a positive contribution in the future that more than compensates the help they got. In the end it is like all the other social benefits the government gives out, this one is not directly given by the government but the effect is the same: you are redistributing wealth from the people who produce more to those who produce less (measured in terms of the value of what they produce). Keep in mind that these days there is no more economic growth (real, above inflation), so it truly is a zero-sum game, if you want to make someone better off then someone else will be worst off. If that someone is a billionaire than probably no big harm is done, but the problem is that in the limit you cannot redistribute more than what the nation as a whole is producing, you can't have something from nothing, so there is this hard limit which is more or less what communist systems try to achieve. But the optimum, defined has the solution that maximizes most people quality of living, is far bellow this hard limit for the simple reason that if you confiscate everything that producers produce than they lose the ability or incentive to continue producing. If your nation as an whole produces less then you have less wealth to distribute, making everyone worst off. There are countless examples in history of this process taking place, ultimately driving countries to poverty and economic collapse.


Joe Vanderbilt said...

The rising inequality of these days is a serious problem, but raising minimum wages or other social benefits (beyond a certain "optimum" point) is fighting the symptoms not the cause. How is it possible that Wal-Mart (using the example he gave) can present a systematic, year after year, profit of $25 Billion? You would think that sooner or later the free market would come along and present a competitor that would simultaneously bid higher for their workers ("stealing" the most productive ones from Wal-Mart) and sell cheaper products, in the process making a profit of say "only" $1 Billion. Problem solved, higher wages, cheaper products, and less wealth concentrated in the Wal-Mart "CEOs" and in the financial elite that owns them. Why doesn't this happen? I would guess that the market is not as free as we think, these companies don't have to fear such competitors because they effectively control a monopoly, given explicitly by law or implicitly by laws that create huge barriers for new businesses to challenge them, or by activities that if not should be illegal like political gambles to drive competitors out of business, defamation technics, antitrust and all kinds of dirty tricks. In the worst cases governments incentivize or even subsidize these monopolies. As an example of monopolies given by law we have the patent system, if some company controls all the relevant patents for their business no one can challenge them, I think the patent system needs a serious revision, but thats another topic.

Another factor that I think contributes to rising inequality is of course the overblown dimension of the financial services sector with respect to the rest of the economy. These guys are just skimming huge profits from everybody else's savings while producing little or nothing of value. The main guilty here is the structure of the international financial system itself, which requires constant exponential growth to maintain itself. But they were only able to grow so big because they successfully convinced (or tricked) everybody else to park their savings with them, so the savers unknowingly are the enablers of the current situation, otherwise the system would have collapsed a long time ago and replaced with something more sustainable. The collapse is coming anyway sooner or later, the financial system cannot keep growing forever at a rate higher than the rest of the economy, not everyone can be an investment banker. But the longer it takes the more savers will go down with it. Move your savings away from paper (cash or cash equivalents, bonds, stocks, derivatives...) and into real assets or you will lose most or all of it. The minimum sensible thing do is to diversify at least a small part of your savings away from paper (say 10%) so that you don't risk ending up begging in the streets. It should be said that many of the savers that will lose everything will also lose their jobs due to the ensuing crises, so the savings will fail them when they needed it the most... real drama!

Joe Vanderbilt said...

There are many real assets to choose from, but keep in mind that when the crises hits governments will do everything in their power to save the current system. In 2008/2009 that meant huge bailouts at the expense of the taxpayers, but that venue is exhausted, next time it will be at the expense of the savers, savings will be heavily taxed or confiscated (similar to what has already happened in Cyprus). And if paper savings are burning that means they will go after real asset savings. As an example I think taxes on real estate will become unbearable, people will want to sell their properties to avoid these taxes (and to make some cash to deal with general financial difficulties); if you have much more sellers than buyers than the price will collapse, making real estate a lousy savings vehicle (specially if you went into debt to acquire it!), but still much better than paper. You already know what real asset I prefer, for a few simple reasons: its proven to work since thousand of years, durable, easy to carry with you if you need to move, not easily confiscatable by governments and it is the real asset central banks themselves use as reserves so they have a vested interest to make sure it is very valuable for the whatever next system that comes along. On top of that it does not cause economic harm to hoard it because it is useless, you do not want to hoard something useful for that will be depriving society of its usefulness. For this same reason its price is largely irrelevant, it can be as high as necessary to re-capitalize the financial system without ever damaging any industry. Same as works of art, largely useless therefore it does not hurt anyone that a Picasso is worth millions.

End of rant! Thank you FOFOA for all the knowledge and understanding I gained through your posts. Donation is going your way.

Edwardo said...

rg asked:

what if they decide that pensions, retirement accounts become collateral for sovereign debts? what i am saying the endgame is certainly coming, but the authorities just have some magical way of kicking this can down the road alot longer than we expect.... from bail ins, negative interest rates, who knows what other rabbits they can pull out of their hats

I don't know about the magical side of can kicking, but I believe the effective confiscation of retirement accounts has been proposed by the IMF. But I posit that the measures designed to trap folk's boodle- see the discussions/proposals regarding imposing exit fees when cashing out of bond funds- will fail because A.) there isn't enough there to do the job even if the authorities were entirely efficient in capture, B.) because a lot of folks will exit the system in advance of such measures, and C.) putting even more pressure on the tax base is manifestly egregiously counterproductive. Does this necessarily mean "they" won't try it. Of course not. Government excels at taking counterproductive measures. The takeaway from this corner is that these nostrums have at least as good a chance, more likely a better one, at hastening the end of the present system than prolonging it.

Sam said...

The dollar gold standard prevented cheating as well. It allowed for scarcity of printed dollars as each dollar was the equivalent of 1/35 ounce of gold. Crypto's may have a place as alternative currencies but not as a pure store of value wealth asset. At least not for anyone that knows their history.

One Bad Adder said...

@BA: - Interesting times eh?
In the "coincident events" department we have (a) the Credit side of the Ledger on the brink of overwhelming the ability to create Debt ...and (b) the impending Chinese Gold Reserves announcement (any day now - pundits tipping a huge increase to 5kT)
One ..OR the other can cause havoc, whilst BOTH together - Butt-ugly!

Michael dV said...

Except for the benefit to governments that comes with controlling the currency (and that is a big 'except') it matters little how folks use various media of exchange. I suspect there are already many exchanges that occur with barter in the used goods market (will trade my RV for a Harley) or the use of coupons as cash in the retail market.
Using Bitcoin would not be a whole lot different than using a credit card if the value of Bitcoin were stable.
As it is now I don't touch cash in most of my transactions . In the future lots of things could function as media of exchange. You'll not likely find me storing Bitcoin or the like for savings however.

burningfiat said...

MdV and Matrix,

I guess the jury is out on whether La Gloria Cubana is Cuban or not.

I've just enjoyed a very nice La Gloria Cubana Medaille d'Or No. 4 today. Definitely Cuban! :)

Winters said...

wrote a comment the other day but blogger seems to have eaten it...

Just when you think FOFOA has explored freegold from every angle, he pulls a prism out of his rucksack and renders across the spectrum in another new light!

Bravo sir, Bravo!

My question to all is, by having the fixed exchange rate, this meant the American economy was subsidising Europe's so they could maintain their lifestyle during rebuild (right?).
What was it in for America? An accelerated rebuild and therefore traders would be on stronger feet faster?

Dim said...


I would say Gold was in it for America. But it was a double edged sword.

Jeff said...


What was in in for America? Peace. The vengeful conditions imposed on Germany after WW1 set Germany up to fail, creating the conditions that would lead to WWII. The next time, they did things differently with Germany and Japan. It worked pretty well, wouldn't you say?

Jeff said...

Yes, Pax Americana came with Tax Americana.

"New world order, regionalism and tribalism are but modern phrases that denote "group retreat to avoid paying up". The worldwide currency system is truly a reflection of an economy built from war, using the American Experience, the US$ and the debt that it represents. But, for the American dollar to continue as the representative of the global financial system, in the form of being the reserve currency, maturing generations of all countries must accept it, and the tax on real production it clearly imposes! In the very same mind set, that people buy the best value for the lowest price (Japan cars in the late 70s), and leave an established producer to die, so will they escape the American currency and accept any competitor that offers a better deal. Because we are speaking of currencies here, the transition will be brutal!"

Victory said...


Thank you, excellent post—you may have taken a little time off but you haven't missed a beat my friend.

This from ZH:

Not even we anticipated this particular "unintended consequence" as a result of the US multi-billion dollar fine on BNP (which France took very much to heart). Moments ago, in a lengthy interview given to French magazine Investir, none other than the governor of the French National Bank Christian Noyer and member of the ECB's governing board, said this stunner at the very end, via Bloomberg: (Me: note ZH forgot to mention that Noyer is also the HNIC at the BIS)


Here is the full google translated segment:

Q. Doesn't the role of the dollar as an international currency create systemic risk?

Noyer: Beyond [the BNP] case, increased legal risks from the application of U.S. rules to all dollar transactions around the world will encourage a diversification from the dollar. BNP Paribas was the occasion for many observers to remember that there has been a number of sanctions and that there would certainly be others in the future. A movement to diversify the currencies used in international trade is inevitable. Trade between Europe and China does not need to use the dollar and may be read and fully paid in euros or renminbi. Walking towards a multipolar world is the natural monetary policy, since there are several major economic and monetary powerful ensembles. China has decided to develop the renminbi as a settlement currency. The Bank of France was behind the popular ECB-PBOC swap and we have just concluded a memorandum on the creation of a system of offshore renminbi clearing in Paris. We have very strong cooperation with the PBOC in this field. But these changes take time. We must not forget that it took decades after the United States became the world's largest economy for the dollar to replace the British pound as the first international currency. But the phenomenon of U.S. rules expanding to all USD-denominated transactions around the world can have an accelerating effect.

kobajashi said...

@ OBA and Bright Aurum,

I always look forward to read your messages, but I have to admit I still have trouble knowing what you guys can “see” in the charts.
Is it possible to try and explain it to me on a very easy way (something like: when the line on OBA’s chart that is currently near 1161, goes vertical , all the way up, or … than, …)?
Als for the chart of Bright Aurum … Is it when the price goes to zero (now near 0,0175) that we can expect something?
I am not that much of a chartist so help is welcome and as easy as possible for me to follow 



Victory said...

Also FOFOA fans will enjoy the last chapter, Gold Games (p. 271-288), in James Rickard's new book 'The Death of Money,'.

runninggloves said...

Lets say they want to run trillion dollar deficits then decide to convert all retirement assets into treasuries....
according to link below there is approximately 20T in retirement accounts
20 more years of can kicking to go?

and... to supplement the can kicking how about fix int ceilings @
bank loans at 2% int
savings deposits at -3.5% int
checking deposits at -5% int
for the purpose of recapitalizing the banks.

I agree in principle; according to the Kondratiev winter, gold is suppose to appreciate relative to shares and housing, but with this unprecedented mkt intervention. they can do some wacky stuff, its just mind boggling

Winters said...

thanks Jeff. Good points (has anyone mentioned you rival JR in your indexing & recall of FO/FO/A quotes :)

One Bad Adder said...

Hi Koba,
Briefly, it is my opinion that "virtuous debt" cannot be created in sufficient quantity to service the "credit" side of the ledger - and hasn't been able to for the best part of the new millenium.
What the Chart you referenced shows is how many short-term Yields it takes to equal a long-term Yield.
Before "Time-line" issues with the Reserve currency surfaced (c 2001), the nominal ratio was 5.
What this implied was that the market accepted there was "no-risk" across the curve ...and multiplier essentially represented Inflation.
Nowadays however we watch and await that inflection point where TIME becomes the ONLY consideration.
If my assumptions prove correct, the system will firstly collapse into the Here 'n Now (short T's and Cash will explode to the upside whilst the longer dated maturities (Stocks, $PoG etc) will be severely discounted.
Stage 2 of this meltdown will see Gold (the ultimate "Here 'n Now asset) valued accordingly - but at that time Gold (Bullion) will be unobtainable.
If you care to check, all the "official" market-management (Fed et-al) activities these last several years have been in earnest deflecton of just such an occurrence.
Hope this helps ;-)

One Bad Adder said...

...whatsmore ...and curiously, it's highly unusual for them to leave "things" as they are (1161 - which is a reflection of $IRX @ 0.03%) over a long-weekend??

Bright aurum said...

My chart represents the ongoing normalcy bias and credibility Inflation peaking.
Things can go bang anytime now and with much more vigour than 1929/2008 - a deflationary prelude to hyperinflation.

Bright aurum said...

The above also implies that if one can borrow cheaply one can short the future to obtain the now and watch inflation eat away one`s future obligations in real terms.

burningfiat said...

Sorry to correct you OBA, but IRX rests this weekend at 0.003%, not 0.03%, but that doesn't subtract from your points. Let's see whether they can hold it together ;)

Bright aurum said...

Belgium a.k.a. the old monied interests is buying more gold than Germany!

Edwardo said...

Lets say they want to run trillion dollar deficits then decide to convert all retirement assets into treasuries....
according to link below there is approximately 20T in retirement accounts 20 more years of can kicking to go?

Perhaps, but I am biased towards the view that it's no longer really in the hands of the U.S. authorities regarding how their outstanding debt will be retired. The ROW is taking steps in increasingly accelerated fashion to augur in a different outcome, one that involves a dramatic collapse
of the greenback.

runninggloves said...

Speaking of the ROW, did the french just recently jump ship from the $IMFS with this whole Total, BNP, Banque de France, Mistral class ship delivery, incident/fiasco?

Now once london decide to jumpship..... hmmmm interesting times are to be seen ahead...

Sam said...

Those retirements "asset" are all debt or equity. Besides the immediate backlash any conversion to treasuries would receive, you would also be forced to tank the stock and bond market in the process. I don't think the US wants to can kick at all costs. I think they know exactly what is coming and have been preparing for it for some time now.

M said...

@ runninggloves

"Lets say they want to run trillion dollar deficits then decide to convert all retirement assets into treasuries....
according to link below there is approximately 20T in retirement accounts
20 more years of can kicking to go?"

Just a quick calculation (could be wrong) , if the US is running a 50 billion per month trade deficit, thats a hair over a half trillion a year. (600 billion) So all of the US's retirement assets would only cover the US's trade deficit for.... 8 years I think.

One Bad Adder said...

@Burning: - you're right Sire ...0.003% - what an investment!
Ponying up $99.99 odd to get back $100 in 3 mths.
There's Another $25Bil up for grabs tomorrow - could get "interesting"

anand srivastava said...


I still have to understand how it works. Being a total stranger to economics, it is not intuitive at all how Forex works. Anyway its not at all pressing. I will let it process in the back of my mind, and maybe something else on the blog will trigger something and I will have my aha moment.

thanks for the clue.

byiamBYoung said...

Well, this doesn't sound good...

It's in German, but here's a snippet from a Google translation:

"Six trillion dollars are ripe for depreciation

Because America sets about to devalue its debts. This is done not by a haircut or stop the unilateral interest payments, such as the rating agency Dadong had feared, but by the U.S. Federal Reserve. In recent years, the Fed has driven with their special programs ("quantitative easing") prices for U.S. government bonds heavily in the air. Now she puts the car into reverse ("tapering"), which is likely to have the opposite effect: a price decline in U.S. bonds.

Fabulous sums are thus ripe for depreciation: A total of six trillion dollars the U.S. government has borrowed from other countries. Mostly politically motivated loans made ​​by central banks and sovereign wealth funds, relying on the strength of the debtor and the U.S. dollar. If parts of it must now be written down and caused billions of dollars in valuation losses, one can view this as an unfriendly act. We will have to speak at the Beijing visit of Kerry and Lew.

But there is much more at stake: the stability of the global economy and the future of the dollar as the dominant world currency.

Beijing is already out to emancipate themselves from the dollar

When the Fed last year its gradual exit from the crisis mode announced, they encountered fierce turmoil on the financial markets of emerging countries. The prospect of higher U.S. interest rates established in many places a capital flight that was only with difficulty to stop. A foretaste of what is to come in the fall when the Fed ceases its market support. Perhaps the streamlining will come even rapid than expected; that in any case suggest the good labor market data.

Meanwhile, many central banks around the globe strive to repel U.S. government bonds and reallocate their reserves into other assets, such as recently, a survey of the journal "Central Banking" and the bank HSBC. This means that portfolio managers take U.S. bonds on the market and buy for other papers, such as shares.

If the Fed ends its quantitative easing program, the consequences could therefore be dramatically rising global interest rates, the crash of the bond markets after a 30-year rally, and as the indebtedness in many countries is very high at a time. It is the stuff of which may be the next big financial crash."

Roacheforque said...

It seems to me the BNP case, along with all prior "rules and sanctions" upon international dollar settlement is a case of the intended consequence of nominally inflating away debt.
As FOFOA has more or less made clear in Peak ExPriv, Moneyness (etc.) it is a desired outcome.

While hard money conspiracy theorists yank out tufts of hair in confusion and angst, coporations continue to stuff cash into record buybacks, in anticipation of the shift to national dollar economies and cheap US labor.

No one on planet earth can do their part to hyperinflate the dollar fast enough, except for those who've foolishly entrusted their savings to dollar denominated paper wealth.

Franco said...

Damn it! Blogger ate my comment!

M said...

@ byiambeyoung

Good find

" The prospect of higher U.S. interest rates established in many places a capital flight that was only with difficulty to stop."

This is the capital flight that will instantly cause velocity induced banana republic style double digit price inflation that Keynesians like Ben Bernanke think they can reverse in 15 minutes.

Good luck Yellen. LOL

Eric C said...

I think I understand the non-equity on CB's balance sheets better. When the entire balance sheet uses an UOA made of your own notes, you could not have equity. Is this correct?

Andrew Storm said...

Out of curiosity, let's assume Freegold happens tomorrow and someone owns some gold coins. In the transition other asset classes, specifically those tied to the dollar should do terribly. It makes sense that selling gold to buy something else could be a good swap. I don't know if it will be, but there is good logic to it. If interest rates shoot way up, there will be good real estate sold to cash buyers, e.g.

So... if Freegold were tomorrow, who would actually be willing to buy the gold from you? If you had 10 coins at FOFOA's price we're talking about $500k. That's a big check even in an inflated world. Further, gold dealers are generally net long metal so are they trading gold for a wide market or do many of them cash out and move on?

I've read about the transition and such, but I'm wondering about human intentions. Most shrimps with some gold will want to sell some and I'm not really sure I know who the buyer is, at least in quantities above 1-2 oz but below real bars. Just a thought, curious others view.

burningfiat said...

OBA, it seems Team Reverse Repo once again came in and saved the day...

Jeff said...

FOFOA: "Why are you worried about how long gold will "lay quiet?" Are you worried you won't be able to sell your gold to cover your expenses? Au contraire! You will be able to sell your gold! You just won't be able to buy. FOA wrote, "dealers would mostly be making a market on the buy side only."

You won't be able to buy any more gold, unless you are willing to outbid (pay more than) all the other bidders for the scarce scraps that are being liquidated by a few shrimps like you to meet personal expenses.

APMEX will report "out of stock" on everything. There will be no known price to advertise, even if they had inventory. You will call several dealers when you are ready to sell and ask for their bids on your Maple Leaf. They will either spit out a bid that will take your breath away, or they will say they'll call you back after they get bids from their buyers. You will sell to the highest bidding dealer, but you won't buy any gold unless you, yourself are the highest bidder.

An official market transmits an official price because somewhere on the supply chain a dealer won't pay more because he can get it from the official market maker at a known price. Or, he won't sell for less because he can sell to the official market maker. Dealers won't be selling their own inventory while gold is in hiding. They'll only be bringing buyers and sellers together through the "auction process" and they'll be earning a spread. The dealer will pit his buyers against each other just like you will pit the dealers against each other.

Through this process will emerge the "dealer network" that I have written about that will last until Another "official market" emerges. When this official (physical only) market finally emerges there will once again be physical gold available to purchase at a known price because it will be at a price established at equilibrium between gold and fiat, each valued at a sustainable price relative to long term capital deployment risks and opportunities. This is what will bring gold back into the market in quantities large enough to make the established price global once again.

"…in terms of today's currencies, gold will be "upvalued" to perhaps $10,000 to $30,000 an ounce." -Another March, 1998 (Gold had dropped to $295)

During this time, after the paper market has failed, that GIANT sucking sound you hear when you call your dealer and mention that you have some gold for sale will be the CBs and Giants somewhere at the other end of the dealer network with their unlimited currency, their insatiable demand for gold, and their standing over-bid acting like a giant concubine sucking a golden golf ball down a tiny hose. Let's call these Giants and CBs "the buyers of last resort" for gold. Another said they stand ready to buy any and all physical gold offered for sale.

Michael dV said...

My plan it to wait until the dust settles and a firm price is established.
Another mentions a 30x to 90x price but I have done calcs and can get even higher (as a gold owner it is a fun exercise.)
If all the gold left in the GLD were bid for by all the holders of treasuries (assume 800 tons and 5T$ of bonds) one gets just shy of $200,000 per ounce.
If the bidders are the owners of ALL US debt the number is 5 times that.
Imagine a situation in which a bond default (or hyperinflation) seemed imminent. Even before the trillion dollar notes started showing up gold would go crazy.
Another scenario would be the USA offering some of it's gold to those holding it's debt. If they offered 4000 tons to those holding 17T$ of debt one gets 132,000 per ounce.
There are lots of other ways to look at this. Ultimately it will be the amount of gold offered not the amount of gold in existence. It will be the number of dollars bidding and not the sum of all currency.
Panic could play a role.
Perhaps there never will be a high dollar price. The dollar could disappear and a new currency emerge. You might learn of the new value by finding how many (or how much of one) Mercedes you can get by selling an ounce and going to the dealership.
Fofoa's $55k was based on 2009 numbers if I recall correctly.
Maybe things will all go to shit for a long while and there won't be much to buy here.
Maybe you'll have to take your gold where it is appreciated to see what it is really worth.
Whatever the ultimate price it seems certain that those who have unlimited dollars now simply cannot get gold in the tonnage they need. Thus they buy Balloon Dog #3 for millions and upscale condos in rat infested cities like New York and London. They buy farm land for far more that the value of corn it can produce.
It is obvious that wealth savers are having a hard time preparing for a transition to a new currency system.
They know gold is the numero uno asset but there just isn't any to be had unless you are a shrimp.
If someone knows a billionaire who has recently scored more than a ton I would love to know. I do not think it is currently possible to buy that much gold at $1300 per ounce.
Jim Willie insists that GLD is no longer redeeming baskets (for each 10-,000 shares you should be able to get 10,000 ounces of physical). Now Jim believes HAARP caused the March 2011 Japan quake and tidal wave so I'm hesitant to use him as source material.
Maybe some one can ask Mike Maloney how much physical gold can be had.
I saw recently someone added up all the gold for sale at APMEX and got 22,000 ounces ...just 2/3 of one ton.
A ton at current prices should go for $42 million. A billion should get you 24 tons. Poor Bill Gates is not going to be able to transfer even 1/60th of his stash into the new order.
I'll bet many of these billionaires will have to start over when things get interesting.

anand srivastava said...

Jeff: Exactly. That is why I am thinking that there is not much need to diversify. Gold during the crisis, will be much better than anything else. If you also factor in the revaluation. Whatever you don't use, becomes X times. The trick is to get very small size coins, preferably 1gm.

I do have some Euros, for the case if I get into trouble before the actual crisis. And I will finish of that first before dipping into my gold. Of course, I have made a cache of daily necessities, to avoid dipping into anywhere :-).

One Bad Adder said...

@burning: - the Month is young mate...and auxillary markets have given an indication of what to expect. It will go there eventually - of that I'm sure ;-)

runninggloves said...

has anybody consider a soft default?
raising the minimum wage at Seattle for example
so lets say raising federal minimum wage to 25$/hour, calling all debt then restructure into say 50 year treasuries @ 4% p.a.
This is as good as a 75% haircut on all bond holders, but most people will not see it.

The point i'm trying to make is yes.... default in some form is coming, but it will definitely be in a form that most people wont notice.

and 30k gold might mean 1000$ Oil, in general it takes a given amount of energy expended from digging the ground to extract an oz of gold.... now if 30k gold arrives, there will definitely be alot more mines opening up. which means more mines bidding up for energy.

Edwardo said...

RG, you really need to RTFB.

Daniel Yu said...

Michael dV, looks like my post several months back about $1million/oz does not seem so far-fetched anymore, eh?

Dim said...

RE a high price/oz in freegold, Texan wrote in 2011, to the acclaim of other FOFOA posters:

FOFOA, I think your article on the time value of gold was one of the smartest things I have ever read. It was nice to see it again in the comments. Thank you for that. I analogize this valuation cpncept to extremely high end real estate or rare fine art, but of course it's even better than those stores of value for numerous reasons ( and more accessible). If the stock of gold is indeed all current and future excess savings, the price is much, much higher.

Then when you cut that total stock down to available stock, well who knows at what currency value it would clear. No one would sell unless they had to or really wanted something else that they could not otherwise obtain from their currency earnings.

It's actually an absolutely staggering concept, and frankly very frightening. I have no idea how society would reorganize around this concept

M said...

Peter Schiff is one of the nay sayers regarding gold being priced anywhere above 10,000 an ounce in 2009 terms. Anything over 5 and he just blah blah blahs about inflated $ and how oil would be X amount if gold was X amount. He thinks at some point, gold can't be worth much more then other commodities. Even though under the various gold standard , 40 to 50% of savings was comprised of gold. If you go anywhere near those percentages these days, gold will be higher then Schiff thinks. But at the same time , he doesn't think it can get there

tEON said...

Peter Schiff never distinguishes the difference between paper and physical gold - that I have seen anyway. He gets maligned because (paper) gold hasn't gone up - and he just adopts a "wait and see" attitude - he's really no different than the rest of the Gold bug analyst community and like Sprott and Turk - he does own a business that sells precious metals - so you have to realize his analysis is tainted so it doesn't conflict with promoting his business. The last interview I saw with him he was, again, making excuses why the paper price was decreasing. He doesn't get it, IMO.

Tekin said...

Bob Anderson said...

The ACTOR that is playing Peter Schiff is the same actor that played Pee Wee Herman.....No joke....Wellaware1 (dot) com

Michael dV said...

Schiff and the whole list of other gold writers definitely do not understand the FG perspective. FG is not something one easily 'figures out'. It defies all recent history and lets face it some of the support we have for our position unproven.
I don't blame these guys but if they asked enough questions eventually they would realize that they were missing something...and it is that realization and that 'something' that have led many of us here.
The story that most gold writers tell is the historical one. It is the way things would happen if things happen like they did in the past.
FG is really about a new story line or at least a return to one that has not been told in a very long time. What we anticipate will be something that no living person has seen. Hell a lot of Sequoia trees haven't seen it either.

Roacheforque said...

With the paper price now rising, the question is (as it was mid-June) will the COMEX diverge or evolve? Not necessarily the FOFOA party-line but then, I was always a trouble maker anyway ...

runninggloves said...

are there numbers on gold accounts? besides ETFs of course.
now if there is supposedly 10 billion oz of paper gold out there; now that would be rather interesting (more paper than physical on the planet).
40M Oz on Comex is tiny compared to world supply.

does anyone have credible numbers on the float thru the LBMA?

Michael dV said...

RG a lot of your ideas have been covered (beaten to death in some instances). RTFB....I do...

M said...

@ tEON

Schiff did agree with me that if a tailored suit cost an oz of gold 90 years ago, that in theory, an oz of gold should be able to buy more then one suit now. Even though the mainstream gold advocates would say that an oz should always buy one. So he does kinda realize that gold vis-à-vis anything is elastic even though mainstream gold advocates talk a lot about gold always being relative.

I wanted to expand on the gold/tailored suit comparison and get him to agree that more so then a suit, gold should be able to buy more oil as time goes on. I know he would agree. So he gets some of it.

KiwiCam said...

Can anyone please show me where I can find out how much gold Australia and New Zealand are, or have been buying lately, if any?

JJ said...

What do we think of this?

My take is that the authorities want to assess the possible damages a rally in paper could cause to the banks.

tEON said...


Schiff did agree with me that if a tailored suit cost an oz of gold 90 years ago, that in theory, an oz of gold should be able to buy more then one suit now.

Why 'a suit'? Why is that your bellwether? - it can be such an arbitary amount ranging from $100 to several thousand.

How about a loaf of bread? An ounce of Gold buys significantly more bread than it did 100 years ago - and the dollar buys significantly less bread.

Anyway, I'm happy for you that you have found some commonality in what Schiff says. As I said - he has a business - he caters to gold-bug philosophies - he hasn't changed his tune in years. Why even bother listening to him anymore.

runninggloves said...

question. are we assuming that giants own/operate their own private vaults?

M said...

@ tEON

Because unlike bread, a physical once of gold does not buy more then one tailored suit now. Just like ounce of gold only bought one 90 years ago. This is one of the main differences between freegold and mainstream advocates.

Right now, mainstream gold advocates think that inflation will eventually reign in interest rates (the Fed), gold will bounce up to $4000 to $8000 an ounce and after the dust settles, there will be a new credit cycle and gold will find some relative price. They still think 1 ounce will buy 1 tailored suit for example. No matter where the dollar is numerically.

Freegold states that there will be hyperinflation of the dollar. And there will be a paradigm shift in the way the world see's savings. No longer will savings arbitrarily lent out at interest. A significantly higher percentage of savings will be arbitrarily stored outside the financial system in the form of gold. An ounce of gold will not find the same relative value. Meaning, when the dust settles, an ounce of gold will buy more then one tailored suit.

So if Schiff agrees (albeit in a gold standardish way) that savings will be comprised of gold in a significantly higher percentage in the future then it does now, and he agrees that an ounce of gold should buy more then one tailored suit as time goes on , then he is almost there. He is almost a freegolder.

And yeah. Schiff owns a company that sells physical gold. Big deal. There is nothing wrong with that. Im not afraid of capitalists.

tEON said...


I understand what you are saying about suits, gold, inflation and FG. I don't dislike Peter - he made me think years ago and definitely had some foresight - but like the song says "what have you done for me lately?"

And yeah. Schiff owns a company that sells physical gold. Big deal. There is nothing wrong with that. I'm not afraid of capitalists.

Being a Capitalist has nothing to do with his lack of ability to predict the (paper) price decline of the last 2+ years. But his conflict of owning a company that sells physical gold could have tainted his analysis. I hate to be harsh, but why give him a second thought - why care what he thinks about suits or Gold, buying into BRICS markets, buying miners etc. . You can probably find 100 interviews of him saying the price of Gold is going up - when it was, actually, headed down. Instead of reflecting why he got that call so wrong - he just makes excuses and says 'wait and see'. He offers no new insight that I've heard - he has been parroting his own spiel for years. Bottom line: He sells gold and says the price of gold is going up. Big deal. What Gold salesman doesn't?

Eric C said...

Hi RG,

Why do you want to know the answer to that question? Do you think the gold is not located somewhere? Do you know what a giant is?


Eric C said...

Hi M,

Your quote "So if Schiff agrees (albeit in a gold standardish way) that savings will be comprised of gold in a significantly higher percentage in the future then it does now, and he agrees that an ounce of gold should buy more then one tailored suit as time goes on, then he is almost there. He is almost a freegolder."

When Schiff says, "as time goes on" it shows he is describing a bull run not a revaluation.


runninggloves said...

@Eric C
well here is the deal. if giants do not operate their own vaults. that means the metals have to be is a custodian's vaults yes?
so what is it to stop ahem... the custodian to sell the giant's gold back to the giants multiple times over you know. goes like this
giant A has hoard A with BB X
giant C has hoard C with BB Y
giant D has hoard D with BB Z
BB Y sells hoard C to giant A
BB Z sells hoard D to giant A
BB X sells hoard A to giant C
BB X sells hoard A to giant D
BB Y sells hoard C to giant D
BB Z sells hoard D to giant C
now all of the sudden giants believe they own all hoards
with each BB has a subcustodian of each other

even if giants do not hold their metal with custodians

somebody does yes? so replace all about giants with whoever that holds accounts with custodians

Indenture said...

runninggloves: Let's pretend there are multiple owners of the same gold. One entity will own the physical gold after transition, all the others will not. They will own paper.
The hierarchy of claim will determine the final allocation.

Try reading Think Like A Giant while considering this.

M said...

@ Eric

"When Schiff says, "as time goes on" it shows he is describing a bull run not a revaluation."

Not necessarily. I asked him in past tense. If an ounce bought a suit 90 years ago then an ounce should buy more then one now. He said .
" well.... you are right, it should. But we are talking about a hand made suit. Although technology doesn't play a big part in a hand measured and hand made suit"

He agreed with the premise.

So you think that he thinks that for a time, gold will be in a bull market and buy more then one suit but then it will revert back to the mean ? (one suit) I see what you are saying but I don't think he meant that.

runninggloves said...

we are in agreement that somebody is going to get jacked
so the premise is that gold is going to be one of the preferred assets for giants.

is the transition defined by the process of the us treasury eventually running out metals to lease? antal fekete mentioned something about CBs bluffing to their last bar.
also what does the transition look like? (1) ending with overnight spike to freegold if CBs try to hold the price relatively constant during majority of the transition period ? (2) or the CBs will let the price ascend gradually by bluffing the markets with bars gradually over the entire transision period? I find (2) to be more plausible. but if someone believes in (1), Lets hear it. I believe (1) can set the stage for alot of chaos. besides governments have alot to lose if (1) were to occur, like a revolution?

Bradley Thompson said...

This post utterly fails to explain freegold.

If freegold made sense it could be explained in a paragraph or two. If it's so simple and obvious, prove it.

Indenture said...

rg: An overnight spike to Freegold is built into the monetary design.


FOFOA's dilemma:

"When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers.

FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma."

Daniel Yu said...

Bradley Thompson, you want simple? Here is my take.

All the assets in the world, including land, houses, buildings, food, and the lives and labor of all the people in the world for the next 50 years, and all the minerals and devices yet to be invented and produced - What is the value of all of this?

If using any currency, that total currency value will fluctuate over time, usually upwards - simply because there will be more people being born, currency devalues due to mismanagement and manipulation, and war.

For the truly wealthy who hold their wealth for generations (and for the people who save), it is necessary for something to hold and retain the value of all the world's assets in physical form (to avoid counterfeiting).

The only thing that meets this criteria is GOLD, also know as Aurum (#79 on the periodic table of elements). By itself, it is a purely non-essential item. Mankind would not suffer a bit if GOLD ceases to exist.

So, if GOLD holds all the value of all the assets in the world - its value in a specific currency would change, over time, but the assets it holds the value for, remains (or even increases) over time.

Freegold just means Un-Shackling gold from specific currency prices and let it float to represent the assets of the world.

Simple? Yes.
Obvious? The obvious are always hard to see.
Proven? Does 5000+ years of human conditioning constitute proof?

Canadarob said...

@Bradley Thompson,
A theory doesn't NEED to be explained in one or two paragraphs to make sense. Furthermore, Fofoa said he was going to write a couple posts to paint a big picture of what its all about. Also, if you look to your right you will notice a bunch of words and phrases and if you click on them it will take you directly to past links covering the information you clearly haven't read yet. And lastly, one cannot PROVE a theory about an event that hasn't happened yet. You wouldnt ask a weatherman forcasting tornadoes to prove there will be tornadoes........well........maybe YOU would. But most people understand why that would be silly.

Freegoldtube said...

Over time and life spans gold has been brought into official use countless times. Only to be bastardized by forces, we as peoples can never control. After every failure and ruination of much wealth, the cries always return to bring gold back as money. Once again to begin the long hard road that leads to the same conclusion. Gold coins, then bank storage, then gold lending, then gold certificate use, then lending of certificates, then certificates are declared paper money, then overprinted, then gold backing removed, then price inflation, then,,,,,, we begin again. But this time it's different the hard money crowd say. Yes, it is. Only the time has changed.

For the better part of human existence, gold alone has served all of the best functions of tradable wealth. But as soon as we call it our money, human nature takes over. Yes, we can call it a stock or a bond, a piece of land or a painting, a car, boat or antique, but just don't label it as money.


Money, the term, the idea, perhaps the ideal,,,,,,, is something we dreamed up to apply to one of our chosen units of tradable wealth. Usually gold. We could take almost every item in the world and use it in this same "money fashion". Still, this form of trading real for real is just exchanging wealth. It isn't exchanging money as we understand money.

Gold is no different than anything else you possess as your wealth, it just so happened to be the most perfect type of tradable wealth in the world. So it evolved to be used the most and eventually labeled in the same function of what we consider to be "sound money".

Now, consider that all wealth is represented in and of itself. You cannot reproduce wealth through substitution, like giving someone five pieces of copper for one piece of gold and then have them think they now have five pieces of gold! This is the process we try to perform within the realm of man's money ideals. We have always debased trading wealth by duplicating it into other forms and calling all of it, collectively, "our money".

Freegoldtube said...

This duplicating, this replicating, this debasement is the result of taking the concept of a credit / contract function (paying in the future) and combining it with the concept of completing a trade at the moment. Think about that for a moment?

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

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

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

Contemporary thought has always blurred these two notions; saying that these two methods of trading are one in the same and both forms use the same idea of what we think money is.


This is the road ahead. A fiat no different from the dollar in function, yet a universe away in management. A wealth asset that also stands beside this money, yet has no modern label or official connection as money. In this way modern society can circle the earth, to once again begin where we started. Having learned that the concepts of wealth-money and man's money were never the same.

Freegoldtube said...

This post utterly fails to explain human existence.

If human existence made sense it could be explained in a paragraph or two.

Michael dV said...

FG is not so much a theory as it is a way of viewing life especially wealth.
Spend a few hours or more reading the gold trail. You will see the way they were trying to explain what had happened to gold and money over the years. We are still asking some of those questions today. We still wonder why things have not happened to make gold more valuable (or higher priced).
There is a difference in the way FG looks at events that is different than your ordinary gold bug however. I think a main difference is the the FG perspective reveals an inevitability to events. the usual gold bug just gets angry and sees an oppressive insurmountable force arrayed against him. Changes will come because the must. Even the Fed cannot stop them.
FG may not do timing much better that other ways of seeing things but it sees the root causes better. We can now see how much is already being done to keep the system afloat.
I don't think you can pick up a way of looking at all this information in a few sentences however.

Eric C said...

Great post Freegoldtube

Hi BT,

I regularly try to simplify my understanding to as few words as possible. The reason I see FG as highly likely is because of how a balance sheet and income statement work. FG will reduce the liabilities compared with the equity on the credit side of the balance sheet of CBs.


Phil_O_Dendron said...

Well Bradley Thompson in response to your comment about "prove it":

One thing that I got early on from reading this blog is that no one here from our host Fofoa on down owes me (or you) anything.
Information is provided "as I see it" and you may take it or leave it as you please. There are many here that have a much better understanding than me about Freegold but I have read enough to know that the overall concept makes sense. No one here (or anywhere else) knows the precise timing or sequence of events that will lead to the outcome that people here expect.
If you want a one paragraph "proof" of Freegold I think you will be dissapointed.
Perhaps an investment of your time in reading the blog and investgating what Freegold is would be beneficial.

David McNamee said...

Freegold is to wealth and currencies as the meter is to length and the gram is to mass, all inviolable standards not subject to question or revision.

runninggloves said...

who actually believes usd support will be withdrawn suddenly?
has there ever been any superpower that experienced a sudden decline in the standard of living overnight?
Individual CBs know they cannot debase continuously since the proverbial frog will jump out of the boiling pot of water; but CBs as a group can debase continuously; its just that individual CBs take turns flipping the print switch on and off; thus gradually turning the heat higher in the long run while oscillating in the intermediate term. to ensure the frog gets cooked successfully (well done?), and what better way to provide a cover for debasement which they call inflation with a war. 2 to 3 regional wars going in the world simultaneously will do it. with the nuclear age that is all that can be done; no major wars maybe a series of smaller proxy wars.

vizeet srivastava said...

HI does not cause decline in standard of living. It causes supply chain disruption for short period and re-establishment again by removing middleman. It improves standard of living because production grows of non-essentials goods. People work more and unemployment goes down. Essentials become very costly. So farmers become rich.
It is not the CBs that plan HI, it is the people sentiments that cause it.

M said...

@ running gloves

"who actually believes usd support will be withdrawn suddenly?"

Useful dollar support has to be backed up by real productive output. So support is only as good as the economy of the support country. Even if countries want to support the USD, there will come point where they cant.

"has there ever been any superpower that experienced a sudden decline in the standard of living overnight?"

In the 70's, the USD was devalued by around 40%. (Decline in standard of living)

The British Pound used to be the reserve currency.

The Soviet Union collapsed overnight.

vizeet srivastava said...

Another think. Catastrophes don't need precedence, they just need mathematical possibility. First time I heard about Tsunami in 2004 when it killed more than 100,000 people. It never used to be considered that devastating before that. One incident changed that psychological mindset.
Current economic system has stress that is growing. US is no more the most important nation (except because it owns world reserve currency). It is like a rubber band. When you keep on stretching it, at some point it will break.

Robert said...

"who actually believes usd support will be withdrawn suddenly?"

On the contrary, withdrawal has been gradual. First political support gradually eroded. Then structural support. The only thing that happens suddenly is the after-the-fact recognition that something dramatic has changed.

You know how dry rot works in a piece of wood? It doesn't happen overnight. The dry rot gradually works through the wood until one day you put your weight down and your foot goes right through the floor. The support wasn't suddenly removed. Rather, the support was gradually removed, and the weakness of the board was revealed once it could no longer handle the pressure.

Gold in size can stop bidding for dollars overnight. On the other hand, there is no reason for that to happen until we encounter a catalyst to expose the weakness. For now the question is whether you believe we have dry rot in our international monetary system.

runninggloves said...

"So farmers become rich. " - agreed
"it is the people sentiments that cause it." - agreed

"It is not the CBs that plan HI" - agreed ; dont CBs want to liquidate sovereign debt in real terms? is it possible to have managed debasement where its at a rate that debts get liquidated in real terms quick enough but not fast enough for people to rush out the door en masse? aka financial repression after WW2.

anand srivastava said...

Bradley Thompson:

Not all things can be explained concisely. Proofs are sometimes way too big. Case in point is the proof of Fermat's last Theorum.

Also when we talk about real world, we talk about theories not proofs. Proofs only exist in the realm of mathematics.

If I was to put a nutshell version of Freegold. It would be that Unit of Account and Store of Value functions of Money cannot be simultaneously satisfied by a single object. In fact UoA can only be satisfied by something that can be printed at will, and SoV can only be satisfied by something that cannot be printed at will.

Freegold is just a realization of the above fact. That the fiat is required as UoA and Gold is required as SoV. Gold must be free to work as SoV, which means that it should not be controlled by any entity. Thankfully it is large enough and widespread enough that nobody can fully control it. But a govt can control gold within its boundaries. Or gold could be manipulated by a large enough entity. Freegold is just an economic paradigm where it is not controlled at all.

There can be no proof that Freegold is the correct theory. It is not even a theory because it is an expectation of the future coarse of humanity for economics.

It just seems to be most likely outcome of the observed history of the last 100 years. To understand that Freegold is a good enough possibility you have to go into how it depends on the past and compare it to how other outcomes seem less likely.

This is the reason why you need to read the whole effing blog to understand how those observations result in the future of Freegold.

Still it is a speculation of the future. And so something can go wrong, or more probably we may get some hybrid, which isn't ideal, but may work for a long time, before the humanity moves again to reach the final destination. The destination being separation of UoA and SoV.

runninggloves said...

timeframe of collapse is somewhat relative.
collapse in a decade is alot better than collapse within 5 years. collapse overnight is inherently very risky for the world.
the last thing we want is ; for some radical leaders in the US scapegoating somebody and leads the electorate into supporting (use your imagination). you have to wonder what happens if someone holds the biggest military and the rug gets pull out right from underneath within less than a year cant be good; they might turn into bandits of the to chip away at their standard of living by stretching out the process to a decade or 2 would result in a lot less angry Americans.

So is it worth the risk to the Rest of the World to run into Hitler's Protege by withdrawing support at an accelerated fashion? A ton of angry americans with alot of guns can get very nasty.
the process started at around 2000, another 5-7 years may do by ratchetting gasoline to approx 15$/gallon will probably do the trick.

the british nasty price inflation did not take off right after loss of reserve status, their was a considerable time lag.

speaking of soviets; their standard of living wasn't that great to begin with during the 80s

runninggloves said...

you couldn't have said it better.

Indenture said...

Question: ""who actually believes usd support will be withdrawn suddenly?"

Answer: "Gold in size can stop bidding for dollars overnight."

vizeet srivastava said...

The reason for debasement is to avoid default and not to liquidate the debt. Gradual debasement does not cause debt liquidation because all currencies are hooked to USD.
But if Fed successfully gradually liquidate its debt (This is not possible but imagine it was) then CB of China who has most to loose from USD liquidation will be the first to dump it. This will crash the system.
Japan was in QE for decades but it didn't got into HI so it is possible not to get into HI inspite of decades of QE. But the difference here is US is in external debt while Japan was in internal debt. Also Japan was saver's economy and its CB let it remain in constant deflation for more than 2 decades. As long as there is no inflation constant printing has no harm. But US doesn't have that luxury so ultimately salaries will rise and money will enter into the economy. There is just too much cash with Banks and Big Businesses that when it enters into the economy it will cause HI.

byiamBYoung said...


"collapse in a decade is alot better than collapse within 5 years. "

Imagine being on a cruise ship. The ship begins listing and taking on water.

What is most likely?

-Passengers form an orderly line and get into the lifeboats one by one, until the lifeboats are full, and everyone else drowns

-The passengers mob the lifeboats and fight furiously for a spot, until only the fastest and smartest among the passengers is saved. The rest drown

Once collapse is visible on the horizon, we have SHTF. Nothing orderly about it, and it won't take years.


runninggloves said...

The british had 200% debt/GDP and most of its debt held by foreigners after WW2 and lost reserve status; and the blow up didnt occur; is that because of the gold fix with bretton woods?

gold in size by the fed can provide phantom bids for dollars for a short while, until it runs out of metal

"Once collapse is visible on the horizon" so what would that look like?

I am in total agreement that the Rest of World can crash the USD ; then what is the motivation for so many foreign countries to provide support today?

runninggloves said...

we can probably agree that when gold will be the currency of choice for trade settlement.

but jokes aside why would developing nations make such a mistake of accumulating irredeemable currency for so long

Eric C said...


I believe it is to allow them time to build up their infrastructure and acquire some gold, rather than breaking the system and having a bunch of other countries angry with them.


Eric C said...

Hi M,

I don't know what Schiff thinks, and the quote is a bit ambiguous, but it seems like if he was going to get FG he would get it at this point. He will get it once it becomes self-evident.


Eric C said...

FOFOA, "I don't believe it is fancy words that make for a high-level discussion. Instead it is deep thoughts, fully understood and clearly articulated."

I was just reading it and thought I would share

vizeet srivastava said...

"During various collapses of temporary gold standards in history, Indian gold reserves (usually unwillingly) stabilised world economies. In recent history, Indian gold reserves went out to stabilise the American currency during the Great Depression and the German currency during the post-Wiemar drift."

Robert said...

"jokes aside why would developing nations make such a mistake of accumulating irredeemable currency for so long"

1. Technology. They do it not to accumulate currency for its own sake, but to attract foreign investment (especially technology) in their own countries. There are a lot of burdens that come along with the $IMFS, but some advantages too. China benefited tremendously from the influx of foreign technology.

2. Foreign exchange stability. They do it to defend their currencies. The 1997 Asian flu showed that developing countries need substantial foreign currency reserves to defend their currencies. In developing counties much of the debt is denominated in dollars, and there is always a shortage of dollars in a wave of defaults. All of the dollars are bought up to repatriate liquidated investments back to the U.S.

3. Oil. They do it to buy oil, which is still almost universally priced in dollars.

4. Liquidity, infrastructure and inertia. The US bond market is by far the largest and most liquid in the world. The dominant interbank payment system in the world today is set up for the US$. For now that combination provides a lot of conveniences and lowers transactional costs. Why try to swim upstream? Paraphrasing our host, first the system will break, and then the world will switch over to a replacement system. The world will continue to use the $IMFS until it doesn't.

4. Stability. In all countries the elites calling the shots are part of the 1%. The last thing they want is the chaos that will come (or might come) when the system collapses. Even if they think they are prepared, social instability can get violent.

5. Guns. The U.S. military just might invade and seize all of the gold in any trouble making countries that threaten "our way of life." It's been known to happen before in world history, and I am sure it will happen again.

Phil S. said...
This comment has been removed by the author.
Brady said...

running gloves, you wrote:

"collapse in a decade is alot better than collapse within 5 years. collapse overnight is inherently very risky for the world."

not sure there's going to be any "good" time...point is, whether it's 1 day, 1 month, 1 year or 5 years from now, etc., it will likely feel like business as usual & then the rug will likely be pulled out from underneath.

of course, the entire post is worth reading but here's a snippet:

"That first reason why collapses happen by surprise relates to the uncontrolled or unplanned collapse of a Ponzi-like structure. The second reason covers planned and controlled collapses. Planned or controlled collapses also happen by surprise, because that's how you get the maximum "bang for your buck" so to speak."

Indenture said...

What does the world need to be ready for the collapse of the dollar? What does it require that it does not have now?

One Bad Adder said...

@Robert: - All too true Sire ...for the moment.

vizeet srivastava said...

Phil S.
No matter who gets the oil in ME, they will sell. So war in ME doesn't creates shortage. It increases price which the US wants to keep its oil production viable.
There is no shortage of oil in the world. So doesn't matter even if US produces the most. What matters is who sells the most.
I agree that US doesn't want anyone to get ME oil. So the terror in ME is likely going to rise. As the terror rises Europe will be uncomfortable; and Asia and Africa will be uncomfortable too; This will force Europe, Asia and Africa to exit USD even more quickly.
US oil is probably not enough to balance its growing debt. I am not sure how long can this delay the crisis but I am quite sure it won't be more than few years.

I think this will be terrible for India.

vizeet srivastava said...

Thanks Phil S. Your comment gave me important direction to think.

DASK said...


No need to leave that to the imagination; the truth is far worse:

Dim said...

Phil S,

Could you please elaborate on what you mean by adding 1+1? I am not sure what you mean.

M said...

@ Robert.

Regarding the "largest and most liquid bond market in the world". I am not saying this to be cute but Bernie Madoffs Ponzi scheme was the largest and most liquid in the world.

All your reasoning aside , don't kid yourself , it is a Ponzi scheme. And as Max Kieser said, you can't taper a Ponzi scheme.

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