"This brilliant, modern free trade system and all of its benefits cannot be implemented using the US dollar as a reserve currency. It shuts off commerce that in turn limits the use of commodities such as oil, metals, food and the like. Many hail the low price inflation in the US as a victory and ignore the intent other nations had in following "free trade". That being to promote a world economy, not just a US economy.
Understand that the increased use of commodities is a good thing. It's not just for the purpose of making rising chart pattern so speculators can sell their calls! Commodity usage creates real things and helps the lives of real people. When citizens gain real productive mechanisms, they hold real wealth. Some would have you believe that third world people are enriched by saving US treasury bonds, not true! The only way to increase world trade, with an eye on building new consumers in all countries, is to remove the overhang of "dollar settlement"."
FOA (3/14/99)
_________
Understand that the increased use of commodities is a good thing. It's not just for the purpose of making rising chart pattern so speculators can sell their calls! Commodity usage creates real things and helps the lives of real people. When citizens gain real productive mechanisms, they hold real wealth. Some would have you believe that third world people are enriched by saving US treasury bonds, not true! The only way to increase world trade, with an eye on building new consumers in all countries, is to remove the overhang of "dollar settlement"."
FOA (3/14/99)
_________
Dirty Float picked up in 1971 where Fiat 33 left off, and this post picks up in the present, where Dirty Float left off, where there is almost universal agreement among esteemed economists that, lately, the global economy (not to get too technical) sucks. Global stagnation, it is agreed, is the symptom of a mysterious economic disease that we, as a planet, picked up along the way; as for its causes and cures, there is little agreement. But before we dive into the problem ailing the present, let's take a little trip back in time... to 1938.
In 1938, nine years after the stock market crash of 1929, and during the final years of the Great Depression, an American economist named Alvin Hansen, sometimes called "the American Keynes", introduced an economic hypothesis called "secular stagnation". His idea was that fundamental economic forces might have been conspiring in a vicious cycle that prevented economic recovery resulting in permanent high unemployment and low growth.
The main forces in 1938, according to Hansen, were a declining birth rate and over-saving which was keeping people from spending (in Keynesian terms, an oversupply of savings in an aging population was suppressing aggregate demand). Shortly thereafter, however, WWII and the baby boom that followed discredited Hansen's theory, consigning it to little more than an economic footnote.
75 years later, on November 8, 2013, Hansen's secular stagnation hypothesis became popular once again when Larry Summers revived it during a speech at the IMF. [1] He followed that up with an article in the Financial Times:
"Is it possible that the US and other major global economies might not return to full employment and strong growth without the help of unconventional policy support? I raised that notion – the old idea of “secular stagnation” – recently in a talk hosted by the International Monetary Fund…" [2]
Summers' invocation of Hansen's "old idea" as a way to explain the current global stagnation brought comment and criticism from all corners of the Economics sphere. Those weighing in on the idea included names like Richard Koo, Barry Eichengreen, Paul Krugman and Alan Greenspan. The Economist called secular stagnation "a baggy concept, arguably too capacious for its own good." [3]
David Wessel, a prominent Economics journalist, suggested that "today's advocates of secular stagnation are as myopic [as Alvin Hansen was in 1938]," and that "we just have to be patient." [4] And Barry Eichengreen wrote, "Secular stagnation, we have learned, is an economist’s Rorchach Test. It means different things to different people." [5]
Paul Krugman loved the idea:
"I was very annoyed when Larry Summers made a big splash talking about secular stagnation at the IMF’s 2013 Annual Research Conference – annoyed not at Larry but at myself. You see, I had been groping toward more or less the same idea, and had blogged in that general direction (Krugman 2013) – but it wasn’t forceful, and Larry rightly gets credit for making the topic a front-burner issue… In what follows, I’ll lay out four reasons why secular stagnation deserves the buzz it’s now getting." [6]
I think the reason that Krugman finds it so exciting is because, as he writes in his chapter in an e-book titled Secular Stagnation: Facts, Causes and Cures, it may have some radical implications and therefore "requires a major rethinking of macroeconomic policy":
"Suppose that the economy really needs a 4% inflation target, but the central bank says: “That seems kind of radical, so let’s be more cautious and only target 2%”. This sounds prudent, but it may actually guarantee failure. In other words, the problem of getting effective monetary policy, always difficult at the zero lower bound, gets even harder if we have entered an era of secular stagnation.
What about fiscal policy? Here the standard argument is that deficit spending can serve as a bridge across a temporary problem, supporting demand while, for example, households pay down debt and restore the health of their balance sheets, at which point they begin spending normally again. Once that has happened, monetary policy can take over the job of sustaining demand while the government goes about restoring its own balance sheet. But what if a negative real natural rate isn’t a temporary phenomenon? Is there a fiscally sustainable way to keep supporting demand?
In this chapter I’ll leave these questions hanging. The crucial point, for now, is that the real possibility that we’ve entered an era of secular stagnation requires a major rethinking of macroeconomic policy." [6]
There are links down in the footnotes if you would like to study what secular stagnation means to 23 different economists. But for the purpose of this post, I'm going to focus mainly on what it means to Larry Summers, since he brought it up, and to Paul Krugman who largely agrees with Larry and is mostly concerned with today's low inflation.
One thing I should mention is that Larry Summers' "New Secular Stagnation Hypothesis" is a little different from its predecessor. Hansen's secular stagnation hypothesis in 1938 was essentially an observation of (what he thought was) permanent damage (or at least permanent changes) in the economy for which there was no cure. Hansen's "secular stagnation" was simply an explanation for why the economy had entered a state of permanent (or at least indefinitely long term, aka secular) stagnation.
Unlike Hansen's dismal outlook, Larry Summers wants you to know that his "New" secular stagnation (SecStag for short [5]) can be cured, by people like himself, by macroeconomists and public servants: "Today, secular stagnation should be viewed as a contingency to be insured against – not a fate to which we ought to be resigned." [2] "Finance is too important to leave entirely to financiers." [1]
Something we should always bear in mind, especially in complex discussions like this one, is the difference between cause, symptom and cure, and similarly, the difference between observation, prediction and prescription. Larry Summers reminds us of the important distinction between prescription and prediction with regard to financial bubbles: "Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognise that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely." [2]
One of the criticisms of Summers' SecStag theory is that our economic model expectations are simply too high, that this is not stagnation we are experiencing right now, but rather a reversion to the long-term mean. Another criticism is that economic model growth measurement standards are simply outdated and not capable of properly counting Internet technology (IT) innovation as growth. Both make valid points about the shortcomings of economic models, but both also miss the big picture, in my view, which is that there really is a physical plane impairment that has been with us for a very long time, and has simply been masked by the same monetary plane phenomena that causes it.
Back in 1986, Larry Summers, along with Olivier Blanchard who is currently the chief economist at the IMF, noticed a certain ratcheting down in the employment numbers of prime-aged males in Europe starting in the 1970s. It was expected that, following a recession, employment would bounce back to previous levels, but in Europe they saw this "ratcheting down" starting in the 70s. In their 1986 paper titled "Hysteresis and the European Unemployment problem" [9], they coined the term "Eurosclerosis" because they thought it was only a European problem. That was in 1986, but current data shows that, from 1990-2012, that same "sclerosis" was happening in the US and China even more so than in Europe. [10]
The point is, what secular stagnation means to Larry Summers is a long-term economic impairment that extends all around the world. It doesn't necessarily mean zero or negative growth, but it does mean that real (physical plane) growth potential has declined substantially, and that this decline, this "ratcheting down" or "sclerosis" in real economic potential, is due to a monetary plane phenomenon. Summers makes it clear that this is more than just a hangover from the 2008 financial crisis, that it has been happening since at least the 1990s but that it was camouflaged by the stock market and housing bubbles. On this much, Larry and I are in full agreement.
The basis of Summers' hypothesis is that today we have a lack of demand (spending, consumption, capital investment and borrowing) facing a glut of savings (too much saved money flooding the system and driving down interest rates and lending standards as it faces a lack of demand from qualified borrowers). Summers believes that, in general, there is an equilibrium that is reached between savers and investors, and that the real interest rate (the nominal "safe" interest rate that can be earned without risk, minus the rate of inflation) is what shifts investor preferences at the margin from saving money (safety) to investing (risk-taking).
Furthermore, he believes that there is a theoretical real interest rate that corresponds with full employment, i.e., sufficient economic growth. He calls this theoretical rate the FERIR, which stands for the Full Employment Real Interest Rate. Others just call it the "natural" interest rate. Summers argues that this theoretical interest rate, which would be the target interest rate for a CB interested in economic growth and full employment, is now stuck well below zero. And because it is below zero, it cannot be practically reached by conventional monetary policy, including QE, and that's why we're stuck in the land of financial bubbles and secular stagnation. The bottom line is that "SecStag may force policymakers to choose between sluggish growth and bubbles." [5]
I'm sure that some of this sounds familiar to my readers. I have been writing for years about how a glut of passive savings crowds active money out of prudent activities thereby retarding the entire financial system. For years I have made the point that investing requires active specialization, and should therefore not be a passive activity. That naturally-passive, risk-averse savers are a large and distinct group, separate from investors, traders and speculators, and that only in the present dollar-based international monetary and financial system (the $IMFS) are they forced to swim with the sharks.
I have been writing for years about how the $IMFS has an unnecessary and terminal conflict built into its very DNA, like a congenital aneurysm just waiting to burst right when you least expect to die. How using the same medium (the dollar) as both the primary and secondary media of exchange (i.e., using the same unit—or fixed/pegged units—as both the tradable credit unit and the primary monetary reserve/savings asset) leads to friction, an inevitable conflict of interests between the real economy and the financial one.
Also, more than 15 years ago, FOA identified the dollar system itself as the cause of retarded economic growth. He said "the narrow margins it produces [in the real economy outside of the US/dollar-based financial one] shut down entire economies." He wrote, "This brilliant, modern free trade system and all of its benefits cannot be implemented using the US dollar as a reserve currency. It shuts off commerce…" See the quote at the top of this post! He also wrote that the $IMFS leaves "entire countries economically impaired in an effort to maintain the fictional valuations of 'US assets'."
"Shuts off commerce", "economically impaired"; does this sound like the economic stagnation we are experiencing? From the quote at the top: "Commodity usage creates real things and helps the lives of real people. When citizens gain real productive mechanisms, they hold real wealth." He's talking about productive businesses that generate income and create the "demand" for other goods and services that is lacking today when he says they hold real wealth. And the dollar reserve system, says FOA, prevents such "demand" from growing while maintaining "the fictional valuations of 'US assets'."
“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.” [11]
That's from the Wall Street Journal reporting on an interview that Alan Greenspan gave at the CFR one month ago in which he was asked about Larry Summers' secular stagnation hypothesis. As I said at the top, there is wide agreement that "effective demand is dead in the water" right now. What there's not much agreement on is why, what to do about it, and whether or not it's a "secular" (long term) problem.
It's easy to believe that saving and investing are merely different ends of a preference continuum of "demand for safe assets" in which an overall shift toward investing spurs economic growth, while a shift toward saving or "safe assets" puts on the brakes. It's what virtually every economist believes. If that's what you believe, then the cause of this economic stagnation must be one of several explanations for the overall shift towards saving and deleveraging. And the cure, depending on whether you believe it to be a secular problem or not, can range from "we just have to be patient" to more government deficit spending and the official embrace of higher inflation rates to encourage spending, consumption and capital investment while discouraging saving.
If you can raise the inflation rate, then that makes the real rate of return on safe assets even more negative, which should cause savers to either spend or invest rather than sitting in "safe assets" that are losing value in real terms. That's the theory anyway, and here are Larry Summers' prescriptions:
What is to be done?
Broadly, to the extent that secular stagnation is a problem, there are two possible strategies for addressing its pernicious impacts.
• The first is to find ways to further reduce real interest rates.
These might include operating with a higher inflation rate target so that a zero nominal rate corresponds to a lower real rate. Or it might include finding ways such as quantitative easing that operate to reduce credit or term premiums. These strategies have the difficulty of course that even if they increase the level of output, they are also likely to increase financial stability risks, which in turn may have output consequences.
• The alternative is to raise demand by increasing investment and reducing saving.
This operates to raise the FERIR and so to promote financial stability as well as increased output and employment. How can this be accomplished? Appropriate strategies will vary from country to country and situation to situation. But they should include increased public investment, reductions in structural barriers to private investment and measures to promote business confidence, a commitment to maintain basic social protections so as to maintain spending power, and measures to reduce inequality and so redistribute income towards those with a higher propensity to spend. [8]
Some economists think that all we need is Summers' second prescription, primarily sufficient fiscal stimulus (i.e., much more government deficit spending), but Paul Krugman particularly likes the first one, the higher inflation rate target, so much so that he gave a presentation titled "Inflation Targets Reconsidered" on May 27, 2014 at an ECB Forum in Portugal. In the presentation, he argued for raising the inflation target from 2% to 4% or even higher. Here is the beginning of that presentation [brackets are mine]:
Inflation Targets Reconsidered
Over the course of the 1990s many of the world’s central banks converged on an inflation target of 2 percent. Why 2 percent, rather than 1 or 3? The target wasn’t arrived at via a particularly scientific process, but for a time 2 percent seemed to make both economic and political sense. On one side, it seemed high enough to render concerns about hitting the zero lower bound mostly moot; on the other, it was low enough to satisfy most of those worried about the distortionary effects of inflation. It was also low enough that those who wanted true price stability — zero inflation — could be deflected with the argument that official price statistics understated quality change, and that true inflation was in fact close to zero.
And as it was widely adopted, the 2 percent target also, of course, acquired the great advantage of conventionality: central bankers couldn’t easily be accused of acting irresponsibly when they had the same inflation target as everyone else.
More recently, however, the 2 percent target has come under much more scrutiny. The main reason is the experience of the global financial crisis and its aftermath, which strongly suggests that advanced economies are far more likely to hit the zero lower bound than previously believed, and that the economic costs of that constraint on conventional monetary policy are much larger than the pre-crisis conventional wisdom. In response, a number of respected macroeconomists, notably Blanchard (2010) and, much more forcefully, Ball (2013), have argued for a sharply higher target, say 4 percent.
But do even these critics go far enough? In this paper I will argue that they don’t — that the case for a higher inflation target is in fact even stronger than the critics have argued, for at least three reasons.
First, recent research and discussion of the possibilities of “secular stagnation” (Krugman 2013, Summers 2013) and/or secular downward trends in the natural real rate of interest (IMF 2014) suggests not just that the probability of zero-lower-bound episodes is higher than previously realized, but that it is growing; an inflation target that may have been defensible two decades ago is arguably much less defensible now.
Second, there are actually two zeroes that should be taken into account in setting an inflation target: downward nominal wage rigidity isn’t as hard a constraint as the interest rate ZLB, but there is now abundant evidence that cuts in nominal wages only take place under severe pressure, which means that real or relative wage adjustment becomes much harder at low inflation. Furthermore, we now have reason to believe that the need for large changes in relative wages occurs much more frequently than previously imagined, especially in an imperfectly integrated currency union like the euro area, and that such adjustments are much easier in a moderate-inflation environment than under deflation or low inflation.
Finally — and this is the main new element in this paper — there is growing evidence that economies entering a severe slump with low inflation can all too easily get stuck in an economic and political trap, in which there is a self-perpetuating feedback loop between economic weakness and low inflation. Escaping from this feedback loop appears to require more radical economic policies than are likely to be forthcoming. As a result, a relatively high inflation target in normal times can be regarded as a crucial form of insurance, a way of foreclosing the possibility of very bad outcomes.
This paper begins with a brief review of the standard arguments for a higher inflation target, then deals in turn with each of the further arguments I have just sketched out. I conclude with some speculation about the unwillingness of many central bankers to consider revising the inflation target despite dramatic changes in our information about how modern economies behave.
1. The two zeroes
If you polled the general public about what rate of inflation we should target, the answer would probably be zero — full price stability. Some economists and central bankers would agree: either they view any erosion of the purchasing power of money as illegitimate, in effect a form of expropriation, or they argue that even mild inflation degrades money’s role as a unit of account. There is even a case for persistent deflation: Milton Friedman’s optimal quantity of money paper famously argued that prices should fall at the rate of time preference, so that the private cost of holding cash to add liquidity matches its zero social cost.
In practice, however, the great majority of both economists and central bankers advocate modest positive inflation. Why? Because of the two zeroes.
The first zero is a hard one: nominal interest rates cannot fall below zero (except for trivial deviations involving transaction costs or the role of bills as collateral), because people always have the option of holding currency. This in turn sets a lower bound on the real interest rate, which can’t fall below [zero] minus the expected rate of inflation.
Meanwhile, central banks are trying to stabilize their economies, which means trying to set policy interest rates at the Wicksellian natural rate [Summers' FERIR], the rate consistent with more or less full employment. The problem is that the real natural rate of interest clearly fluctuates over time, rising during investment booms (whether these booms are well-grounded in fundamentals or reflect bubbles), falling when economies face adverse shocks. If expected inflation is low, this raises the possibility that there will be periods in which the central bank cannot cut rates to the natural rate, leading to output below potential and excess unemployment.
A positive expected rate of inflation reduces the size of this problem, because it allows real interest rates to go negative; and the easiest way to ensure that expected inflation is positive is to pursue a monetary policy that keeps inflation stable at a modestly positive rate. [12]
Notice that he mentioned the "Wicksellian natural rate" which I noted as being the same as Summers' FERIR. This theory of interest rates was Knut Wicksell's most influential contribution to Economics, published in 1898, and it comes from the Austrian School which theorized that an economic boom happened when the natural rate of interest was higher than the market (or monetary) rate of interest. [13] The inverse would be that an economic slump, or stagnation, would happen when the natural rate (or FERIR) was lower than the market rate of interest, which Larry Summers shows that it is today.
You might be wondering why I included such a long excerpt from Paul Krugman's paper. I did that on purpose, because I thought It was very good and provided some important insight into central banking. This being a gold blog, some of you probably assume that I think Paul Krugman is always wrong, perhaps even an idiot. But that assumption would be wrong. For example, on the subject of the gold standard and the unrighteousness of hard money (see here), and on whether or not normal inflation is akin to theft (see here), I'm basically in agreement with Paul, more so than with the hard money camp. [14]
Where we differ is in our perspectives on the big picture. Think of it like this: The $IMFS is like a fishbowl, and we are all like goldfish swimming around in that confined environment, wondering why our economy has stagnated and why there's no more room to grow. Krugman, Summers and everyone else are all trying to understand the cause in order to cure the problem within the confines of the fishbowl, while the fishbowl itself is the limiting factor.
It should be no surprise that a fish, immersed in water inside a fishbowl, would not identify the glass boundary as the problem and recommend breaking it in order to grow. Most would not even be aware of the bowl, and even if they were, breaking it would seem like a suicidal means of escape. So imagine that global stagnation is a real problem, but that all 23 economists and virtually everyone else discussing its possible causes and cures are all viewing it from an inside-the-fishbowl perspective, and that what I am offering you in this post is an out-of-the-fishbowl view, even though I'm stuck inside the fishbowl just like everyone else.
What if I told you that the fishbowl is only an illusion? That even though it confines us, we remain inside its boundary not because it really exists, but because we think it exists? And what if I told you that there's a big ocean out there, just waiting for us to break free from our self-imposed confinement? Does this analogy resonate with any of you?
Remember the scene in The Matrix where the little boy is teaching Neo how to bend a spoon like Uri Geller? The boy says, "Do not try and bend the spoon… that's impossible. Instead, only try to realize the truth." "What truth?" asks Neo, and the boy responds, "There is no spoon." Neo puzzles, "There is no spoon?" And the boy explains, "Then you'll see that it is not the spoon that bends, it is only yourself."
I used the Matrix analogy at least once before, back in 2010, in How Can We Possibly Calculate the Future Value of Gold? Here's a quote:
"This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued."
When the "virtual matrix" blinks off, which in this present analogy is a fishbowl, more than just the value of gold will be affected. $IMFS financial structures that support existing malinvestment while stifling competition will fail, uneconomical practices will face the harsh reality of the open sea, and economical ideas will have the space to grow and flourish. And lest any of you think this is a utopian dream I'm describing, I'll just add that it will be hell on wheels for many fish to adjust to the reality of the ocean.
My View
As I said, I agree with Krugman and Summers on the symptoms of global stagnation. Where I disagree is on the causes and cures. This is what my Freegold lens (my out-of-the-fishbowl perspective courtesy of FOA) reveals—a different cause and cure for today's global economic stagnation.
Okay, let's start with the low inflation problem. Remember that low inflation combined with a low or negative natural interest rate (the FERIR) leaves central banks stuck between a rock and a hard place, the rock being sluggish growth and the hard place being financial bubbles and instability. But with loose monetary policy and explosive growth in the money supply since the 1970s, what could possibly account for more than three decades of low inflation?
I'm talking about consumer price inflation here, which is where the rubber meets the road. Physical plane (the real world and the real economy) price inflation has been surprisingly low relative to growth in the monetary plane (the financial sector and the money supply). Here's how FOA described it:
FOA (10/3/01; 10:21:26MT - usagold.com msg#110)
"For decades, hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles. We gasped in horror at these numbers, but these rates never came close to reflecting the total dollar expansion if at that moment it could actually be represented in total worldwide dollar debt. That creation of trillions and trillions of dollar equivalents should have, long ago, been reflected in a dollar goods "price inflation" that reached hyper status. But it didn't.
That "price inflation" never showed up because the world had to support its only money system until something could replace it. We as Americans came to think that our dollar, and its illusion of value, represented our special abilities; perhaps more pointedly our military and economic power. We conceived that this wonderful buying power, free of substantial goods price inflation, was our god given right; and the rest of the world could have this life too, if they could only be as good as us! Oh boy,,,,,, do we have some hard financial learning to do."
In a world with many different fiat currencies, the value of each one is a reflection of its economy. "Where the rubber meets the road" means where the monetary plane meets the physical plane, meaning that a currency is worth what its economy produces that can be bought with that currency. But price and value are not necessarily the same thing in the world of many different currencies.
In order to price something, you need a numéraire. So while the value of a currency is what its economy produces that can be purchased with that currency, the price of a currency is its exchange rate with other currencies from other economies. In a clean float with Freegold, I think that the price and value of each currency will be pretty close to equal, but that's not the case in the $IMFS.
The $IMFS is characterized by two things that work in tandem to not only misprice currencies relative to the physical plane, but to systemically cement the mispricing and make it cumulative over the long term rather than cyclical with periodic corrections. The two things are public- and private-sector capital flows between different currency zones. Capital flows between currency zones are monetary plane movements that cause physical plane imbalances, also known as current account or trade imbalances.
The public sector uses fiat currencies—primarily the US dollar—as international monetary system reserves, and the private sector uses fiat currencies—primarily the US dollar—as wealth items, collateral, financial reserves and savings. Private sector capital flows into the dollar and US-based dollar-denominated investments overprice the dollar relative to its physical plane value. This happens with other currencies as well, but the dollar is the one that the foreign public sector, by doing the dirty float, prevents from periodically correcting. The result is the perpetual US trade deficit that hasn't reversed in 40 years.
The perpetual US trade deficit is what reveals that the dollar is overvalued. This is caused by the foreign sector buying dollars as investments, savings and reserves. The foreign sector is divided into two subsectors, the foreign public sector and the foreign private sector. The foreign public sector is the foreign CBs, like the ECB and the PBOC. The foreign private sector is everyone else.
The foreign private sector loves all kinds of US investments, and it buys lots of dollars because of this love affair with Wall Street and the various US markets. This overvalues the dollar and causes the US trade deficit. But the foreign private sector isn't a constant source of dollar support because it acts only from the profit motive. Every once in a while, US markets come down and the foreign private sector flees out of the dollar. That's when the dollar exchange rate declines.
For the past 40+ years, certain foreign CBs have kept their currencies more or less pegged to the dollar. This meant buying dollars whenever the dollar's exchange rate declined. In effect, this acted as a "stop gap measure" for the dollar, and prevented its overvaluation from ever correcting. In effect, this exchange rate pegging with the dollar was the structural support that I write about. The foreign public sector bought dollars not with a profit motive, but for quite opposite reasons which translated into buying dollars whenever the rest of the foreign sector was fleeing from the dollar and its markets. This was structural support.
FOA (03/20/99; 11:34:12MDT - Msg ID:3615)
"Entire countries are economically impaired in an effort to maintain the fictional valuations of "US assets"! … It was the longest "stop gap measure" I have ever known to exist! A tremendous success by any standard, to keep the dollar stable for such a time. Many think it was "good old American know how" that did it. Well, now we will see…"
I apologize for repeating myself, but I think this is important. In essence, the "dirty float" or unofficial pegs to the US dollar were structural support. Not that they were primarily responsible for the overvaluation of the dollar (the foreign private sector was), but they kept it from collapsing and correcting each time the private sector retreated, including in the 2008 financial crisis. To understand how this structural support is responsible for the low inflation rate "problem", at least in dollar terms, please read this quote from FOA, as many times as it takes until it sinks in:
Friend of Another (9/22/98; 18:01:45 Msg ID:96)
"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)."
Many things, of course, can cause price inflation. Physical plane prices are really just the relative values of different things expressed using a common numéraire, and those relative values change all the time for many different supply and demand-related reasons. But overall inflation is a monetary phenomenon, a change in the price of the numéraire itself, which, as I said above, requires another numéraire. We often think of it as a case of more money versus fewer goods and services resulting in price inflation, but that's not necessarily the case when the global monetary and financial system promotes the hoarding rather than the spending of money acquired as surplus revenue.
Think about a trade surplus country like China, which has now accumulated nearly $4 trillion in foreign currency reserves. We can think of that $4T as surplus revenue that has been accumulated over the past 15 years, but the truth is that it was accumulated merely as a consequence of the dirty float of the Chinese currency. The effect was that it kept the price (the exchange rate) of the dollar elevated when it would have otherwise declined. This kept US imports cheap in dollars when they would have otherwise become more expensive, in other words, it kept US price inflation lower than it would otherwise have been. This effect is the same whether it is the foreign CBs or the foreign private sector hoarding dollars, but together, in tandem, the two sectors have kept the dollar perpetually overvalued for decades.
Another way we tend to think about inflation is as a decrease in production (supply) relative to consumption (demand) that results in an overall shortage of goods and services and therefore an overall rise in prices. But that doesn't necessarily work either. The US is a good example of an economy in which consumption (demand) is greater than production (supply), even as the US is one of the largest producers in the world. This is evident in the US trade deficit. Each month we consume about $40B more goods and services than we produce. The extra supply comes from abroad, where the rest of the world (ROW) in aggregate is producing about $40B more goods and services than it consumes each month. The ROW (in aggregate) is also buying about $40B in dollars for investment purchases, savings or monetary reserves each month.
As long as those two numbers are pretty close to each other, the US capital inflow and the US trade deficit, the dollar's exchange rate will be pretty stable. If the dollar is rising, then either the ROW is buying more dollars (capital inflow is increasing), or else US consumption (demand) is declining relative to US production (supply). Likewise, if the dollar is declining, then either the ROW is buying fewer dollars (capital inflow is decreasing or even reversing), or else US consumption is rising relative to US production. But when we look at these two variables, changes in net consumption happen relatively slowly while capital flows can literally turn on a dime.
Now, imagine that the $40B per month capital inflow suddenly stopped. You can imagine any number of causes, but perhaps a dramatic stock market correction would suffice. It doesn't even need to reverse and become a capital outflow, so you can imagine the money that's "already inside the US" running to the "safety" of Treasuries while money that's not already in dollars finds greener pastures elsewhere. As I've laid it out for you here, it should be clear that the dollar's price (its exchange rate) would plunge toward its physical plane value. The dollar's current price is based on a constant monetary inflow each and every month, not a balance of trade, so if that inflow stops, the price of a dollar drops.
When that happens, even if no price tags are changed inside or outside of the US, the prices of imports from the ROW will appear to have risen from the perspective of the dollar holder. And if the price tag of a net-import like oil which is priced in dollars isn't changed, then it will appear to have declined from the perspective of the foreign oil producer, so it will have to be raised. I hope you can see the "relativistic" effect on the prices of imports and exports when currency prices (exchange rates) change. While US imports will appear more expensive from inside the US, US exports will appear cheaper from the perspective of the ROW, and this relativistic (relative to your frame of reference) effect is present without changing any local price tags.
I don't want to spend too much time on this point, but what it means is that, in an open system with many different fiat currencies, the two things which I said characterize the $IMFS subjugate, supersede and overpower local inflation drivers. Those two things, once again, are oversized private sector international capital flows and their structural counterpart, public sector capital flows known as the dirty float. As FOA said, "the real cause of price increases is when the exchange rate is allowed to balance a negative trade deficit." In the present case, the cause of price stability in the $IMFS is the dirty float, in which exchange rates are not allowed to balance trade.
In a clean float, you'd have more closely balanced trade, and therefore the local inflation drivers targeted by monetary policy would begin to reassert their influence. Private sector capital flows would still have an effect, but it would correct periodically. And because changes occur more slowly in the physical than in the monetary plane, imbalances driven by private sector financial drifts would not become structural, cumulative and therefore systemically dangerous. Furthermore, and I hope to get into this more later, the predicted transition implies a smaller financial sector, smaller international capital flows, and a shift from financial pyramids and volatility churning into real economic enterprises as the most profitable focus for "hot money".
People, especially economists, tend to think they understand the causes of inflation. What I am proposing to you here is that, inside the $IMFS fishbowl, most of them are wrong, or at least what they understand theoretically is subjugated globally by the $IMFS and the dirty float. Look no farther than the US to see this in action. Here's the official inflation rate in the US for the last 30 years, from 1984-2014:
During that time, the US population grew by 35% and household incomes grew by 100%, meaning they doubled nominally. But that low inflation rate compounds to about 130% total over 30 years, which means household incomes haven't changed in real terms in 30 years, at least by the official inflation rate. But even though our incomes merely doubled in nominal terms, we spent as if they skyrocketed as shown in the 1,200% growth of total US debt to almost $60T:
As a consequence of all of that deficit spending, our cumulative checking accounts (basically the money supply aggregate that should affect consumer prices) grew by 900%, and our monetary base grew by 2,000% while cumulative consumer price inflation was only 130%. If this seems to violate what you thought you understood about the causes of inflation, you are not alone.
In my view, where we are today is stuck in a physical plane (real economy) that is subjugated, superseded, overpowered by and therefore subservient to the monetary plane (oversized financial capital flows). We have actually achieved a remarkable level of price stability for most of the world and for a very long time, but at what cost? In my view, there are two big costs, persistent economic stagnation in a relatively stable price environment, and inevitable periodic currency collapse.
Price stability mandates are only a means to an end which is a healthy and sustainable real economy, and yet, almost ironically, today's price stability continues at the cost of global economic stagnation. But this economic rut that we're in is not the only cost. Price inflation has been within acceptable levels for a very long time, aside from the occasional currency collapse or hyperinflation. And that's the second cost: the occasional currency collapses and bouts of hyperinflation.
You see, structural imbalances leave our landscape of many currencies vulnerable to abrupt and devastating corrections. It's like the tectonic plates on which we all live. The immense pressure that builds up around the edges is belied by the stable ground we feel most of the time, but every once in a while those plates correct themselves with disastrous effects.
Even with a higher target inflation rate like Krugman and Summers both recommend, monetary policy would likely have little or no effect as it stands today. In fact, we can see with our own eyes that it has little effect, as central banks have printed trillions in new reserves, practically monetizing consumption directly in some cases, while lowering both short and long term key interest rates to unprecedented lows, and still no effect on inflation.
Some have suggested that, in the case of Europe, the monetization of a broader range of assets, including gold, might be appropriate for monetary policy easing [15]. But all that does is raise demand for the monetized assets, likely raising the price, and in the case of gold causing inflow from other currency zones thereby putting downward pressure on the price of the currency itself. These kinds of purchases do not raise consumption, demand or create new borrowers, but instead they simply transfer existing purchasing power from the economy to prior asset holders. (And in the case of gold, CB purchases beyond a prudent reserve level are just currency manipulations that punish the workers in the economy while actually incentivizing lower consumption as more people will elect to forego current expenditures in order to buy gold: "Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises." - Another).
Even if they could get inflation up, I doubt that it would have the intended effect on the real economy. A certain rate of price inflation may well accompany the kind of economic growth that economists and central planners desire, but I'm not sure causation works in the direction they hope it does. In other words, economic growth may cause inflation, but inflation does not cause real economic growth. Here is a concrete example of what I mean:
By 1933, the annual US inflation rate was below -10%. Prices had fallen 60%, industrial production was down by half, millions were homeless and a quarter of the workforce was unemployed. FDR's inauguration on March 4, 1933 marked the lowest point in the worst depression in history, and it also occurred in the middle of a bank run. By the end of that day, 32 of the 48 states had already closed their banks, and the very next day, the day after his inauguration, FDR declared a four-day national bank holiday while Congress worked out a change in the dollar monetary system.
That monetary change of rules stopped price deflation in its tracks. By May, the monthly rate of inflation hit an annualized rate of 10%, and it even hit 40% annualized in June. [16]
The positive inflation rate, however, did little for the real economy in which unemployment remained in double digits until WWII. Five years after FDR's inauguration, Alvin Hansen would propose his secular stagnation hypothesis, and only gearing up for war in 1941 would finally drag the US economy out of its rut, and unemployment back down to low single digits.
During the post-war years of 1946-1953, with the US economy roaring on its own, cranking out a trade surplus with Europe as evident in the gold inflow which peaked in 1952 (see Fiat 33), we saw some of the highest price inflation rates ever, reaching 20% in 1947 and 10% in 1951. The point, once again, is that even though inflation may well accompany periods of economic growth, it does not follow that higher inflation rates cause higher economic growth.
Money Hoarding
For that matter, neither does low inflation—also known as price stability—cause economic growth. In my view, today's price stability has the same cause as today's low interest rates, which is also the same cause as today's global stagnation. As I've said many times before, correlation does not imply causation, and the treating of symptoms rarely cures the disease.
The "cause" that I am referring to is massive, systemic and global money hoarding. Money, at its essence, is credit. It is the credibility of future production revenue made spendable in the present (see Moneyness 2: Money is Credit). That is how new money comes into being, and then it circulates right along with the rest of the money pool as a medium of exchange in the present.
The hoarding of such credits, however, overvalues the unit of account itself, as the credits that are not hoarded enjoy a present purchasing power that would otherwise be lower if all existing "fungible credibility" circulated, and such credits were only held as short term balances rather than as wealth reserves. Hoarding, by the way, includes re-lending the credits to someone else, which is the primary way money is hoarded.
The re-lending of credits earned as surplus revenue simulates the money creation process without actually creating any new money, again overvaluing the unit itself as the credits enjoy a present purchasing power that would otherwise be lower if new money had actually been created. Re-lending is fine and normal to a degree. That degree is where it is done professionally, with one's own surplus revenue.
Where it becomes hazardous is when it is done systemically and passively by savers who leave it up to someone else to determine the lending standards. All of this money circulates in the same pool, so using credits as the system's reserves and the passive savings of virtually everyone in the world crowds the banks and professional investors within the financial and monetary arena. This crowding pushes the banks and professional investors into riskier and more questionable activities in order to make a living.
The result is low interest rates (because there is too much money competing for a limited pool of credible borrowers), lower lending standards (because passive money is being managed by people who make an up-front percentage and then have no more skin in the game), low inflation (because the process itself systematically overvalues the currency on an ongoing and cumulative basis), and economic stagnation (once debt and malinvestment levels reach a certain point of saturation). That's where we are today, in my view, on a global scale.
Money hoarded as savings or foreign reserves must find a vehicle to be hoarded into. This creates a massively oversized and passively generic demand for debt and equity investment vehicles, which leads to bubbles, malinvestment, debt saturation, across-the-board unprofitability, and ultimately to persistent economic stagnation where uneconomic and unprofitable businesses continue operating at a loss just to service their debt, and in some cases where government stimulus is involved, just to keep people employed. We see this happening everywhere today, even in China.
It is a vicious feedback loop, and it only gets worse as the viability of new products becomes secondary to their corporate presence in the investment markets. One of the main criticisms of the secular stagnation hypothesis, which I mentioned earlier, is that innovation and growth in the IT sector is underappreciated by economists. But just consider how many of the new rising stars in the tech industry are more about the business of selling shares than creating real economic value.
In essence, global savings (because in the $IMFS "savings" is defined as money hoarding) has outstripped profitable investment opportunities. There are more "savings" in the world today than there are truly-economic opportunities to make a profit, therefore the very act of saving for the future today worsens imprudent lending standards, inflates valuation bubbles in overpriced (and therefore unprofitable) industries, and promotes the illusion of new rising stars of productivity like Pets.com and Candy Crush.
In supply and demand terms, there is too much savings relative to investment opportunities that are profitable due to real economic value creation. The return on "savings" (interest in the case of debt and dividends or profits in the case of equity) is low because there is too much supply (savings) relative to demand (profitable opportunities). These are exactly the conditions in which bubbles arise—when "savings" or investment capital are in overabundance.
If you think it's good for the economy or for society in general to loan your surplus revenue to someone else, or to buy a company's stock, or even to stuff it in your mattress for later, guess again. You are part of the problem. If you're willing to give it away and forget about it, that's fine, but if you're hoping to reclaim that purchasing power at some point in the future, you are only adding to the congestion that is bringing the global economy to a standstill.
FOA (3/14/99; 16:17:55MDT - Msg ID:3362)
"Ironically, the very prospect of free world trade, so fought for by the American Administration, is the condition that the IMF/dollar system cannot handle! The debt built up from all of the past, unfree, protectionist old world trade is killing the transition. The policy is to sell free trade and the narrow margins it produces as they shut down entire economies because the low profits cannot service the old debt. Do you follow the logic and the problem? This brilliant, modern free trade system and all of its benefits cannot be implemented using the US dollar as a reserve currency. It shuts off commerce that in turn limits the use of commodities such as oil, metals, food and the like. Many hail the low price inflation in the US as a victory and ignore the intent other nations had in following "free trade". That being to promote a world economy, not just a US economy.
Enter the Euro! Understand that the increased use of commodities is a good thing. It's not just for the purpose of making a rising chart pattern so speculators can sell their calls! Commodity usage creates real things and helps the lives of real people. When citizens gain real productive mechanisms, they hold real wealth. Some would have you believe that third world people are enriched by saving US treasury bonds, not true! The only way to increase world trade, with an eye on building new consumers in all countries, is to remove the overhang of "dollar settlement".
The US started the free trade movement but quickly backed away when it was realized that the US currency, backed by debt through the fractional reserve system, would suffer severe inflation in the transition. Government guarantees would require the treasury (and Fed) to print unbelievable amounts of new currency to cover the unserviceable debt that Free Trade would create!"
FOA (03/20/99; 11:34:12MDT - Msg ID:3615)
"It was understood some time ago that the $US would indeed become "debted out" as digital currencies go. It was the logical conclusion to the world reserve money being removed from the gold exchange standard… We arrive at the final result today, with the dollar so expanded that it is failing the "free trade conversion" the world so craves. Entire countries are economically impaired in an effort to maintain the fictional valuations of "US assets"! …
It was the longest "stop gap measure" I have ever known to exist! A tremendous success by any standard, to keep the dollar stable for such a time. Many think it was "good old American know how" that did it. Well, now we will see "who knows how" as the world unwinds all of this dollar debt! …
As it is, this is created through BIS manipulations of foreign exchange (dirty float) and official money flows out of all non reserve currencies … One might have expected that others (as in the markets) would already be deducing the "secret moves" and re-evaluating the value of the dollar accordingly… this is not a "New York day trade", but rather a world money transformation that will affect you "down to the shoes on your feet"… Also, history usually documents that the most earth moving events were obvious, all along, but no one believed them!"
The Cure
The cure for global stagnation, I think, is very simple. In fact, unlike Krugman and Summers, I don't have a prescription. What would be my recommendation is already happening, so I only have a prediction for how and why it will end.
There is a common misconception that the sale of foreign goods and services in exchange for US dollars is what overvalues the dollar—foreign oil priced in dollars being the prime example, but China has also been selling other goods in exchange for dollars for a long time. In other words, it is a misconception that the international use of dollars as a medium of exchange is what keeps the $IMFS going.
This misconception, sometimes called the petrodollar theory, is so common that it is ubiquitous, not just in the conspiratard community, but in the mainstream as well. So I'm going to explain briefly the truth of the matter. You will need to understand this if you would like to accurately understand how and why it will end.
There are two ways for the foreign sector to buy dollars. One is by trading goods and services for them, and the other is through the foreign currency exchange. So, as a foreigner, you can buy dollars either with goods and services or with another currency. I'm not even necessarily talking about trade directly with the US, because you can buy dollars from other foreigners in both of these ways as well.
The US trades more than $2.2T worth of goods and services with the rest of the world each year. We export $2.2T worth of goods and services, and in exchange for them we also import $2.2T worth of goods and services. Dollars are the medium of exchange for all of them so, as you can imagine, there is a large pool of dollars circulating internationally. Think of it like this: A foreign exporter buys dollars with his goods and services, and then he sells the dollars to a foreign importer (in exchange for the local currency) who then uses the dollars to buy goods and services from the US. This happens each year to the tune of more than $2.2T.
In my scenario, you have $2.2T in dollars being bought with goods and services, and another $2.2T being bought with foreign currency (by the foreign importers who buy goods and services from the US). That would be balanced trade if that was all that was happening, but it's not. At the foreign currency exchange, where dollars are bought with foreign currency (rather than goods and services), there is also another group of dollar buyers competing with the foreign importers.
For simplicity's sake, let's call this second group the foreign investors and central banks. On average for the last several years, this group has bought about $500B each year which it has used for purposes other than buying goods and services. In 2006, this group's dollar buying peaked at an all-time high of about $750B, but for the last six years it has averaged almost exactly $500B per year. Instead of buying goods and services, these dollars were purchased in order to be hoarded, i.e., to buy dollar-denominated financial assets, like US stocks, bonds, Treasuries, real estate and foreign direct investment (FDI) inside the US.
The easiest way to understand the effect I'm trying to explain is to picture this second group bidding against the first group. The first group is foreign importers who buy $2.2T each year to be used to buy US goods and services. The second group is foreign investors and CBs who buy $500B each year to be used to buy US financial investments (aka IOUs). Together, they represent a foreign sector demand for $2.7T in dollars per year, which overvalues the dollar and causes the physical plane imbalance more commonly called the US trade deficit.
As I said above, we (the US) export $2.2T and we import $2.2T worth of goods and services. But we also import an extra $500B worth of goods and services which meets that extra demand for dollars from the second group, the foreign investors and central banks. Those extra imports are our trade deficit, and the important point here is that our trade deficit is caused solely by that extra demand for dollars from the second group, the foreign investors and foreign CBs. It is not caused by the fact that so many goods worldwide can be purchased in dollars that most American importers aren't even aware that other currencies exist.
The fact that many goods and services worldwide—once again oil being the prime example—can be purchased with US dollars does play a supporting role, but it is not the cause of the dollar's overvaluation. And in order to accurately understand how and why the $IMFS, and therefore global stagnation, will end, you need to understand its true cause. Oil being priced in dollars supports the dollar's overvaluation only insofar as the foreign oil producers themselves choose to hoard the dollars they earn as surplus revenue.
Secondarily, it provides the central banks engaged in the dirty float a false pretense for their excessive purchases of US dollars. You'd be surprised at how many people actually believe that China bought trillions of dollars as a rainy-day reserve fund simply because oil, food and many other global necessities are priced in dollars.
The cause of the dollar's overvaluation is the exorbitant hoarding of dollars by foreigners, including both foreign investors (which, yes, includes some of the foreign oil producers, though not to a great extent) and foreign central banks doing the dirty float. And of those two (foreign investors and foreign CBs), it is the CBs that were the cause of the perpetuation which lasted many decades, because they were the ones who bought dollars when everyone else was not.
Eliminate that particular cause, and you don't immediately eliminate the overvaluation, but you do end its perpetuation. And that's where I think we are today.
There have been a number of articles lately, both in the conspiratard media and in the mainstream, like this, this and this, about how the plunging price of oil spells doom for the dollar. $45 oil didn't doom the system in 2009, nor did $26 oil in 2001 or $16 oil in 1998, and $68 oil isn't going to doom it today. Something else is. The oil narrative is predicated on the common misconception that I outlined above, and is therefore wrong. But that doesn't mean the system is not doomed, it only reveals an inaccurate understanding of how and why it will end.
According to the narrative in those articles I linked, the fat lady should have already sung, if not in 2008, then at least in 2012, 2013, or at the beginning of this year at the latest. Yet the dollar is stronger than it has been in four years, the stock market is soaring at all-time highs, our trade deficit is currently above its six-year average at $516B annualized, and official price inflation is holding steady at 1.7%. There must be a better narrative, and there is.
Here's a chart by the French bank BNP Paribas from the Reuters article above. It shows what it calls "petrodollar exports" which it says were negative this year for the first time in 18 years.
Like I said, if this were the whole picture, then the fat lady would have already sung, but it's not and she hasn't… yet. I think this chart is misleading in many ways. "Petrodollar exports" is supposed to mean dollars spent on foreign oil priced in dollars that were then "recycled" back into US financial markets and other dollar-denominated debt. But all it really shows is foreign private sector dollar investment from part of the ROW. Excluded from the chart are Japan, Europe and the foreign CBs.
Look at 2008 in the chart. The blue is Asia excluding Japan, and it's negative in 2008. Yet 2008 was the PBOC's second-largest dollar buying spree ever, with an accumulation of $250B in Treasuries that year. The PBOC surpassed 2008 two years later in 2010 by buying $265B that year, and notice that the entire "petrodollar exports" for 2010 in that chart don't even total $200B. I don't have the data for the chart, but it looks like about $185B for 2010. In 2010, our trade deficit was $499B. $265B was purchased by the PBOC, and about $185B from "petrodollar exports", for a total of $450B. Something must be missing, and it is. Europe's private sector!
Notice, also, that those two years, 2008 and 2010, contained big dips in the dollar's price. In 2008, the dollar hit its all-time low of 71.5, and in 2010, it plunged from 88 in June down to 76 in October, a 14% plunge reminiscent of 1978 (see "Q2 1978" in Dirty Float). Remember I said that CBs doing the dirty buy dollars when everyone else is running away? Well it appears that the PBOC did just that, and it's not in that petrodollar chart.
Here's another chart, this one by Frank Knopers of Marketupdate.nl. It doesn't entirely complete the picture, but it fills in a good portion of what's missing:
This chart is only Treasuries, and you'll notice it's quite large precisely where the "petrodollar exports" one was small, and small where the petrodollar one was large. In this chart, Asia is red, and you'll notice how it dominates in 2008-2011 while in the last chart, where Asia was blue, it was but a minor concern. Also look at 2006, and how it's actually the lowest point in the past decade in this chart while it was the highest point in the last one.
We're looking at an incomplete picture in both of these charts, and also if we take them together the picture is still incomplete. That's because the total capital flow includes sectors, markets and actors that are not accounted for on either one of these charts. But if we understand how the balance of payments works, then we know that the physical plane trade deficit is the sum total of the monetary plane (capital) flows, of which these two charts merely give us a partial view.
Now imagine that the monetary plane "capital inflow" into the US suddenly stopped, turned on a dime, panicked, or whatever… it just vanished—poof. It would look something like this:
Notice that the numbers no longer balance. Suddenly the US is trying to import $2.7T in goods and services while only exporting $2.2T in goods and services. This puts an extra $500B in dollars per year into the foreign sector for which there is no longer a demand. As I said above, the demand caused the flow in the first place and, because the foreign public and private sectors worked in tandem, perpetuated it for decades. But, remember I also said that changes in net consumption happen slowly while capital flows can literally turn on a dime. The inertial differential between the two planes is critical in this instance.
One way or another, however, those numbers will balance in short order. Perhaps the red numbers could drop from $2.7T to $2.2T, or the black numbers could increase to $2.7T. Think about what would have to happen in short order, in real terms, for either of those scenarios to work. To foresee how these two numbers will reconcile, you must think in real, physical plane terms. You must think about those numbers representing a real volume of goods and services flowing in either direction, and the inertia of the demand to keep that real volume unchanged.
What you'll find, if you play out this thought experiment honestly, is that the weakest link in the whole system, the one that will lose its grip and make those numbers meet, is where the rubber meets the road—the prices that connect the dollar to the physical plane of goods and services. First the price of a dollar (its exchange rate) will slip, because there is suddenly a $2.7T supply meeting a $2.2T demand. This will have two initial effects. 1. It will send more dollars back to the US bidding up the price of US goods and services (real price inflation). 2. It will make those US imports appear relatively more expensive from the frame of reference of the dollar holder (relativistic price inflation).
Normally, this would mean a quick devaluation of the dollar, say for simplicity of calculation, by 50% or something. If that happened, you'd see those numbers rising quickly, but with the black numbers rising faster than the red until they meet at $4.4T (a 50% devaluation of the dollar). In real terms, US exports would have remained the same, but US imports would have shrunk from what would have been $5.4T after the devaluation to only $4.4T, an 18.5% reduction in imports in real terms, and a 100% reduction in net consumption by the US as a whole.
The sudden elimination of net consumption by the US as a whole is what FOA called "crashing our lifestyle," but he added in the very next sentence: "Something our currency management policy will confront with dollar printing to avert." A simple devaluation of the dollar would not only eliminate our trade deficit immediately, but in the case of the dollar because it is the global standard for savings and reserves totaling more than $60T, it would deliver a global haircut in real terms to the value of those savings and reserves. Nominally they would still be the same, but their real value would have been halved.
That, alone, would probably be enough to start a cascading avalanche of panic out of dollar holdings that would take the dollar much lower than the initial devaluation. But what FOA wrote—"Something our currency management policy will confront with dollar printing to avert"—is even more true today than when he wrote it and will, in my view, precede and amplify the avalanche, making the US dollar look more like the Zimbabwe dollar than the krona, peso or ruble in the end.
The reason I say it is more true today than when he wrote it is that, when he wrote it, the US private sector was the primary net consumer. But ever since the 2008 financial crisis, the US private sector is no longer a net consumer. We have, in essence, already "crashed our lifestyle." Yet the US as a whole, which in sectoral terms means the US private sector plus the US public sector (the USG), hasn't crashed its lifestyle at all.
Beginning in 2009, the net consumption of the US public sector, the US federal government, with net consumption defined as spending in excess of income, has been equal to or greater than the net consumption of the US public and private sectors combined. Stated simply, the USG's budget deficit has been equal to or greater than the US trade deficit for the last six years.
What this means, if you play out my thought experiment honestly, is that "the sudden elimination of net consumption" will be borne entirely, or at least almost entirely, by the one entity that can unilaterally, not unlike Mugabe, "confront with dollar printing to avert" (or at least attempt to avoid) bearing the brunt of that crash of lifestyle. That singular entity is the USG, and that's the basis for my view of how the US dollar will come to look more like the Zimbabwe dollar in the end.
FOA (3/17/2000; 9:16:57MT - usagold.com msg#13)
"We are only just now arriving at a time period that will bring about "The Currency Wars". Everything prior to this was only a preparation period to build an alternative currency. The years spent traveling this road were done to prepare the world for an escape medium when the dollar finally began its "price" hyper-inflation stage.
Few investors can "grasp" that in reality, our dollar has already been hyper inflated , but without the higher price effects. Years of deficit spending, over borrowing, debt expansion have created an illusion that the dollar was immune to price inflation. This illusion is evident in our massive trade deficit as it carries on with no negative effects on dollar exchange rates. Clearly other investors, outside the Central Banks were helping in the dollar support process without knowing they were buying into a dying currency system.
The only thing that kept this process from showing up in the prices of everyday goods was the support other Central Banks showed for our currency through exchange intervention. As I pointed out in my other writings, this support was convoluted at best and done over 15 to 20 years. Still, it's been done with a purpose all this time. That purpose was to maintain the dollar for world economic trade, without which we would all sink into depression…
The first signs that official dollar support is winding down is seen in real world pricing and official policy. The most obvious "first" price sensitive arena to reflect a "real coming inflation" is not gold as so many think, it's the stock markets. Their long term bull run, mostly starting around the early 80s completely reflected this official sanction of world dollar expansion without price inflation. It's only in the last year that we can see where equity markets are telegraphing a transition into dollar expansion "without world support". Better said, major price inflation is coming on a level equal to hyper status. Many stock markets have headed straight up in reflection of this."
Trail Guide (03/22/00; 07:53:28MDT - Msg ID:27266)
"The whole system is spiraling out of control now. We just call it the end of a currencies "timeline" and leave it at that. Most everyone else will eventually call it the beginning of dollar hyperinflation."
FOA (9/23/2000; 9:26:10MD - usagold.com msg#39)
"Again; it's the dollar that's caught in a vice because its exchange value is rising while its native buying power is somewhat the same. In order to balance the dollar's strength, native goods prices should be falling. By staying the same, its effects on our exchange rate process makes the local price of US goods ever more noncompetitive to sell to world markets…
Left on its own, such a process would expose the dollar structure to the bankrupt / hyper inflated position it has been in for many years. The US trade deficit would grow until the flow of dollars destroys our dollar reserve system. From where I swim in the ocean (in deep water), this is exactly the unending process we have embarked on. This time it will not reverse…
Truly, the ECB is not interested in "crashing" the system, rather let's "transition" the system into a more fair order. If intervention is needed, it's needed to keep the American economy from failing too fast from the coming hyperinflation of its currency. If the ECB is worried about the "exchange rate" being too far out of whack, it's a worry about its effect in generating a dollar system meltdown from deficit trade. Not a total failure of the Euro as so many report. When the time comes, and it will; the dollar will begin its fall away from its own past policy failure. Until that time, for the benefit of oil producers and many others, let's move as far down this Euro/gold trail as possible. Without a breakdown."
Trail Guide (10/07/00; 21:53:36MT - usagold.com msg#: 38526)
"I expect to see the Euro Zone taking off with some price inflation and a declining trade surplus heading toward deficit. All the while the US goes hyper with mountains of dollars coming home. And I don't mean coming home for investment. I mean coming home to exercise delivery against real US produced goods. I expect that before this is over, we (US) might be forced to use our gold card to help devalue the dollar. That would involve a forced restructuring of the gold markets so as to make gold rise. A few political heads would roll if this takes place. Believe it!"
Trail Guide (10/21/00; 08:50:07MT - usagold.com msg#: 39569)
"Once the ball starts rolling, it's good bye dollar overvaluation,,,,, and hello US hyper inflation. Especially if we want to keep our DOW and financial structure away from bookkeeping failure. Roaring prices for goods, yes, but bookkeeping failure, no! This is how a real inflation plays out!"
Trail Guide (10/24/00; 10:58:56MT - usagold.com msg#: 39784)
"Our currency will be lowered to non reserve status no matter what route we take. Just as in many other historic examples and present examples around the world, nation states always choose hyperinflation when no other way out is offered. No nation on earth has ever cascaded themselves into deflation once they are off the gold money system."
FOA (12/02/00; 11:40:02MD - usagold.com msg#49)
"Thoughts spoken with a background of coming hyperinflation—
It's almost impossible to compare our (FOA & Another) outcome of all this to other opinions because we have built our actions and testimony upon the one-way flow of this timeline transition.
We say "one way and one way only" and waver not! Own physical gold and position one's other interests with regards to a changing reserve currency dynamic.
Most every commentary written that is somewhat at odds with us, uses a foundation of a continued sound dollar financial structure as its base. Be it; deflation alone and/or deflation with some return to a gold exchange standard OR a total failure of other world bodies to reach for other acceptable alternative structures. Some say a little inflation will arrive and lift all boats within a "more of the same" dollar world. Indeed, their boats include a paper gold system and its ongoing use by the gold producing industry. All of these concepts are yesterday's outcomes and will be washed away in this great storm…
In our time and for the first time in the modern US dollar history, the US will embark into a classic hyperinflation for the sake of retaining its own lessened dollar for trade use. As destructive as that might be to players in this financial house, it is better than immediate total economic failure. It will evolve in a form much like the course of any other third world country, if its currency too was suddenly deprived of world reserve status. We will, like people the world over, learn to live with it and live in it. Truly, our dollar and economy will not go away, but its function, use and value will change dramatically."
Trail Guide (05/12/01; 09:57:47MT - usagold.com msg#: 53470)
"I know that far too many think the system is healthy enough to go on forever maintaining their lifestyle. It won't. Currency systems come and go with time and our dollar is being phased out. Eventually, as the next reserve system unfolds, our US inflation rate will spike into hyper status. Not because the dollar or our economy is suddenly nonfunctional, but because all the past "inflation tax deficits" that we built up over decades will come due. Then, not only the price of using our fiat system will be exposed,,,,, the price of all the political bailouts and American lifestyle enhancements will come due also. It will require a hugh devaluation of the dollar to cover this debt. It will appear to us as a sudden, hyperinflation, imposed on us by an unfair, European government,,,, out to get us."
FOA (06/12/01; 11:23:21MT - usagold.com msg#77)
"As the dollar tumbles on exchange markets, so too will our cost rise to produce anything (massive hyper price inflation). Rendering a net / net non gain in world trade advantage."
Trail Guide (06/12/01; 19:26:58MT - usagold.com msg#: 55977)
"Do you know how many national currencies in the world today experience an average of over 20% inflation rates? Do you know how many of those nations also experience almost hyper rates? More than a few, my friend. The point is that even in super inflation dynamics, modern people still use the fiat. Even as the governments lop off zeros weekly. Sure everyone has gold and hard dollars,,,,, but they don't spend them as much as they do their currency notes.
My point is that we will all be doing just as in Mexico; spending pesos while holding dollars and gold. Only in America we will be saving gold, putting aside Euros and spending inflating dollars. When the dollar goes completely hyper, we will resort to Euros, not gold or silver. The times have changed, my friend, you are fighting a war that will not begin. The world will use only one hard metal as wealth, gold! Because as Randy puts it: "we don't need a redundant wealth asset to hold in reserve". Silver is a good commodity but has no future in either the Euro System asset structure or my private wealth. Gold is the place to be and the events to follow will show this to be true."
FOA (07/27/01; 15:20:44MT - usagold.com msg#85)
"Make no mistake, we are not calling for price inflation to end the dollar's reserve reign! We are calling for "inflationary policy" to dethrone it while said hyperinflation follows…
The very changes needed in our money universe, today, would kill dollar demand by devaluing all dollar assets in super higher gold prices. The debts and the dollars would remain; only 90% of their current illusion of value would vanish. Hyperinflation in prices of all wealth objects will be the workout result of this process. As such, opposing dollar political motive will force the US to give the markets what is needed; both gold and gold prices beyond imagination."
FOA (11/2/01; 12:35:27MT - usagold.com msg#128)
"The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of their last 30 years of hard money success."
This hyperinflationary picture I paint (and if you'd like to read more about it, I'd recommend these three posts as a good place to start) may seem extreme and inconceivable, but I don't think it is. Nor do I think it is all that bad. As there are usually two sides to everything, there's a good side to dollar hyperinflation as well! ;D
Yes, it will destroy probably close to $100T in savings and monetary reserves worldwide (not counting all the fancy derivatives), but it will also destroy the debt those savings and reserves are built upon. And in so doing, it will destroy the virtual fishbowl that today confines the global economy, holding it in a state of secular stagnation. Yes, this is the cure, and like I said, I don't have a prescription for making it happen because what would be my recommendation is already happening.
As to whether or not it will happen, my view is unequivocally that it is absolutely and positively inevitable. As for when, my view that it could happen at any moment is more than just a feeling and a realization that it's decades overdue. It is, in fact, informed by two simple but important things.
First, all of the US markets are "already badly overpriced", while the foreign markets "are less so". So says Jeremy Grantham in his latest "Bubble Watch Update" newsletter. Grantham's firm has more than $112B in assets under management, and he has built his reputation on correctly identifying bubbles as they were happening. [17] Yet all signs are that the foreign private sector is still piling into the dollar short-bus as if it's the only ride in town. The miraculous dollar and its many markets are doing quite well, even as a correction like we haven't seen in at least six years appears to be on the horizon. That would be one of those times when, over the last several decades at least, the foreign public sector stepped in and bought precisely what everyone else was running away from… the dollar. But will it happen this time?
I don't think so, and that's the second thing. All signs are that the dirty float is finished. The ECB has made it quite clear that it will not be interfering with exchange rates anymore, and so have many other central banks. Even in the face of epic weakness, Russia's central bank has, over the past three months, repeatedly reaffirmed its new policy of a "free floating" ruble, here, here, here, here and even here back on Sept. 2nd.
Since publishing Dirty Float on August 3rd, I have also seen free floating exchange rate articles pertaining to Canada, Myanmar, Brazil and Hong Kong. Clean float, as a concept, almost seems to be trending! ;D
The PBOC has reportedly stepped back from its daily interventions in the [currency] market, and well it should stop. Exchange rate manipulation is anathema to its 28 bilateral currency swap agreements, three of which (Sri Lanka, Qatar and Canada) are new since Dirty Float was published. Also new since then are RMB trading centers in Paris, Luxembourg, Toronto and Doha, Qatar. China's currency is finally ready to float, and what do you know, its Treasury holdings are the same today as they were in 2011. The dirty float is dead. Long live the clean float.
Then again, there's still the chance that the drying-up of the subterranean stream (the flow of physical gold through London) will precede the monetary plane's inevitable time bomb, so who knows which one will happen first. A couple of recent statements on this front were Jeremy East's comment at the LBMA conference last June: "We are seeing gold flows circumventing the London market when, historically, gold would typically find its way to London and then out again. So we are seeing a bypass of the London market…" And this comment from a gold refiner via FT.com just last month: "I have to fly gold from Zurich to London, because there just is not enough gold on offer in London. You never used to have to do that."
My recommendation is to be prepared now, because that's the best way to avoid stress and regrets, which, IMO, are two things that are well worth avoiding. Either way it ends, I can't imagine how it could take too much longer.
FOA (2/28/2000; 10:18:13MT - usagold.com msg#8)
"Central banks gorged themselves with worthless dollar reserves and prevented a hyperinflation of the dollar in the process. They did this, because they knew that gold had the ability to completely replace any and all loss of dollar reserve value once a new system was in operation."
FOA (03/02/00; 20:15:21MT - usagold.com msg#9)
"Soon, bullion will return to doing what it did centuries ago. Representing the value of the world's assets and productive wealth. Only, with the world having far more in the way of modern things than ever before in its history, "Freegold" trading as a "reserve asset" will be valued as never before."
Trail Guide (03/04/00; 17:50:29MDT - Msg ID:26375)
"At first dollar hyper inflation will not be reflected in a rising price of gold on the current dollar paper gold market. It will be reflected in a corresponding lack of real gold relative to outstanding contracts! A physical gold shortage will happen "first", as the contract price system slowly defaults in an ever lower price. Next the paper markets will totally fail from non availability. That means a super low (discounted) bid price for contract gold. That's the same price the stock market players currently value your gold shares with.
Once the dollar gold contract system fails (and this will be happening during a full blown "hidden" price inflation), a physical gold market will develop,,,, whether officially (Euroland) or black market style.
The point is that during this dollar inflation, physical gold will be in almost no supply and its price will be 10X the paper price. No body, and I mean NO BODY is going to be cashing out of gold shares or any form of paper gold and doing an even swap! Every gold mine that operates using the dollar gold market to sell into,,,, does its financing with and is hedged leveraged with dollar based Bullion Banks ,,,,,, is going to see their stock ride the paper gold market to its end."
FOA (4/19/01; 17:50:29MT - usagold.com msg#65)
"The dollar is toast because most of the world doesn't like the management policy. They didn't like it in 71, but tolerated it because gold was supposed to keep flowing in repatriation payments. And if they didn't like it back then, they god awful hate it now!
We like to think that the dollar is what it is because we are so good. (smile) But, the truth is that for over a two decade period +, none of our economic policy, our trade financing policy, our defense policy or our internal lifestyle policy has pleased anyone outside these borders. We managed the dollar for us (U.S.) and the rest could just follow along.
Our fiat currency has survived all these years because others have supported our dollar flow in a way that kept it from crashing its exchange rate. We talk and think like we are winning the tug-of-war when, in fact, they just aren't pulling too hard. Waiting for their own system to form up."
Looking Forward
As I wrote earlier, my predicted transition implies a smaller financial sector, smaller international capital flows, and a shift from financial pyramids and volatility churning into real economic enterprises as the most profitable focus for "hot money". I know that many of my readers find this "glimpsing the hereafter" stuff challenging. I mean, everyone's into stocks and bonds today, right? So won't they run back into the warm embrace of paper IOUs right away?
Well, remember the Roaring 20s when everybody including the shoeshine boy was in the markets? After that crash, the average saver did not want to touch the stuff for four or five decades, and that was without hyperinflation wiping out his or her "savings" to 0.01% of their previous purchasing power. This time, I think it will be quite obvious that the only things "left standing" will be "real things".
Even among real things, the degree of purchasing power retention in real terms will vary greatly. This should lead to the usual mentality of risk reduction and channel future savings to a different focal point than today. And it's not just about the focal point which is for truly surplus (i.e., not needed anytime soon) revenue, but all forms of real wealth that enhance one's standard of living through their presence and use will gain widespread appreciation. Like nice, heirloom-quality household goods and furniture, instead of the cheap crap we buy today with the virtually-unlimited credit from an overvalued currency.
Ensuring that you own your home free and clear by retirement is another thing we should see post $IMFS, because it reduces risk. And no, I'm not talking about anything like the housing market speculation of today. All this "glimpsing the hereafter" stuff is based on common sense flowing from the elimination of money hoarding which will have proven so disastrous through the reset. This is what FOA explained so brilliantly, how our very human nature leads our behavior, especially through change.
One other thing I mentioned earlier that I want to expand upon in this final section is that any central bank purchases of gold, or any foreign currency for that matter, beyond a level that is prudent for normal international banking liquidity needs and emergencies (a level which I might add that all major CBs already have in reserve), are just currency manipulations that punish the workers in their own economy by reducing the purchasing power of their wages and transferring that purchasing power to someone else. Such transfers do not increase aggregate demand (i.e., purchasing power), they only transfer it from one person to another.
You may have seen the term "GOMO" used recently, which means Gold Open Market Operations or a CB buying or selling gold on the open market. While this idea has been associated with Freegold, I will tell you now that I don't agree that it is part of Freegold, a good idea, or even that we should expect to see it tried by the incompetent. Don't count on GOMO, because it's not what you are probably thinking it is.
I see a lot of people falling into the trap of thinking that "physical gold purchases can only be good no matter who's doing it", because they are thinking of their own holdings and projecting that personal feeling onto a CB that represents an entire economy made up of both debtors and savers. If you thought it was hard to think like a giant, it's even harder to think like a CB. A giant can underconsume and save just like us, but if a CB tries to do the same thing, it's not really saving. It is merely preventing the exchange rate from balancing trade via the relative prices of goods and services, and thereby mispricing its currency and unnecessarily punishing its own labor force.
Look at China. Over the past 15 years the PBOC has accumulated $4T in foreign currency reserves. To do that, it printed $4T-worth of yuan base money. Such printing should have been massively inflationary in China, but it wasn't. Look at China's inflation rate over the past 15 years:
Pretty mild for having printed $4T in new base money, right? The PBOC didn't stimulate demand in its economy with all that printing, instead it suppressed it locally and transferred it to someone else… to us in the US! :D That's all the PBOC did by manipulating its currency. It punished its own workers in its own economy by lowering the purchasing power of their wages below where it would have been otherwise, and it transferred that purchasing power to us.
Now, if a CB buys gold instead, it will be punishing the workers in its own economy in the same way, by lowering the purchasing power of their wages below where it would have been if it hadn't bought gold, and it will be transferring that purchasing power to… you guessed it… anyone who has gold! Sounds good, right? Well don't count on it, because it doesn't increase aggregate demand or consumption, it only transfers it. Gold is not a form of monetary policy, even if someone at the ECB inappropriately mentioned it along with debt and other market assets.
Gold falls under reserves, and not monetary policy, by the ECB's own definitions. It's on every single ECB weekly statement:
Items not related to monetary policy operations (includes gold, foreign currencies and foreign debt)
Items related to monetary policy operations (includes things like lending facilities, refinancing facilities, deposit facilities, LTROs, securities market programs, etc…, many different things, but not gold)
Monetary policy will be the same in Freegold as it is today… raising and lowering interest rates or other ways of easing and tightening, and buying debt if rates get too low. The difference is that they'll only do it within their own currency zone, because the dirty float will be finished.
The ECB's own statements make it clear, every week: Monetary policy, by definition, is stuff you do at home; Reserves—gold and foreign currency/foreign debt—and operations pertaining to reserves, are not part of monetary policy. They are exchange rate manipulations, and the ECB has made it clear that they aren't doing the dirty anymore. Monetary policy won't change. If you hate this system because of CB monetary policy, then you'll probably hate the next one as well.
What will change is that exchange rates will no longer be manipulated, therefore foreign currency, foreign debt and gold will just sit there, unchanged, on the CB balance sheets. Simple as that. The CBs will still mess with interest rates, reserve requirements, and buy debt and other stuff within their own currency zones, because that's what has at least a little effect on aggregate demand.
_________
In Fiat 33, Dirty Float and now Global Stagnation, I have traced the evolution of the global exchange rate regime, from the fixed exchange rates of Bretton Woods, to the "exchange rate anarchy" of the 1970s, to the dirty float of 1979-2013, and now to the clean float that will take us well into the future. At the beginning of Fiat 33 back in June, I made a statement which bothered some of you:
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"!
I knew what I had in mind would take several posts to explain. I knew what I was writing at the beginning would be confusing and maybe even a little controversial, but I hoped that it would eventually make sense after I finally got out what I had in mind. So now my question to you is whether or not the beginning of Fiat 33 finally makes sense to you. I hope it does. I'll end with the part I'm referring to, so please let me know if it now makes sense, or if I've still got more work to do. ;D
From Fiat 33:
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. 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.
Make sense yet? ;D
Sincerely,
FOFOA
[1] Larry Summers appeared on a panel with Ben Bernanke, Stan Fischer and Ken Rogoff at the 14th Annual IMF Economic Forum on Friday, November 8, 2013. The panel, Policy Responses to Crises, included a discussion of optimal policy responses to mitigate the adverse effects of crises. http://youtu.be/KYpVzBbQIX0?t=2m11s
[2] Why stagnation might prove to be the new normal By Lawrence Summers, Financial Times, Dec 15 2013
[3] Secular Stagnation – Fad or Fact? The Economist, Aug 16th 2014
[4] Is The Economy Suffering From Secular Stagnation? NPR, Sept. 9 2014
[5] Secular Stagnation:
Facts, Causes and Cures A VoxEU.org eBook by the Centre for Economic Policy Research (CEPR), Chapter 2, "Secular stagnation: A review of the issues" by Barry Eichengreen
[6] Ibid., Chapter 4, "Four observations on secular stagnation" by Paul Krugman
[7] U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound by Larry Summers, Business Economics 2014
[8] Ibid. [5], Chapter 1, "Reflections on the 'New Secular Stagnation Hypothesis'" by Larry Summers
[9] Hysteresis and the European Unemployment problem Blanchard and Summers (1986)
[10] Ibid. [5], Introduction, Figures 1, 2 & 3, Source: World Bank online database
[11] Former Fed Chief Greenspan Worried About Future of Monetary Policy The Wall Street Journal, Oct. 29 2014
[12] Inflation targets reconsidered Paper presented by Paul Krugman on May 27, 2014 at the ECB Forum on Central Banking: Monetary policy in a changing financial landscape
[13] http://en.wikipedia.org/wiki/Knut_Wicksell#Theoretical_contributions
[14] Gold is like distilled, pure physical wealth, and in that sense it is "monetary wealth" in that it is kind of like the ambassador representing the physical plane while residing in the monetary plane and acting as its most liquid physical reserve asset. Other than that, any entanglement between money (economic credit) and gold (pure physical wealth) is unrighteous at best, and deadly at worst. True wealth is hard, but true money is "easy" by definition. Hard money is practically an oxymoron if you really consider the money concept. Therefore if normal inflation is theft, then so is the value you lose when you buy a brand new car and drive it off the lot. Misusing something as a wealth reserve is user error, not malfunction.
[15] http://www.ecb.europa.eu/press/key/date/2014/html/sp141117.de.html Google translated from German: "The Board of Governors has unanimously advocated, where appropriate, to take further unconventional measures to counteract a lengthy period to lower inflation. Theoretically, this also includes the purchase of government bonds or other assets such as gold, shares, Exchange Traded Funds (ETF) etc.." Yves Mersch, Nov. 17 2014
[16] Source: Puncturing Deflation Myths, Part 1- Inflation During The Great Depression by Daniel R. Amerman, CFA. Feb. 12, 2009
[17] Jeremy Grantham: http://en.wikipedia.org/wiki/Jeremy_Grantham#Views_on_market_bubbles_and_the_2007-2008_credit_crisis Quote source: http://www.businessinsider.com/grantham-guesses-stocks-work-20-30-higher-2013-11
691 comments:
«Oldest ‹Older 201 – 400 of 691 Newer› Newest»I can imagine a variety of things that could come about to cause it. We may, for example, be right on the cusp of some rather serious problems related to junk debt (estimates vary on how much) that was issued on the back of the now very rickety looking U.S. shale oil and gas "miracle."
Blake
The budget deficit as reported really hasn't changed much and the other parts of it that matter (ie the redemption of treasuries held by Social Security) are not counted as they are off budget items. QE has ended, but barely. I suspect the fed is still supporting the system in other ways (the government got a lot of loans from somewhere recently).
Give this thing a little time. Nothing has changed much. The numbers may look a little better but nothing of significance has changed. The cannot raise interest rates so QE4 must be in the plans. They may be waiting for the proper nudge to make it look necessary or there may be something else going on that precludes it for now.
The USG does not have the income to support it's 'needs'. It can't bring in more in taxes. It won't spend less as that would cripple GDP numbers. Soon we will see what the response will be and it will either be more of the same or the whole thing will be interrupted by something big.
The recovery is not real. The USG is in a hopeless position.
Jorge
If you look at how equities have performed through hyperinflationary event, the answer is NOT GOOD. Yes the retain some value as you actually own part of a company and therefore real things. The disrupted economy that follows such events usually messes with company earnings.
The example I give is Siemens, the German Corp. If you bought in 1913 and held it through 2 hyperinflationary collapses (1923 and again in 1926 iirc(, the Second WW and the destruction of the Mark once again (third time in 32 years, no wonder Germans fear inflation eh?) you would have still lost half of your purchasing power/
I'm sticking with gold.
Stu, that's the $55,000 question. In part it's a psychological/behavioral question. In Russia the currency is collapsing because the country has had a history of currency collapses, and the people have already learned that in times of trouble there is an easy and alternative choice: the USD. When people want out of the USD, what is the easy and obvious alternative ("obvious" as in obvious to everyone)? There is none. That's why most USD holders will stay right where they are -- because they do not know where else to go. Individuals who have never purchased gold before need to go through the learning curve (remember when you bought your first coin and kept asking yourself how do I know this is real?). Institutions are generally not set up to handle physical gold, and are generally more concerned with nominal performance anyway, so they will be content to stay in dollar denominated assets going to the moon even if the dollar is going down the tubes.
At the moment I think it will take a major black swan event to change the mindset, perhaps the fall of major derivatives domino or a cascading devaluation of another major currency like the Yen.
@Carillion
You wrote
” Less than 1% of those living in the West hold any silver bullion, so where is this avalanche of silver going to come from which will make it worthless in say, the UK or the US during a period of hyper-inflation?”
I personally dishoarded over 1200 oz of silver (a retarded silverite = silvertard see Burningfiat`s explanation above). And I am not rich but rather saner now. Period!
@PeaknikMicki
All paper - AKA I.O.U. promises will burn in a finite world as they are just mend to. Eventually backwardation will appear in all FX markets.
@ anand and KnallGold
HMS tin foil hat on.
Putin needs to:
1. Put an expiration date for all USD reserves for the Russian CB. Disallow any sale of gold Chinese style.
2. Order that until the demise of the USD all pricing above say 10000 RUB threshold be in both a weight of gold and RUB for the buyer to decide.
3. Forbid the courts to enforce contracts that reference gold weight instead of price (preferably all contracts should reference fiat pricing only).
That should do it.
HMS tin foil hat off.
@ Jorge
You wrote:
“stock investments also represent investments in real assets, not only paper, so I don't quite see what is so bad about them.”
As always timing is everything. In my opinion this statement is right in the warming transition of HI. Once prices get hit in the red hot phase – USs` stocks (UKs` and others as well) will be a losing ticket as seen from the point of view of the ROW. You see the physical sector absolutely needs the fiat (and the credits (M0, M1, M2…) transferring sector AKA the FIRE sector ≈ banks) to function in order for it to perform any service to society. And that will take time.
RUB 50+% down
Check out the Russian stock market:
http://www.investing.com/indices/mcx
and the real estate’s market in USD!:
http://www.irn.ru/gd/?type=1¤cy=1#begin
Indexes are outright stupid. In fact all stocks whose certificates are not in your direct possession (and are, for example, held in a brokerage house instead).
“In fact, if the economy is going to be stronger after we pass through the fire of currencies, then I would expect that to be very bullish for the markets in the longer term.”
Not so fast.
A large part of the economy will just die off.
“…why wouldn't the game go on for another 10 years, or longer…”
7+ billion people will not allow 300 mill. to over-consume by creating a stranglehold of the world trade and economy in order to do it.
Michael dV said: “Yes [stocks] retain some value as you actually own part of a company and therefore real things.”
This is a common misconception. Stocks are not any more real things than money is.
If a company goes bankrupt and is wound down, due to mismanagement or other reasons, stockholders to not get a claim on any assets. They are sold and bondholders are paid instead. Stockholders do not “own” any physical assets of the company.
A stock does not give you guaranteed access to anything the company produces. Owning stock in Shell does not give me any sort of guaranteed access to fuel at my local Shell station.
Some stocks provide dividends, but management can withdraw dividends at any time. Owning a stock does not guarantee dividend income. Plus, dividends are only as good as the currency they are denominated in.
A stock is worth whatever I can sell it for. When I purchase a stock, my money goes to whoever owned it before me.... it does not get invested in the company itself. When I sell my stock, I get money from the next owner, not the company.
If the stock price changes, the company does not directly gain or loose anything (with the exception of stock held by the company to compensate/incentivize employees, but that effects the employees more directly than the company itself). The stock price is only loosely coupled to the company. If a company reports good earnings and is well positioned to do well in the future, then more people will want to own it, so the price will go up as demand for that stock increases. If a company looks poorly positioned, and is not doing well, then fewer people will want to own it and the price will go down. The stock price and company financials are correlated because the market expects them to be correlated, and so they are correlated. The market as a whole also goes up and down as market sentiment trends positive or negative.
I personally prefer to think of buying stocks as speculating on the future of companies, not as investment. An investment would be opening up your own business, or buying an existing business, either fully or partially. Taking an ownership stake, where you have some legal rights to the assets of the business itself. Whether or not you consider speculation to be investing is a matter of semantics, and I don't think it's really an important distinction. But I do think that it is important to place stocks firmly in the “money plane”, and not in the “physical plane”.
Was RRTFB and thought of Jorge:
"But if you are one of the ants that cannot distinguish between a monetary collapse and the myriad other problems with our civilization (i.e. you think that when the money collapses everything else goes to permanent sh-t as well—it doesn't by the way, look at history), then you probably think we'll be in a Mad Max wasteland for a generation or more after the dollar finally goes the way of the peso.
In that case, you should probably buy yourself a Texas ranch, a lot of guns, and a few friends to help you shoot those guns, like the Circle K Cowboys. The way I see it, the monetary collapse is going to reverse and ultimately correct many of those myriad other problems because reality will be uncovered and freed to exert its more balanced supply and demand dynamic. "
http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html
That post also mentions Life in the Ant Farm which I also meant to highly suggest.
So what do guys think about silver? It seems to be a great bargain at this price.
Flat Shoe Lance:
http://fofoa.blogspot.com/2011/05/costatas-silver-open-forum.html
Flat Shoe Lance: Also try
http://fofoa.blogspot.com/2010/12/focal-point-gold.html
Lance- enter this string in google too:
site:fofoa.blogspot.com silver
Much of what I don't understand (having read quite a bit but not everything here and trying to view the actions of nations through the lens today) is the concept of the Giants buying and selling gold at the 'real' price. If this is so, why was Russia allowed to continue accumulating for so long at the paper price, and why does Russia sell it today at the paper price instead of selling it to Giants at the real rate? If there is demand for gold *in size* then why not tap it?
I'd think Russia would be ecstatic to sell at the 'real' price, helping its balance sheet in the eyes of investors while also discrediting the dollar.
I'm not saying this to be skeptical, I'm asking b/c I don't understand how to marry the two ideas. Thanks
Maybe to refine my point having just read it over, there's a SocGen note on ZH (the highly credible source...) that Russia is selling. Regardless of whether it is, Russia could solve investor fears if it could show an ability to sell a small part of its holdings, which would still be *in size*, at a price far above that perceived today, while also exposing the weakness of the dollar.
Andrew,
Have a read of this first and see what you think:
https://www.bullionstar.com/blog/koos-jansen/guest-post-russia-selling-oil-gold/
Jojo,
No, that was not very helpful. I still struggle with the gap between the prices paid *in size* and not, as it seems like real size can in fact be cobbled together for certain entities like Russia. And if Russia wanted to really do damage, it could simply help force free gold or make it more obvious, which would show its own balance sheet as far better than feared.
For the article, I frankly thought it was pretty poor. The US isn't trying to suppress oil prices; it's actions have been nothing but the opposite over time. Thinking there is some denizen hiding out bombing the oil market is ridiculous, there has been a massive increase in supply along with declining demand globally. Pretty simple... Also, Russia was buying gold before oil fell so the argument made doesn't really make sense. And as for the Chinese, the renmibi is currently pegged to the dollar which is the primary determinant of its dollar holdings.
Anyway, I know my question is a bit unformed because the concept is also unformed in my mind on this point.
Thanks,
AS
Andrew,
I'll take a guess. Central bank sales and purchases of gold are very publicly visible. If they traded gold at the "real" price, it would explode the current system.
I've always accepted the higher true price of gold was for private giants who attempted to take gold in size out of the market.
Just a guess. would welcome a suggested post or two on this...
With all due respect to our host and the many fine, intelligent posters here, Ive always thought that the idea that gold trades in size at a secret price to be baloney. And I say that as someone who largely buys into the freegold thesis. There is so much proof to the contrary, especially the way central banks have been adding "in size" that I don't think it passes the sniff test. I do see how no one could ever buy suddenly "in size" without triggering freegold, but I've always thought the conspiratorial notion that gold trades at some super secret higher price really requires blinders to believe.
Gold in size: http://fofoa.blogspot.de/2014/02/think-like-giant-3.html
@ Andrew Storm
If Russia ever needs to dishoard physical at any price below 55+k USD it will go to its own oligarchs first! Probably buying them off so that they invest the difference (their expatriated loot) back into the country.
Dr. Octagon +100
Good comment on the largest casino in the world: The stock market. #paperWealth
Two-tier doubters, please go read tlg3... I would love to read your comeback, now with the proper Giant-perspective in place!
http://fofoa.blogspot.com/2010/05/open-letter-to-emu-heads-of-state.html
Things that make you (or at least me) go Hmmm...
First I revisited "Think like a giant":
"Here we have Giant-sized, non-oil-based new money Superproducers buying, at the open market price, paper gold *IN SIZE* that they think will be made 24-karat good by Western CBs, even though it is way out in front of what the mines are capable of producing anytime soon, simply because the LBMA bullion banks got reckless and took their money while creating implicitly-CB-backed paper from thin air in exchange. Another summed it up succinctly: To use the Queens English "it ain't gona happen dude"!"
I then moved on to check out KingWorldNews and read Von Greyerz positing the following in relation to Gunvor's statement about undocumented source of gold (http://kingworldnews.com/will-nightmare-scenario-send-silver-500-gold-10000/):
" I’ve often said that if you buy gold from a major bank it could be encumbered and belong to a central bank.
Therefore if you buy gold from banks, one day the central bank may decide that they are going to claim their gold back. That’s whether you store it in the bank or you take it out. This is why we buy freshly cast or minted gold directly from the refiners because that way we know it can’t be traced back to a central bank."
It rhymes with what Another suggested that CB's weren't interested in selling their gold but they ended up backing the paper market. If the gold is out there with their serial numbers stamped on it there may be a day when they say, sorry, that was our property and shouldn't have been sold. We'll take it back and here you go some nice paper as compensation.
My impulsive thought would have been that if they ended up with bars they suspected were from CB's could they not imply recast them together with other gold? Would there be compelling reasons not to do this? (political, legal, contractual)
Thoughts?
What's wrong with stocks? Nothing except their numeraire.
All due respect to the baloney eaters, but if you don't get it now you will get it later. Too later.
"Think that I a fool, because I trade gold for thousands US an oz.? You will think much on this in the future." -ANOTHER
Well, there's my point, from a more credible source:
"You will not see 80% or more of gold deals. If it was done with all to see the discount value would be lost as the world price would explode. This is not the relm of any public “wall street”. At one time it belonged mostly to the Barron. Now it is large with the BIS and super rich." -Another
Again, respectfully, but to use the quotes of Another to prove anything is a bit of a circle jerk. It's like the last refuge before you have no choice but to cede the point. Another also said a few things that have not proven correct as well. It's like a Christian using the words of Jesus to prove he was the Son of God. He may have been, but using his own claims as proof hie was correct doesnt prove a thing.
Stu,
Really give this another (Haha) try: http://fofoa.blogspot.de/2014/02/think-like-giant-3.html
It made zero sense to me when I first read it. Now, on third read, it makes a ton of excellent points. RRTFB, and it starts to sink in.
"Again, respectfully, but to use the quotes of Another to prove anything is a bit of a circle jerk."
No. It makes more and more sense as you read. Sorry if you are missing the meaning.
Stu: Find a quote from 'Think Like A Giant 3' that you don't like and let us know about it.
Looks like a potential push for SDR's. Worth keeping an eye on the IMF conference later in 2015. SDR's of course aren't a solution but will it allow them to kick the can....?
http://www.alt-market.com/articles/2444-imf-now-ready-to-slam-the-door-on-the-us-and-the-dollar
Peak
With regard to a CB claiming gold once you possess it...absurd. I think the guy was just pointing people to another product. Possession is the key. The beauty of gold in the quantities we are likely to get is that it is fungible and very easily hidden.
As for SDRs, Rickards is the only person I know of who thinks they have a future. The world simply is not going to go for another paper store of value after transition. As a medium of exchange...who cares. I'll use wampum if it works.
Stu, I agree with not using an Another quote to prove his ideas. Most of Fofoa's work does just that. He certainly found inspiration in A/FOA but now it is up to us to confirm. this is not a debating society. Many here are adults with a lifetime of wealth to protect after losing 50% in 2001 and again in 2008. For me I have no loyalty to any particular thought just because of the person who said it. That said however I have found the collection of ideas expressed here to be the most complete and logical I have found anywhere. That is after 5 years of reading preceded by a couple of years of wandering.
We are looking for a way to save our savings from the processes that hurt us in the past. If it is not doing it for you move on. Good luck.
As for SDRs, Rickards is the only person I know of who thinks they have a future.
Perhaps Michael, but China has been trying for years to get the renminbi to be part of the SDR basket. Maybe they too see it as a potential short term 'answer' and are just covering their bases...
Comments by Chinese officials have hinted that the renminbi may be fully convertible on the capital account by 2015, paving the way for the Chinese currency to be included in the Special Drawing Rights (SDR)... (h/t Bloomberg)
I agree with you that it is a stop-gap solution without long term sustainability... kinda like the dollar.
Michael DV, it's a low probability... but I like to recall that if you in some countries buy stolen goods you may need to return it to the original owner even if bought in good faith.
Governments can of course go even further than that if it suits them. Just like it's been suggested that miners would be forced to sell to governments when gold goes free. Today that would also seem absurd at least in a democratic country.
It is a curious though that Gunvor would include the source of the gold in the reason. Anyway, I think we can put that topic to rest.
tEON, fully second your post. Really don't think an SDR solution fixes anything longer term wise.
Wondering though if they also won't try re-jig the composition of the SDR once China is in to make it...less fiat. Surely that is the only way it can have any longevity.
Further...
Zhou Xiaochuanl; governor of the People's Bank of China since December 2002 states:
The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system....
Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries....
Politics? Smoke and mirrors? a bluff/distraction? appeasing the IMF?
Perhaps the renminbi's allocation % will be their negotiation hole card. What would be better for them? It seems like they are all in this together and no one wants to take their finger from the, severely leaking, dike. The SDR is only a few more sandbags... no permanent solution.
Meanwhile it seems US has been snubbing IMF and ended up in Lagarde's bad book. (By the way, anyone familiar with the site philosophyofmetrics? Just came across it but it looks interesting. Lucky I got a two hour flight ahead of me so will have a chance to acquaintance myself bit more with some of the articles.)
http://philosophyofmetrics.com/2014/12/12/imf-and-g20-moving-forward-on-plan-b/
Stu
Fwiw, I am also not convinced about the gold trading at higher prices in size in shadow.
Proof is for people too lazy to think for themselves. ANOTHER never tried to prove anything, but he had a lot to say; for example about the discount trade:
http://fofoa.blogspot.com/2013/01/legs.html?showComment=1358584614767#c5914305203680559299
My 5 cents about gold trading at different prices depending on size.
I am convinced there was gold involved in oil trading and in that regard gold was traded at a higher price.., around US$ 6000 is mentioned. I have not digged deeper into that and the number is not important to oilproducers.., the flow is. So why not 6000 if that is what was thought of being a sustainable level for keeping the flow.
About trading size at higher prices. Yes I believe that too BUT the price in those events should reflect the state of US$. In the days of Another and FOA it would certainly have looked that the end was nigh and gold in size would thus have been priced higher than paper. I would Imagine the same two tier market was obvious in the seventies. But the price.., the number would not be 20 times paper.., rather depending on how long it would take to accumulate a certain size and how long time was left to act..,
I dont remember when these 280 Tons were supposed to have traded but if it was in 1997 I would imagine a premium of maybe 5-20% and if it was right after the Washington agreement the premium could obviously have been a lot higher.
Since tis the season; why did Jesus speak in parables?
Another: I do not offer to prove my thoughts. If what is written was easy for all to find, the information would be of no use to you. Many will take no motions to change their ways and protect worth. Such is life.
Each will chose his way and as always the future will teach the truth.
The CB gold in the Gunvor example likely never moved, only its paper proxy. If Gunvor can't verify serial numbers, they need to source elsewhere, this is not a CB implication.
The SDR is a hopeful strategy for some. Asia always plays the odds pragmatically, but they aren't stacking SDRs.
Today would be a good day for Ender to comment. It's the currency markets, the current, established FX regime, that is showing its power play today. As the BIS notes, exchange stability for dollar holders affords more "systemic privilege" than petrodollar oil linkage today. They issued this report weeks before the ruble collapse card was played.
Then their mouthpiece (Reuters) hinted at the "renminbi" block by implying that if the renminbi "showed substantial independent movement against the major currencies and if its neighbours' and trading partners' currencies shared that movement" the parallel market in FX (renminbi bloc) will have arrived.
It's the current FX regime that (FOFOA is basically telling you) is "the system" at risk --to be protected at all costs.
Gold has nothing to do with it until it collapses.
Even the brightest of the brightest are haviing a hard time breaking free ... even though the BIS is showing the way.
My opinion only. I have no crystal ball, but the puzzle pieces do seem to fit.
Stu, thanks for your thoughts, I think we're on the same page. I have re-read think like a giant 3 several times and again now. I understand, I think, the implied logic. It makes a world of sense to me that the super rich have their own special currency at their own special price to trade things around. I get that. Russia just said it bought more gold, instead of selling, so great. I won't guess at Russia's logic because I'm not smart enough to know or say what it should do.
My point is more along the lines of those who are interested in ending the $ regime. If there is a separate price, truly, then someone, somewhere will have an incentive to shoot down the system and make it clear. Most players don't and I get that. But if your'e under attack like Russia seems to be and your CB is wasting money to defend the currency, it seems far more worthwhile to try and expose gold for what it is to prove its balance sheet is better. Selling to your oligarchs doesn't accomplish much. Selling 100 tons, which is *in size* at a higher price in an open market transaction would make everyone blink in shock and steady the Ruble as it would re-capitalize its balance sheet in no time.
Again, I don't know what Russia wants, but Venezuala has gold, others have gold and have fallen on hard times. It just seems bizarre to me with how many bad actors are out there that no one has ever blinked or tried to ruin the party... It presumes everyone is down with keeping the secret, which makes sense up to a point for me. I'm not saying the logic is wrong, I just think I'm missing something. As Stu said, it doesn't pass my sniff test...
Also, in regards to stock ownership, I'd say truly stop trying to over think it.
Company stock is a good, not great, inflation hedge. Stocks did great in Weimar Germany if you compare it to cash, furniture, etc... You do own a piece of a company, even if it is so small as to be irrelevant. If you build your own business and it goes broke, you don't own the assets either, the bank does. Stocks are what they are because everyone agrees on it and has for hundreds of years and there are clear, enforceable property rights attached to it. Yes, sometimes people get screwed, but sometimes people buy gold that isn't gold or get scammed in other ways.
Andrew, I only meant to address your idea of Russia selling any of this Gold they have been collecting. It seems absurd to me.
Aren't we talking about extremely private 2 party arrangements, where gold is transferred outside of the market mechanism? I do not think there is any dispute on this point. So how can proof be provided? Perhaps a better question, if that proof was provided, what would happen to the discount (market) gold price?
Isn't a bit silly to ask for proof that by definition (perpetuity of the discount market) cannot exist? I think that is a serious flaw of reasoning. You might as well say that anything that isn't provable (at this time) does not exist.
How about we return to a more stable perspective, one that was intended by Another quite sometime ago. How about we survey our current location on the trail and ground ourselves in why we are here in the first place. To do that, lets read the first 24 words of this blog. They have been there, unaltered, for over 6 years.
This blog is not for everyone. If proof is what you seek, it certainly isn't for you.
"Everyone knows where we have been. Let's see where we are going!" -Another
This quote says it all. The past can be proven by virtue that it has already happened. How do you prove the future? Better still, how do ask someone to prove the future? Perhaps proof will be found in the future of Freegold. I doubt it though. It will be a redundant and silly question at that point, because the Giants will no longer have the necessity for private party to party transactions.
This blog is about developing a lens that we can use to see the world in a different way. It isn't for everyone. In fact, I think it appeals to a very few.
We old timers ask the same of all our newer readers. RTFB. If it appeals to you, stick around and frequent the Donate button. If it doesn't, go and find something that does. It really isn't that hard to RTFB. The entire blog is available in PDF format and can literally go anywhere with you.
!'m not sure if that was directed at me but I found this blog two months after it was founded. I am very familiar with every facet of freegold. I simply have never found the idea that gold transacts at higher prices credible, and in an effort to engage that subject I now find it even less credible. Because I see now that many posters here are of the "believe it or find another blog" or "read this quote by Aanother" ilk. It's not only not provable, there is direct evidence to the contrary, namely the significant additions IN SIZE to the far east and many central banks. In my search for a more compelling explanation, I have found less.
Selah.
@Andrew Storm:
Company stock is a good, not great, inflation hedge. Stocks did great in Weimar Germany if you compare it to cash, furniture, etc...
The stock market dropped more than 99% in Weimar Germany. I don't remember where I got this stat, but I am very confident of it (may have come from When_Money_Dies by Fergusson). The actual figure is probably more like 99.99%. That means $100 turned into 1 cent. Not where I would want my money.
Stu,
The IN SIZE deals are and have been super private so why would you, as someone who claims to have been reading here since 08, expect "direct evidence to the contrary, namely the significant additions IN SIZE to the far east and many central banks" ???
The CB's are not private.
You expect far east private hoards to be accounted for and revealed out in the public light??
That's even more absurd.
Almost as absurd as admitting "It's not only not provable, " yet still expecting proof.
WTF?
Stu and Andrew, thank you for your insightful and refreshing comments.
My disappointment is with some of the responses from several self appointed guardians of the gate that have a certain religious fervor to them. There are many things that Another got wrong because he was/is not divine and was making only his best guess about the future.
JoJo, I don't doubt that in the past there have been private in size gold deals at well above the then market price. If a person wants immediate secret delivery of any "in size" quantity of almost anything that has a limited supply (as opposed to paper), you are going to pay a premium. But if you are suggesting (based on the words or reasoning of Another alone) that there is an active shadow market where in size gold purchases regularly happen at many multiples of the market price; then count me in the skeptical camp.
@Jojo - fair point. I'm trying to use examples to explain my question but, it's true, we are addressing a private market. I doubt any of us can truly understand the inner calculus of Russia, super rich or any other major nation so asking why anyone doesn't do something is a bit fruitless on my part.
@Matrix - I'm not seeking proof, I'm questioning logic. I started by saying I don't understand. If Another is a Rothschild, e.g., he has a deep understanding we don't. That doesn't mean his family wasn't robbed twice... That doesn't mean the world can't change in an unpredictable way.
I think my biggest question is on human nature. I get the point that the wealthy want to hide their wealth and like the privacy and system, but there's always a bad actor at some point. Just as FOFOA thinks politicians choose hyper-inflation as the path of least resistance, I think someone would use the two-tier system to break it... Kind of like the Hunts did when trying to corner silver and later told their sister "we were just trying to make some money".
Put another way, if gold is really worth 10x when in size and I'm a billionaire, why not buy $1 billion on the open market by paying hordes of people in India, China, Australia, etc... to buy small lots every day, rather than paying $10 billion to someone else super rich. If you spent $1 billion in wages to those people and all the other costs, you would still come out way far ahead. If country's can buy in that size, why don't the country leaders? Kind of like when Erdogan's son was caught with hundreds of millions in gold. (again, using examples isn't very helpful, but w/e). I understand the comment "being super-rich must be exhausting" as I think about logistically setting that up and then storing it hidden, but I also think about human nature and the fact people that get that rich like getting richer as efficiently as possible. Not everyone is wise enough, even the super rich, to understand that "when a thousand hungry lions fight for one scrap of food, small dogs should hide with what's in their belly"
Just some thoughts I'm trying to figure out and it sounds like some others.
I completely get that the super rich buy balloon dog for a whole lot because they can sell it for a whole lot. But if you could buy 20 pieces of balloon dog and assemble it for 1/200 of the price and have any wealthy person agree to buy it for full price... The argument is a massive stash of gold isn't a replicable asset but it seems like it can be based on the #s presented in think like a giant 3?
Wow, all of this has been explained and written about extensively. Why not a bad actor who decides to crash the discount market? What do you think this "bad actor" is paying for his off the market gold? Is it Freegold valuation? Hint: the answer is in the blog. What would be the result of crashing the discount market? Are there two tiers to the discount market? Our tier, and perhaps another tier for Giants? It's all here in the blog.
My comment wasn't meant to be inflammatory. It was clearly calling into question specious reasoning, where someone wants proof of the unprovable in order to consider the merit of the thesis.
Let's not forget that we are talking about a small market.
Relative handfuls of Giants vs. the rest of the world.
It is these few participants in this small market that make this market. To own a huge chunk of gold (IN SIZE) is to hold another Mona Lisa. But even better, no one (read "we the people") knows about it.
No one knows you have it, where it's kept, nothing.
Its been in the family for generations.
Would you keep such a large chunk of gold if you knew that in case of emergency you'd have to dump it on the "market" and get a very small % of it's value?
If that was your only exit out of that huge chunk, would you build such a huge chunk?
Or would you instead go to rarer, higher value wealth items? (more hideable?)
But if you knew you could easily sell that to another Giant for a whole lot more (full value or closer to), would that make you feel safe building such a large pile of Gold?
And, thinking back to when Gold really was currency, can you imagine the scorn that could come your way if "they" found out you were hoarding a huge amount of the worlds/countries lifeblood????
How would you trade something so unique? (no, gold is not unique but gold IN SIZE is very unique)
It reminds me a little of those huge piles of dollars you sometimes see in a South American drug lord bust- you know , the 2x2x2 meter stack of Ben Franklins.
You think they can just go deposit that huge chunk of dollars? (well, some banks they can ;))
It seems ultra clear to me!?
(I am a brainwashed cult member though)
Honestly, I could spend a lot of time tapping away here in order to speak to the plausibility of Giants and their "members only" market. I would never be able to say anything more or better than what is already written in Think Like a Giant 1-3. Nor do I think anyone else can do a better job than FOFOA himself in that regard. The guy is pretty damn good at what he does. So I would say that after reading those three posts a few times, and it still seems improbable, then go with it and reject the possibility. Convince yourself and move on.
Lol....just saw this part but it reminded me of the guy who made the exact same argument in comments a few years ago which in turn reminded me that there hasn't been a fresh objection in years on this blog so Matrix makes an excellent point.
I'm not bein a dick, but he's right. Everything brought up has been brought up (sometimes almost verbatim) before and probably multiple times. If you don't get it or don't like it, well ok.
I still suggest you keep reading.
Although if you've read everything here for 6 years and still don't understand things, maybe you wont ever??
Posts I am re reading right now, that I've read many times already, produce new insights due to new insights just gained on yesterdays re read.
I dare say, it might be best to reread a lot of the classic posts every time you gain a personally big insight.
Whatever, to each his own, just don't come on here asking for fucking proof :)
I was talking about this:
"by paying hordes of people in India, China, Australia, etc... to buy small lots every day, rather than paying $10 billion to someone else super rich. If you spent $1 billion in wages to those people and all the other costs, you would still come out way far ahead."
Again, I agree that it is plausible (and probably likely) that Giants have on occasion privately traded gold in size. I also think it is plausible (depending on the market and specific circumstances involved) that the actual price paid in any particular case might reflect a premium or a discount. What is implausible to me is the characterization of some unspecified number of trades over an unspecified length of time as being a "Market". Or that in the world of Giants there is always going to be a buyer of gold in size ready to pay many multiples of the paper price.
As a practical matter, there are too many unspecified variables involved in this hypothetical "Members Only Giant Market" for me to draw many conclusions other than the fact that there are giants who agree that gold is one of the best ways over time to preserve wealth. But if someone could provide even a reasonable guess about some of these variables, then it would be a much more interesting and non-specious discussion.
A = number of Giants in the market?
B = the average size of an in size trade?
C= the number of in size trades per month/year/decade?
D= price/multiple over the market price?
If you are a self-appointed gate keeper who think A/Foa were only guessing about the future and wrong about many things you will find little succor here. Specious indeed.
Jeff you should reread my posts more carefully. Misquoting is not an attractive trait.
1 of 2
The evidence of two-tier gold is circumstantial, but there is enough to get a conviction, because once you understand why there must be a two-tier market for gold, it does not leave any reasonable doubt.
First you must understand money. Money is credit and today’s most widely recognized and liquid credit is the various currencies of individual currency zones. Anything and everything can be bought on credit in theory but credit has very real limits in reality. If you use credit to buy a little more than you can reasonably pay back, the value of your credit will be diminished in the eyes of those that hold and trade it. If you go way overboard the value can and will be destroyed. This is to be avoided because having valuable credit over the long term is more of an asset than all of the short term stuff that can be bought with it.
Second you must believe gold matters. It’s held by virtually all CB’s and super producers. These two groups have the power to establish the value of any assets just by simply bidding for it with their limitless wealth and credibility.
If you put these two pieces of the puzzle together it should answer the question as to why, with seemingly unlimited amount of credit, no currency zone can or would try to buy up all or even too much of the world’s gold….or any other asset for that matter. However they still want to project that since $1200 can buy one ounce of gold, $12,000 will obviously buy 10 ounces, and then let us foolishly do the math and make assumptions all the way up to infinity forming a false perception. The goal of any currency issuer would be to project to the people the limitless purchasing power of their currency to buy all things while behind the scenes carefully limiting how their credit is used on all fronts in order to maintain its value. They are all very good at this and the proof of this in how our minds perceive currency. It won’t be necessary for them to play this game in the future because gold will be set free to function but it is necessary under our current system. The old FOA quote comes to mind about the people at a high end auction that all bid on a rare painting. If the winner gets the painting for 1 million dollars all the others at the auction believe they could have got the painting for just a few dollars more. They establish their net worth in paintings. If you are worth 10 million dollars you determine you could have bought 10 of those paintings. This is all an illusion though. There isn’t an unlimited amount of painting and so your money is not worth what it says it is.
2 of 2
So now let’s put ourselves in the shoes of a CB and/or super producer. Both understand gold and credit which means both understand gold is worth a whole lot more than the published market price and your credit is worth a whole lot less. It stands to reason that it would become beneficial and or necessary for these two entities to trade their large hordes of gold with each other from time to time. Therefore, if they wanted to trade gold with each other, and they both recognize gold's higher value, it only makes sense that they traded it at this higher value or they would otherwise be unable to do business at all. Publishing this higher price would have literally set the new price for gold overnight. However there would have been a downside to doing that and no upside until the world is ready. Maintaining the illusion (higher value for credit lower value for gold) allowed for gold to be pulled out of the ground right around its production cost and get it to where it needed to go in order to maintain the global economy. This bought a lot of time and maintained and improved the life style of millions. One does not “buy time” forever though.
I’ll close with this. Back when value investing was actually reflected in the stock market Warren Buffet didn’t buy stocks worth $10 because he thought they would go up to $15. He bought stocks worth $15 for the “market price” of $10 and waited for the market to figure out the value he learned about long ago. I think you are demonstrating some serious naivety if you think the CB’s and super producers of the world won’t know what the value of gold is until it flashes on a kitco screen.
Some of you guys just think way too hard. The master has spoken and we shall obey (oops, sorry, that's my other cult).
The 2 price tier question boils down to this: Do you believe that large amounts of gold can be hard by the super rich? Can a billionaire get 10 tons (300 million dollars worth, if they desire? Can they get physical?
Because I believe they can't and I believe many would want it now, then the 2 price idea makes sense.....and Jim Willie and Rob Kirby agree with me.
Unfortunately I do not know a billionaire that I can ask to test that theory, I have just read too many state that fact to ignore it. Obviously for the rest of us there is the 3000 tons produced annually by mine and a few extra tons of scrap (less the amount going to India, China, Russia and else where.)
The known stockpiles are dropping. It seems like an eternity but fairly soon we will know as the 1000+ tons in various ETFs and the Comex are depleted. Maybe low oil prices will keep supply up for even longer.
At the end of the day this is not an academic exercise. I have to decide how to save my wealth. My beliefs of the most probable outcome of failing U$D system will direct my actions. It is interesting learning about the monetary system too but that is a secondary issue.
@ Andrew
You have answered your own question without even knowing it.
„I completely get that the super rich buy balloon dog for a whole lot because they can sell it for a whole lot“
It is what is to be expected in this kind of (art) market. Although I would expect most of the deals to be done OTC. Still I have never heard of a really rich person dieing and his family or distressed ancestor auctioning off his/her gold heirloom on the shrimp market. Never!
„Put another way, if gold is really worth 10x when in size and I'm a billionaire, why not buy $1 billion on the open market by paying hordes of people in India, China, Australia, etc... to buy small lots every day, rather than paying $10 billion to someone else super rich. If you spent $1 billion in wages to those people and all the other costs, you would still come out way far ahead.“
You may be shocked but billionaires do just that without paying 1 bill. in wages with a small caveat – their time preference.
I don`t know if that helps but I have heard that in my small countries` capitol, the oligarchs (large shrimps in fact compared to the Russian ones) have cornered the market for the 20 gold franks which sell for up to 10% above POG and this is for the underweight crappy leftovers that remain to be on the pricelist.
When those eventually demise their wealth gets absorbed in a trickle up fashion by larger entities that eventually reach whalesise. How do you think the Rothschilds started in the first place if not by managing the resources of a larger community.
Cheers,
I do believe a billionaire could bet 10 tons, easily. Hell, Russia is getting 20-30 tons a month, China easily 10x that. Thank you for clarifying my thinking. I had a small job inthe gold industry briefly (not claiming to be some major insider) but I saw deals of that size go down, and they usually happened for as close to spot as you could imagine. In my opinion, this issue isn't critical to freegold, and thank goodness, because I believe some may be a bit brainwashed on this issue. what evidence could possibly have lead you to believe that the physical market is that tight when you easily see many multiples of that moving every month? I appreciate the effort, I wondered if I had missed something in "Think like a Giant" but now I am positive I didn't, I just think that thesis has a huge hole in it. Surprised there hasn't been more pushback. Thanks for the interaction.
@ Stu Ungar
„ I saw deals of that size go down, and they usually happened for as close to spot as you could imagine“
Yah you saw it, probably because those deals had a ton of legal paper carried with them. Now try to figure it out how it would be done without exposing both sides, as if no countries governments or legal authorities ever existed.
Andrew & Stu - have you spent any time looking at how much gold Russia and China mine from within their own borders every year, and where that gold goes? Consider that the numbers you see are what is officially reported, and the actual number may or may not be higher.
There is no need to buy gold in size if you're a government with plenty in the ground, you already have it. Also, consider how much easier it is for a government to quietly pull it from the ground at low prices, compared to how much more visible and likely to be stolen somewhere along the line at the higher prices. There is no need to rush, since it's already in the country. If I were in the position of Russia or China, I would want prices to stay low so I could continue the slow removal quietly for as long as possible.
https://en.wikipedia.org/wiki/List_of_countries_by_gold_production
@Bright No, I have seen physical transactions that size (10 tons). Usually bigger transactions, 50 tons or more would happen with a balance sheet transfer. But on one of our potential deals we had to make sure we could source at least 150 tons because at the time we didn't know how big the deal would be (long story). and we had no problem contracting with J&M, PAMP and a few others to acquire that tonnage. None at all. And believe me, I was a freegold disciple at the time as well, I was trying to find the limit on what we could acquire and never was one found. This was 2011. I'm sorry if that conflicts with your worldview, but its the truth. And if FOFOA would like to chime in, before anyone says I'm bullshitting, he can at the very least confirm that the deal we were exploring was real, and that I was in a position to be inquiring about a deal of that size.
Nice post, Sam. You wrote:
Second you must believe gold matters. It’s held by virtually all CB’s and super producers.
This may seem like semantics to you, but I think we ought to dispense with the term believe. In this matter, faith isn't applicable. One is, instead, obliged to accept as fact the essential nature of physical gold for central banks-The Federal Reserve amounts to a (technical) exception since Treasury possesses the gold- and super producers. The evidence is is overwhelming that this is a fact in much the same way that it is a fact that Florida produces the most citrus of any state in the union, or that the District of Columbia is the home of the U.S. Federal Government.
So, while acknowledging that the aforesaid facts are not immutable laws of nature, they still manage to entirely reflect the present (and foreseeable future) reality.
On Dec 14 Michael Pettis put up a good essay challenging the argument that China's reduced purchase of US debt will be a problem for the US (making an argument against FOFOA's broken sewer line argument). I am surprised that nobody here has commented. I am curious about the extent FOFOA and followers would agree or disagree with his analysis.
http://blog.mpettis.com/
Yo Stu,
"I saw deals of that size go down, and they usually happened for as close to spot as you could imagine."
Wow! Please do elaborate! Can you relate anecdotes of giants trading enormous gold holdings for ~spot? This would be very interesting fresh information!
I'm all ears!
I can't really elaborate and it isn't as interesting as you imagine. It was a potential capital market transaction and so the underwriters could know the maximum size of the offering, they had to know how much could be sourced. This wasn't a giant, but would have been a huge one time purchase. Thats all I'll say about it, I suppose you'll have to take it or leave it at that.
Robert wrote:
On Dec 14 Michael Pettis put up a good essay challenging the argument that China's reduced purchase of US debt will be a problem for the US (making an argument against FOFOA's broken sewer line argument). I am surprised that nobody here has commented. I am curious about the extent FOFOA and followers would agree or disagree with his analysis.
Mr. Pettis seems deeply ensconced in the fish bowl.
To wit:
it will force the PBoC to purchase even more foreign government bonds, if the PBoC continues to intervene in the currency...
Stop right there at if the PBOC continues to intervene in the currency
Archer, a few more thoughts about the Pettis article: He argues that the PBOC has virtually no choice about how much debt it buys once it makes a decision to manage its exchange rate. Everything that follows the decision to manage the exchange rate becomes a matter of accounting identities. He argues that the US does not want China to buy so much of the debt. That's why the US has pressured China to let the Yuan strengthen. The message to China is: Stop sending your savings to us, let the Yuan strengthen (= effectively saying let's increase the price Americans have to pay for Chinese imports). If the PBOC is buying less US debt, he says one of four things must be happening: (i) other Chinese institutions must be buying USD assets, removing the need for the PBOC to buy USD assets; (ii) the reduction of PBOC purchase must be matched by an increase of other foreigners buying USD assets; (iii) if the reduction was not matched by an increase of other foreigners buying USD assets, this must mean that the US current account deficit is declining (and because the US current account deficit is by definition the excees of savings over investment) and savings are increasing ; or (iv) the current account deficit is falling and investment is declining. Further, if countries adopt policies that reduce the amount of savings they export to the US, they must accept higher unemployment in their own economies. The flip side of this is that the employment/savings picture in the US improves.
My instinct is that there are limits to an argument constructed primarily on accounting identities, but what am I missing here?
@Edwardo
I ofcourse agree that its fact but under our current system most of the big players remain coy about gold's role. They will say its important without saying why. Like they hadn't really given it much thought =)
@Stu
I could offer several explanations against your anecdotal experience not disproving two-tier gold but I was wondering if you had any argument against the concept itself. I don't want you to think I'm being cult like or unwilling to debate or answer questions (though they have been explained thoroughly in the blog) but you aren't arguing the concept which is why others probably dismissed you. Instead you are arguing that something that Another said was done behind the curtain isn't provable (that would be the point) and that what you have seen doesn't match (as it shouldn't). Do you think Another and FOA were just banking on no one in the gold business ever reading their stuff? The transactions you saw or thought you saw were not the in size transactions Another and FOA were talking about unless you are talking about secret behind the scenes deals that you were a part of.
May I interfer for a short moment:
Can a billionaire get 10 tons (300 million dollars worth, if they desire?
Come on, guys and girls. What are 300m? Not really very much, right? Same would be true for 3bn (100 tons). We are talking of billionaires! Which have surplusses of MANY billions, of dozens of billions, or am I wrong?
So I am quite convinced, Stu, that you have seen physical transfers of the given size.
But a second tier market would see movements of much, much bigger volume. 10 or even 100 tonnes would not really shake the market, or?
Stu
If you are saying that in 2011 it was possible to source 150 tons of physical gold at near spot price for a private party…yes that would really surprise me. I am under the impression that even a few tons of physical is near impossible to source.
Stu
it would also raise the question of why China does not already have all the gold it needs. It has the ability to buy thousands of tons at current spot and not dent it's reserves.
@Stu
What I was implying was that this kind of deals you saw sere perfectly legal („with a balance sheet transfer“ – as you put it and so on). But this is not what gold is used for in the Giants` deals or „Market“ if you like. In my opinion gold is what settles the score in political deals/favours for public expenditures, procurement (AKA pork barrel contracts),dowry in marriages, big ticket purchases that have to be kept outside public scrutiny etc. Therefore the 55+k USD price is simply notional no credits exchanged!
Cheers,
Sorry folks, I'm stepping clear of this one. I smell the foul odor of bullshit emmanating from one of our debaters. I've seen it a million times on this blog. It is tedious. We all know what happens next. Back to my hole.
Robert,
If the PBOC is buying less US debt, he says one of four things must be happening: (i) other Chinese institutions must be buying USD assets, removing the need for the PBOC to buy USD assets; (ii) the reduction of PBOC purchase must be matched by an increase of other foreigners buying USD assets; (iii) if the reduction was not matched by an increase of other foreigners buying USD assets, this must mean that the US current account deficit is declining.
Again, this strikes me as a classic "inside the fishbowl" analysis. Tossing around concepts/terms such as reserve currency is indicative of the inside the box mentality. Another example of not pushing the envelope is the presence of the fundamental premise that all roads-whether they be publicly funded highways or privately operated toll roads must/inevitably lead to the uptake of U.S. government debt purchases. I realize it's a big ask for most to get their mitts around, but I do wonder how analysts can persistently avoid thinking outside the bowl/box, especially in the face of evidence that the U.S. economy is in a secular decline that is the obvious result of the monetary system's fundamental flaws.
What I have specifically in mind here is the idea of an improvement in the current account deficit. Even if the current account deficit diminishes, how meaningful, how lasting is it apt to be given that the secular decline in the U.S. economy has, of late, only been arrested by an, at best, shaky domestic oil and gas extraction industry.
So, yes, I agree with you that the accounting identities argument isn't compelling.
Why China thinks gold is the buy of the century
(. . . In one easy lesson*)
- China could purchase the total United States gold reserve (8133 metric tonnes) with 8% of its foreign exchange reserves.
- To put it another way, China could pay double the current price for the world’s total gold reserve and still have nearly $1.5 trillion in foreign exchange reserves.
They don't need to buy entire US Gold Hoard. But, half of it (4.066 tons) for 4% of their reserves? That's a no-brainer. Even if physical gold goes to 0 (zero), they would only lose 4% of their reserves! I mean, if a simpleton like me sees this and they do not, then those "very thank you" people must be unbelievably stupid. Beyond comprehension.
I don't know about two-tier gold market. But I know one thing. With 100% certainty. US Treasury value their gold at offical price of 42.5 US$ per ounce, correct? We say $43 per ounce. At that price, I am ready to buy 10 Kg, right here, right now, no questions asked. 10 Kg is 10.000 grams or 321.5 oz for metric system impaired ones. I don't care if it is 99.99 or 90.00 gold. I'll get on a plane and personally retrieve it so no shipping necessary.
So, if there is some Fed\US Treasury employees reading this, leave a comment and I'll contact you for details. Couple of drinks and a lunch at a restaurant of your choice is included in the deal. ;-)
Matrix, you would be dead wrong. But I do find it a funny confirmation of the human condition when confronted with something that conflicts with your worldview that your default position is that I'm lying. As I said, FOFOA can easily confirm what I'm saying. He knows who I am, why not send him an email and ask if I'm a bullshitter? I'm sure it's easier for you, emotionally, to just say I'm lying. You have much company. I'm sorry I interrupted your echo chamber.
@ein anderer Of course, anything is possible. 150 tons was the most I ever confirmed could be sourced. My point simply is that there is nothing to support the concept of two tiered pricing other than a theory. All credible and visible evidence, whether my own personal experience, whether its monthly chinese/russian/indian import data..nothing indicates this a two tier market exists. In short, its a fantasy. It's a fantasy that may wind up being true, but I suppose what bothers me the most is the way many participants simply accept it as fact when there is plenty, I mean plenty of evidence to the contrary.
Micheal- Sorry to burst your bubble but a few tons could be found quite easily. never mentioned thousands of tons, but since we all know by reading this fine blog that gold doesnt have a diminishing marginal utility that there isnt an "enough" number. Plus I'm sure there is a number that would intentionally trigger freegold. I think with the amount of Chinese reserves this is obvious. If they ever dumped to buy at once I think it's clear the order could not be filled. My only point is that I have never seen any indication that there is two-tiered pricing and yet it's accepted here as fact. It's not a fact, its an extremely debatable point. I thought this was a place where people might like to challenge their own orthodoxy, and in my freegold studies, thats the one area that set off my bullshit detector.
And as my last self promotion in this thread, I was not some major gold insider and I did not work for one of the major bullion banks. I am just a guy, who put himself in a situation to glimpse how these large purchases get done, and even a schmuck like me was very welcome to source at least 150 tons with no problem at all.
And for the record, FOFOA is the bees knees, he;s brilliant and awesome and a fantastic thinker. But he's not Jesus, and I never liked Like of Brian all that much. Matrix, I see you're a big fan.
Archer, I suppose in the end my hunch agrees with yours, but I still feel that Pettis' argument has not been rigorously and satisfactorily rebutted.
Stu, as much as I agree with Matrix that we can all benefit immensely from reading and rereading the archives many times, I think Matrix is the last guy you want to talk to when you are faced with something that FOFOA has not yet addressed in the archives. Sometimes the best way to learn is by working through something new, something which has not yet been answered even if you RRTFB. FWIW.
Lol all these wankers on this site waiting for a massive gold revaluation so that they can retire to Florida. You all got a long long time to wait! FOA predicted dollar collapse in 2000 as the Euro was formed. 14 years later we are still waiting.
Mak Muk: We wait, but the Euro was formed with a purpose in mind. A clear purpose with a 'break glass in case of an emergency' instruction manual.
Bit defensive aren't you? Hey, here's a newsflash: I could give a rat's ass who you are or who you think you are. I know this, if you were a man of substance you would not elude to the fact that you a man of substance. You reveal yourself and your flaw for all to see. So easy to set the bait. I just throw out something, insinuating, and you are ready to defend yourself. Why?
Wouldn't a man of substance, in the know, certainly in the know enough to discount a two tiered gold market, simply laugh at such an ass-clown and move on to more weighty things commensurate to your knowledge and station? If I were a man of substance I certainly wouldn't waste my time with such a fool or such a foolish blog as this. Since I am typing this and I read this blog every day, I am stating unequivocally I am just a commoner. You should feel embarrassed big guy.
You see, I could have said nothing and went my merry way. But alas, I do like to mix up a bit when I see a poser playing a little game. I can't help it really. So go ahead, tell us all why I am of course wrong and how you really are a man of substance. That is what I of course hope for. I handed you a shovel and you started digging. So dig some more.
Oh how I wish I could purchase 150 tonnes today. I would put you in charge of executing the trade. Then I would laugh my ass off as you suddenly disappear from this blog. I nonetheless will satisfy myself with that beautiful imagery.
I do not pretend to be anything that I am not. I know very few things for sure. I can't prove a two tiered market. I cannot disprove it as well, your feeble attempt notwithstanding. When I put myself in the Giants shoes, walk in their footsteps, I see the clear and pristine logic of it. Therefore, I see it as possible and likely. Just as I see the possibility of the Many Worlds or the Copenhagen interpretations in quantum physics. Nobody knows for sure, yet.
I owe no allegiance to FOFOA, FOA, or Another. I find their arguments to be compelling. A two-tiered market is like the double slit experiment, and its description of particle behavior. As long as you don't observe a particle's path, multiple behaviors remain a possibility and renders real and observable physical effects. Once the particle's path is observed at the double slit, the infinite possible paths travelled beyond the double slit disappears, the wave function collapses, and a single observable path resolves. Observing the discount market collapses all possibilities into the certainty that it exists. The result, a singularity where the discount market does not exist. The act of observation alters the behavior of the physical properties of the market.
Not to leave the Many Worlders out, there is a universe where Giants have a two-tiered market, and there is one where they don't. There are at least two version of you (∞) and me, some where we type away this morning, others where we don't. Some where you witness 150 tonne physical gold transactions, some where you don't. Even some where you think your witnessing them, but it was just your imagination. So arguing whether a two-tiered market exists is pointless and absurd.
So I will go forward with my interpretation that I can know little. However, perhaps I can intuit and thereby act on quite a bit more. So go along now and act on your certainty and I'll act upon my illusion of uncertainty.
Maybe the Large Hadron collider in Cern will settle the score and prove super-symmetry rather than Many Worlds.
Maybe time will show that Freegold was a fantasy, where there is an unlimited supply of physical gold for delivery at the commodity price. If that is the case we will never see a fracture of the physical market, just an ever-higher and incremental climb in the bid for gold credits.
Shall we place our bets? Shall we watch together?
Stu,
thanks.
Would you mind to re-read Giant 3?
As far as I can see, FOFOA is trying there a »proof« for the thesis that a two-tier gold must exist.
Which of his arguments do you think are faulty?
Dante_Eu: that was a very good one!
Aside that, the 2-tier market of the past is not a pre-requisite for the FreeGold theory. A separation would be the result of $IMS' demise, is the thesis. We watch and wait for signs to emerge (2008, we remember you...).
But, if it already happened, long ago, on the Giant level, it might impact your view of the time scale further.
@ Matrix You are clearly a crazy person. First of all, you were the first that implied I was lying. Instead of just walking away you had to imply I was bullshitting. You drew first blood. Second, I went out of my way to say I am not "a man of substance" or whatever crazy nonsense you insinuated. quite the contrary. But I did have an opportunity to inquire about a deal this size and I did have close contact with PAMP, Metalor etc about the logistics of such a trade. Then you devolve into mimicking Anothers writing style..my suggestion to you is to up the meds, you're clearly holding on to to tight. I responded with a brief paragraph and then you laid...that...egg.
@einanderer I have way too much respect for FOFOA to do a line by line critique of anything he writes, I will simply say that he presupposes his thesis is correct and then works backwards in that article as to WHY there might be a two-tiered market. I just didn't find the logic compelling given the facts in my face. Do you? You see import/export and reserve numbers. Does anything you see imply gold is not available in size? We see tons flow well beyond mining and scrap supply, cumulatively it is in SIZE, every month. Personally I have enough of my wealth in gold that I am always looking for holes in the freegold logic, I believe the two tier theory is a such a hole. Not a terminal one, but a hold nonetheless.
That said, I am still a proponent of freegold, and I always imagined it coming about like FOFOA has mentioned, with existing holders simply removing theirs from sale. not a huge rush into gold.
My advice as someone who also visits this blog every day and has since the beginning is to try in distance yourself like the religious followers like Matrix, as you can see, when zealots are challenged, even by someone who largely agrees with them, they get violent and lash out. These folks will make you miss holes in the argument, and up the volume of the echo chamber.
I am a pot stirrer by nature, I can see the theology is too strict here, even for a believer like me.
The question of the existence on a 2 tier market is important.
If gold was freely available in any quantity at spot why would Another have spoken of trading at higher prices? What would be the pressure that would take gold to a higher price?
Clearly 3000+ tons a year flows but how is it determined who gets it. If it is readily available why would a giant not dishoard at current prices? As China produces 400+ tons a year 150 tons would at least be a remarkable trade for any facility.
I wonder what a balance sheet transfer is. I imagine those take place at central bank levels. I might speculate that a CB was transferred gold for 5 or 6 billion and that might settle an account but there could be other 'good and valuable considerations' included in the transaction as sometimes happens in private deals to keep the details private.
There are so many questions when one does not have all the required info.
…and I think Stu is right that fofoa starts with assumptions and looks for supporting details…that is the very nature of this blog. We were told things by A/FOA that lead us to certain actions. It is up to us to challenge those assumptions as well as too find information that confirms their opinion and stated fact. A lie (or a poorly understood observation) in all this argument could add to the existing confusion immeasurably.
@Michael Just to clarify, I did not say ANY amount was available. Clearly it's not. If a major central bank wanted to exchange it's reserves for physical it could easily lock the market. I'm simply saying that I believe flow is available in much larger quantities than is assumed here and the logic of a two tiered market is at least worthy of ribald debate and can't be just ASSUMED to be true.
Why does anyone have to determine who gets it? You know who I think gets it? People that choose to get it. It's out there for whomever wants it. And if western investors just stopped accepting paper claims, IMO that might be enough.
In my experience balance sheet transfers are usually some type of money laundering. Usually requests for those type of transactions would break down when you got to the KYC part of the process.
All in all, I do not believe any of this is terminal to the thesis of freegold, far from it. We still have oodles of FX and paper gold transactions trading "as good as gold" when clearly they are not. If those reserves suddenly went for allocated, there would be no chance at acquiring that kind of metal.
I kind of thought of this as an ancillary argument, not key to the concept. Sort of like the spot price has to go DOWN to trigger freegold. I think thats likely, but I also believe freegold can be triggered at any price, and the dropping paper price thesis supports more of a long drawn out transition.
Anyway, I dont see how any of these disagreements are an attack on freegold. But as someone that has well over 50% of my wealth in physical gold, I am sure as shit welcome to attacks on the thesis, because if I'm wrong, I want to know.
I've never been one of those that says they buy gold and are totally happy if the transition happens after they are dead. I want to maximize my purchasing power during my lifetime, and I invest accordingly.
Robert wrote:
I still feel that Pettis' argument has not been rigorously and satisfactorily rebutted.
Mr. Pettis’ lengthy argument doesn't strike me as particularly rigorous. Here are a few of my observations along those lines.
I am much more concerned than they seem to be about the speed with which different countries are adjusting, or not adjusting, to the deep structural imbalances that set the stage for the global crisis.
Deep structural imbalances? What set the stage for the 2008 debacle was the bursting of the U.S. housing bubble that, itself, was engineered as a response to the bursting of the doc.com bubble that preceded it. As it happens, on the back of the real estate boom, the largest commercial banks in the U.S. engaged in rampant and entirely dodgy securitization schemes that exposed those same commercial banks to ruin when the housing bubble inevitably burst. As a result, what would have otherwise been an unpleasant but manageable property bust turned into a terminally crippling experience for the $IMFS.
All this by way of saying that I was not impressed with the the use of the rather formidable, yet strangely vague sounding phrase, structural imbalances.
My reading of financial history suggests that we tend to undervalue institutional flexibility, especially in the first few years after a major financial crisis, perhaps because in the beginning countries that adjust very quickly tend to underperform countries that adjust more slowly.
Setting aside the merits or not of his assessment of the institutional responses to the recent financial crisis, one would like to know what adjustments Mr. Pettis thinks were implemented after the crisis.
Continued
In fact the impact of reduced PBoC purchases of US government bonds is likely to be net positive.
Note the use of the key word likely. It’s just as well that he inserted this qualifier since I can't find anyplace in the body of the essay where Mr. Pettis offers any argument, other than his own opinion, to support of the idea that reduced PBOC purchases of US government bonds will be positive.
I found this curious.
I think the authors are confusing capital exports through the PBoC (increases in central bank reserves) and capital exports more generally.
Pettis either doesn’t want to consider, or has simply overlooked the possibility that in emphasizing the condition of Chinese officialdom’s capital exports, the authors aren’t necessarily confused about capital exports, but are, instead, implicitly stating that public support is more meaningful than private. That stance should certainly sound familiar to readers of this blog.
It is true that PBoC reserves have not increased in 2014, and have actually declined, although this may be mainly because the non-dollar portion of the reserves dropped dramatically in value, so that in dollar terms they have declined, but this was not because net exports have declined and it is not even a policy choice.
Again, the reader is treated to another qualifier that mutes the force of the assertion. This does not strike me as the stuff of rigorous argument.
Because PBoC purchases of US government bonds are so large, it seems intuitively obvious to most people that if the PBoC were to stop buying, the huge reduction in demand must force up interest rates. But this argument may be based on a fundamental misunderstanding of how the balance of payments works. First of all, greater use of the RMB as a reserve currency does not mean that the PBoC will buy fewer US government bonds. On the contrary, higher levels of RMB reserves in foreign central banks will by definition increase capital inflows into China. In that case either it will force the PBoC to purchase even more foreign government bonds, if the PBoC continues to intervene in the currency, or it will cause some combination of an increase in Chinese capital outflows and a reduction in China’s current account surplus. This is an arithmetical necessity.
So, now we that we have made the questionable leap to the idea of the RMB functioning as a reserve currency, we then take the predictable leap towards the idea that the PBOC must, by necessity purchase MOAR government bonds. It’s an arithmetical necessity I tell you. Well, math, has nothing to do with it, but I do appreciate that when one wants to seal the deal on an argument playing the math card is an irresistible tactic. No one with Pettis’ mind set, which, ironically, at least in this matter, is identical to Martin Armstrong’s, could conceive of anything other than government debt acting as the repository of all those excess funds sloshing through the global monetary system. When I read something like this, I am faced with the stupefying realization that, for some, the ongoing problems in the EZ, have little to nothing to do with the very problematic phenomenon of saving in debt.
Continued
As I show in the May 8 entry on my blog, excess savings in one part of the world must result either in higher productive investment or in lower savings in the part of the world into which those excess savings flow. This is an arithmetical necessity.
Oh dear, Mr. Pettis is again resorting to the seemingly indomitable arithmetical necessity. Let me see if I've got this straight, excess savings in one part of the world must result in one of two possible outcomes. One of those outcomes is higher productive investment. Well, that must be some stunning arithmetic, because what I see all over creation, from Shanghai to Sarasota, (and here I'm not alone) is massive misallocation of capital and malinvestment. Okay. I'm going to wrap it up as this about all I have time for right now.
looking on the bright side of life I would like to announce that I am finally moving out of my last bits of silver. I know it's a bit early days but I still have, lets see, yup, exactly 30 pieces left to go, for the right zealot that is, any takers here? I know, there are times that 'Size' really, really matters but in this case I will settle for spot, no questions asked and no paper trail :-)
You can not trade silver too soon
Like yesterday well before noon
'Cause silver's not gold I know you've been told
It won't get you safe through the monsoon
Stu,
A couple of thoughts occurred to me about that whole sourcing thing. You reached out to PAMP, J&M, and a few others. It sounds like your inquiries never went beyond a very preliminary look.
Tell me about the terms discussed. Was the request one for full delivery of physical on a specified date? Or was it something that could be construed as delivery e v e n t u a l l y ?
Also, are you sure PAMP didn't assure you they could provide X amount of physical, while thinking they could source the amount they lacked from , oh, maybe J&M and the others you were sourcing?
Finally, the customer reps I know all have a similar trait, which is the tendancy to say yes to all inquiries, and then scramble in the background to make it so. Any chance of that sort of thing going on in your sourcing adventure?
In the end, because you didn't see the deal materialize, it is a bit thin as a proof point. But I'm still interested in the details...
This was most definitely for full delivery within 30 days, it was unambiguous.
I am absolutely sure that these amounts would be sourced from their own supply chains and inventory. This was a fairly extensive DD process involving a few interested parties, none of them small. Any limits a particular refiner voiced were based on refining capacity within the specified time, not about metal sourcing.
The deal didn't materialize for a few reasons, none of which were about sourcing metal. The conversations were fairly detailed, not at all superficial.
I realize it all comes down to faith in an anonymous internet poster, and I appreciate the skepticism, but I have zero doubt that metal would have been sourced in the time allotted.
Stu: For my own clarity, was this 'deal' over the phone or in person?
Just out of curiosity, what was the largest in-size deal you confirmed. Stu, and what rough average of other in-size (>10t?) deliveries? How frequent or how many during your work with the company?
Archer, thanks for your comments. If you follow Pettis you will know that some of the themes of his writing overlap quite a lot with what FOFOA has been writing about. For me the question is not who is right, Pettis or FOFOA, but how much the agree, where they depart, and why. Pettis is a sharp guy, not one to easily dismiss, and yet I get uneasy when he falls back on accounting identities.
Stu, I share your view that the two tier market is not necessary for the freegold thesis, particularly the part about trades at multiples higher than spot. Bron Suchecki from the Perth Mint also confirmed a few months back that there were plenty of 400 oz bars available right at or slightly above spot. The physical market is not nearly as stretched as the snake oil salesmen at KWN would lead people to believe. Some here dismissed Bron's observations on the ground that the Perth Mint is a small player, and the giants must be transacting in volumes much higher than the Perth Mint would ever be able to supply. But I share your view: Two tier markets rarely last very long because of the arbitrage opportunity. If giants are willing to pay multiples of the spot price to buy in size, my money says that someone would step in to take advantage of the opportunity (and perhaps save their profits in physical gold). Perhaps two tier markets come and go depending on circumstances, and perhaps some giants will pay a premium for privacy. But as a permanent feature of the gold market I don't think the notion of two tier pricing multiples apart passes the smell test.
And I think we need to leave open the possibility that maybe Another and FOA were wrong about the depth and liquidity of the physical gold market. It is an opaque market, isn't it? FOFOA has suggested that they could not have foreseen that China would step in an buy a mountain of debt to keep the system going for another 15 years. But now that China is no longer buying, what will FOFOA and other say if the system someone continues to endure? Where is the flaw, the false premise? The big unknown is how much physical is ready to flow at or around the current spot price, and I am not sure anyone here can answer that question.
It is an opaque market to outsiders, but not to everyone; do you think it was opaque to ANOTHER? This facile notion that a two-tiered market hasn't been proved therefore doesn't exist is a fallacy. Absence of evidence is not evidence of absence; there isn't even absence of evidence, but the evidence is circumstantial.
There is no arbitrage opportunity because arbitragers aren't invited to play.
You are also thinking like a 'poor trader'; a real Giant isn't trying to make his year by breaking the gold market. He isn't in it for a profit.
Finally, you can't claim ANOTHER was 'wrong' about a two tiered market of which he claimed to have direct knowledge. Either he was lying or not, and if he was lying you should provide a counter thesis which takes account of his other thoughts, which have been proved true by time and not by words.
The freegold concept is consistent with a two-tiered market.
Hi Stu
I don't mean to get involved in the larger discussion going on, but I did want to make a small comment about something you said regarding FOFOA's method in his blog writing.
You said :
"I will simply say that he presupposes his thesis is correct and then works backwards in that article as to WHY there might be a two-tiered market"
Maybe you were referring only to the two-tier market discussions. But that sentence really stood out to me, since it is the antithesis of how I have concluded that FOFOA thinks and writes.
My understanding of this blog has always been that FOFOA uses the scientific method. He has tried to disprove the freegold theory, testing it from every angle, to determine whether it is legitimate.
Matrix is another person who approaches freegold this way, and he said it much better than I can, in a comment he made to the December 2012 post "Arguments against Freegold".
"I am a big fan of the scientific method. As such I have constantly measured the Freegold thesis against competing ideas. To date I have found that it makes the most sense in the world that I observe. The end. It is not that I believe that Freegold is the end of the discussion, the question answered, problem solved. It is simply that I find it to be the very best description of where we are likely headed. Until a better thesis is presented I will stick with it." Matrix December 12, 2012 3:18 AM
That is
@Lisa Let me make it clear again that I have the utmost respect for FOFOA and I'm not in his league when it comes to understanding the way "shit" works and his ability to explain it. And I don't really chime in on the comments because in virtually every instance I'm simply not capable of adding anything. But in this particular point I think the case laid out starts with a conclusion and works backwards, and as much conviction as I have in freegold, its my opinion that one issue is the weakest and in my opinion least logical facet of the freegold argument. With frankly a lot of evidence to the contrary. And when things like that get universally accepted as fact because one man believes it...well I think thats dangerous to all of us that invest for this event. Echo chambers serve no one, not even our gracious host.
I'm not going to continue to beat this point to death, but I want to be unambiguously clear that I am not being critical of FOFOA's body of work, and if freegold never materializes, I would still be grateful to the man for opening me up to an entire new way of thinking.
But has it really?
Stu,
You have unequivocally stated your position on the plausibility of a two-tiered gold market. I think you have made it clear as to why you stake this position. Perhaps it would be useful to travel upstream a bit and examine the source of this idea that a two-tired market is and has been present. In doing so, lets say that we are swayed by your argument. Therefore we can dispense with the previous argument based on your observation of deals that are inconsistent with the two-tiered thesis.
A couple of quotes by Another were posted that amount to the headwaters, where the idea of a two-tiered market originates:
Jeff posted: "Think that I a fool, because I trade gold for thousands US an oz.? You will think much on this in the future." –ANOTHER
Then byiamBYoung posted: "You will not see 80% or more of gold deals. If it was done with all to see the discount value would be lost as the world price would explode. This is not the relm of any public “wall street”. At one time it belonged mostly to the Barron. Now it is large with the BIS and super rich." –Another
Lets also say that we agree with your statement: "Again, respectfully, but to use the quotes of Another to prove anything is a bit of a circle jerk. It's like the last refuge before you have no choice but to cede the point. Another also said a few things that have not proven correct as well. It's like a Christian using the words of Jesus to prove he was the Son of God. He may have been, but using his own claims as proof hie was correct doesnt prove a thing."
What is your position on those two statements by Another? It would appear from your words above that you believe Another was simply mistaken or wrong. That would be plausible position if the Another had given us less concise language. I think it is rather clear, he says he participates in this two-tiered market, and then says the two-tiered market goes back to antiquity. That is pretty tight language. He is not theorizing or surmising. It would seem to me that if you cannot accept these statements from Another, you must conclude that he was simply lying. How would you reconcile your position that you largely agree with Another's Freegold thesis after you exclude the existence of the two-tiered gold market?
So perhaps you can expand on the why you find Another credible on Freegold, but not credible on the two-tiered gold market? Again, let's focus on Another and what he said. Do you think he was lying?
Another question I am curious to see you answer. What is the purpose of this blog?
I think this tells us all we need to know:
I was not some major gold insider and I did not work for one of the major bullion banks.
LMAO XD
"But in this particular point I think the case laid out starts with a conclusion and works backwards, and as much conviction as I have in freegold, its my opinion that one issue is the weakest and in my opinion least logical facet of the freegold argument."
So, FOFOA came up with the idea and worked his way backwards until he could make it consistent with Another's writing? Really? This instead of starting with Another's words and then working forward to craft the concept, in his own words, to the Blog's audience?
@poopy thats my entire point. I was not an insider, I was not working for a major bullion bank, and yet we were easily able to source that amount of metal, at least a few years ago for essentially spot. What does that tell you about what a REAL insider might be able to source? What does that tell us about the REAL tightness of the physical market? You're using that quote to diminish my insider knowledge, fine. No argument from me. I freely admit I am not and have never been a major insider. If anything, that makes my point stronger, assuming I'm telling the truth, which I am.
Stu and Matrix
Another lived in a time when Saudi traded gold in thousands, for the sake of accumulating, to be able to pass something on intergenerationally when oil (and today currencies) had run out. The size/price dependant on oil volume in ground and gold availability.., Giving a two-tier market. With a little gold, priced in the thousands, for nobody to c, Saudi could accumulate. Can u imagine the price if it was for all to c? Knowing this price, giants could also price it close to that level depending on the view of the timeline. At that time nobody knew about 9/11 and that the world would buy $ more time. Neither did anybody know about China wanting to let the people accumulate.
2011 when gold was priced slightly higher than a decade earlier and even more out of fashion, 150 tons could be easily found.., just look at Chinese import figures and it can also be accumulated for all to c when u look at Russia.
My take thus - Another was not lying, Stu not lying.
What is interresting though is that backwardation is frequent.., meaning that physical is in demand NOW. Brokering a 150 ton deal today could be slightly harder than in 2011.
Is there a difference between sourcing 150 tonnes and actually completing the sale and delivery?
One more point, assuming for a moment I am not full of it, how many giants would ever have a need to source more than 150 tons in a month? How many "giants" even have the firepower to buy that much, that quickly? Other than the Saudis I can't think of any, if any. So, assuming again for a moment that I am telling the truth, what would be the purpose or logic of paying many multiples of the price when even a minimal amount of patience (and clearly freegold wasn't moving at warp speed) would acquire the metal for the spot price? We've established that giants arent twitchy nervous types that jump into things, they would acquire slowly over time at the best price, because they are logical sane beings.
There is simply no cause to do it that way.
@matrix I am loathe to engage with you, as you are clearly a zealot, but I am not opposed to the idea that at certain moments in history perhaps a modest two tiered market existed. In moments of crisis or if it looked like the "big one" was imminent. Perhaps Another wrote that quote during one of those rare, brief moments. That might also explain why he was so wrong on his timing.
Why do I give credence to Anothers other claims and not this one? because his other claims appear to have some verifiable data points to support him, on this particular point, there are ONLY data points to refute him. At least right now.
You're using that quote to diminish my insider knowledge, fine. No argument from me. I freely admit I am not and have never been a major insider.
There is a rather specific type of demand that can blow up the paper gold market, namely store-of-value demand for physical gold by giants/super-producers. Yes, thousands of tons flow each year for shrimp and commodity consumption. Yes, this means big gold deals go down at spot price (ZOMG!!!!!!!!!!!!!!!111111111111one). However, it's the "giant" type of demand that needs to be handled off-market to allow that commodity/shrimp flow to continue taking place at spot price.
Can I prove the existence (or lack thereof) of a two-tiered gold market? No, I am not in a position to do so. But neither are you. And you aren't revealing anything that wasn't already assumed to exist, nor are you offering any new insight with your admittedly ant-like perspective.
JJ,
So Another was truthful in your mind. So a two-tiered market existed and he participated in it. Further, he said this two-tiered market has been with us for a very long time, "..This is not the relm of any public “wall street”. At one time it belonged mostly to the Barron."
So does the two-tiered market exist today?
Stu: Would you care to comment on this?
https://www.bullionvault.com/gold-news/gold-fix-030720142
"For a start the price that gets printed by Bloomberg is without size. If the bullion banker were to be asked a real price, by a real trader, the banker's first question would be "what is the size?" He has to know if he is quoting for a $200 deal or a $200 million dollar deal, because the prices are completely different!
This gives a third dimension to the price, one which any spot price chart always ignores. At any given point in time the price of anything is a function of the amount of it you want to buy or sell.
Unlike quantum particles this is not difficult concept to grasp. If I were a greengrocer, and you asked me for one banana, I'd probably charge you 20 pence. If you asked me for 10, I might give you a discount, and sell for £1.90 (19p each). If you asked me for 500 I might charge you a premium, because I'd have to get in the van and go and purchase a lot more bananas – so maybe £110 (22p each). But if you asked me for 1,000,000 there is no price. I don't want to sell you 1,000,000 bananas because I wouldn't know where to get them, and I certainly don't want to spend my week in the van hunting them down and paying ever larger prices for the diminishing stock! As you can see the price varies according to size.
Once you introduce this extra dimension to the price chart, so as to get the real feel for where the trading price is, the single line of Bloomberg starts to look like a gross over-simplification. Because not only is there uncertainty in the vertical momentum of the price between two measured points (trades) but also there is a completely different answer depending on the size.
So instead of a line progressing from last quote to next quote the reality is that there is a very large volume of three dimensional economic space between the points, and, with different probabilities, the next trading price could be any point within that volume.
All in all it seems to me that there is a very good case for saying that in the absence of a trade there is no such thing as price. Anyone who seeks to know a price without the hard experiment of executing a trade is deluding themselves into creating a phenomenon which does not really exist. Price is an attribute of a specific trade."
Stu, did you ever execute a trade in size?
Stu,
So your position is that Another was not lying, that he and others realized the price of gold in the thousands. Funny that Another didn't specify that multi-generational Giants and the super rich knew the price of gold in thousands only during times of acute crisis. You would think that would be an important concept to articulate.
Was it sloppy writing?
I think think we are homing in on the issue of this ongoing debate. You clearly are not willing to question the credibility of Another by saying he wasn't being truthful. That's refreshing because that makes your thinking on the point consistent with this Blog's author.
So please expand on your latest. Did Another omit a very important nuance, that a two-tired market only develops in times of extreme crisis? Was it a purposeful commission or was an inadvertent oversight?
@poopy It is my position that such a "giant demand that can blow up the physical market" does not exist. It is illogical that it would exist, because there are so few "giants" of that size and even if there were there is really no need for someone of that size to ever "rush" a transaction. And virtually any size transaction could be done with even a modest amount of patience.
Why would a giant ever need to buy enough gold in a sufficiently short amount of time to justify paying many multiples of spot? there is no logical response to this answer, except during a perceived crisis.
That should read ..."omission."
@Stu
So you concede that you have no meaningful inside knowledge on the matter - good to hear. Pardon my interruption. Please continue bloviating ant-like speculation on matters about which you know absolutely nothing.
@poopy Good to know you consider honest, forthright discussion on an issue I am in a position to know AT LEAST as much as you on, bloviating. You and matrix should meet behind homeroom and share your comic book scribblings and race for the sticky cookie. I like your odds.
The reaction some here have to even the slightest challenge to their orthodoxy is like a textbook illustration of groupthink.
Carry on.
Stu said: "Why would a giant ever need to buy enough gold in a sufficiently short amount of time to justify paying many multiples of spot? there is no logical response to this answer, except during a perceived crisis."
FOFOA siad: "OPEC raised its annual revenues by approximately 100 billion dollars. How much IS 100 billion dollars per year? It can't be much, because we all know the Middle East is heavily in debt with struggling economies even now at the end of the 1990's. Right? Well, I invite you to follow along, and judge for yourself. Let's try to spend that $100 billion, and remember...it is 1974. And let's not waste time on small stuff, we'll go right for the big ticket toys.
How about some F-14's? Fully equipped (minus missiles because we are a peaceful bunch) they are ours for $9 million each. Grumman on Long Island assembles 80 each year. Hell, let's take 'em all for $720 million. How about some F-15's too? At $12 million each, we conclude our visit to McDonnell Douglas with 100 under our arm for a cool $1.2 billion. Let's take home the biggest brute the U.S. has to offer--a top of the line nuclear-powered aircraft carrier for $1.4 billion. Better yet, make that two carriers. Throw in some destroyers, some submarines...let's see... We've spent a total of $2 billion on a kicking air force and a little more than that on a fine little navy. How much money is left in round figures? About $100 billion. And this amount comes in not only this year, but the next, and the next, and the next..."
So is this timeline short enough? Should it be broken down so this Giant spends 8.3 Billion per month in 1974 dollars? Gold peaked at $195.25 an ounce on December 30, 1974, so 8.3 Billion Dollars would buy 1290 tons per month!
Just the Saudis, if they only bought gold, would require 1290 tons of gold per month. The entire world gold production in 1974 was approximately 1300 tons.
Stu: After the Saudis bought all the gold in the world in the first month, what did they do with their dollars for the other 11 months of 1974? And the year after that?
Stu: After the Saudis bought all the newly mined gold in the world in the first month, what did they do with their dollars for the other 11 months of 1974? And the year after that?
Stu,
Your sign off was predictable. You find yourself holding a losing hand and instead of folding, you leave the game. Bravo hot shot.
I asked a question earlier and you haven't answered it. Perhaps it seems trivial to you and therefore it isn't a question that's imperative to answer.
What is the purpose of this blog? Ten important words:
A Tribute to the Thoughts of Another and his Friend
You see, the blog host and zealots like me see this blog as a tribute. When Another and FOA speak, we take their words literally. We don't distinguish between things we agree with or don't. We don't assign allegorical interpretations to certain passages, and literal ones to others. We don't ask whether there are things left out, intentionally or otherwise.
We do not see Another and FOA as a couple of "anonymous bloggers on some gold site." We see Another exactly as he portrayed himself, a very high level and connected man with access to a world that we can never see ourselves. We believe the writing from these two people was purposeful, to accomplish a specific goal. Not a whim that provided them an opportunity to pass the time.
Clearly, you see them differently than we zealots do. At the same time you tell us again, you have no high level inside information or connections to the world that Another professed to move in.
Perhaps your suggestion that FOFOA starts with the conclusion and works his way back to Another is a bit silly in this context? I think that statement is a spectacular insult to FOFOA considering the effort the man has put into this blog in order to craft his tribute. You pretty much spat in his face. In fact, it pissed me off right proper. Enough that I felt emboldened to goad you a bit.
You will not be received well on this blog by crafting your own story of what Another meant or missed or omitted. You will be attacked when your careless and idiotic rhetoric insults this blog's host, whether you meant it as an insult or not.
I am extremely skeptical that you have read this entire blog and possess even the most rudimentary understanding of Freegold. I won't call you a liar. I will say I find it incomprehensible that after reading this blog as it has unfolded over the last 6 years, one could have your viewpoint. You remind me of me before it all clicked in place in my mind. It took me a couple years to decide Freegold was a certainty instead of a possibility. 6 years is a long time and helluva lot more writing by FOFOA.
I think you are straddling Freegold and the $IMFS. You really do not believe you know how this resolves. Your view of Another shows that. I tried to get you to commit to a view on another's credibility. You waffled. Why not admit the truth, you have serious doubts about his credibility? That is a path easier to travel. You won't get pushback from zealots like me. Far easier than pretending you embrace Freegold and yet reject a fundamental aspect of it given to us by the source of concept itself.
Hopefully your sign off is genuine and you won't be back. I hope this for you friend, you need to be allocating your time to something you can really believe in.
I've heard silver is going to the moon.
I dislike the current conversation.
I will take a crack at these :
""Think that I a fool, because I trade gold for thousands US an oz.? You will think much on this in the future." –ANOTHER
Then byiamBYoung posted: "You will not see 80% or more of gold deals. If it was done with all to see the discount value would be lost as the world price would explode. This is not the relm of any public “wall street”. At one time it belonged mostly to the Barron. Now it is large with the BIS and super rich." –Another
...
What is your position on those two statements by Another?"
The first for me is not indicative of support of the two-tier market thesis. The word I find interesting there is 'trade'. One of the theses here is that the gold market was cornered using another market, that of oil. In that scenario it is perfectly reasonable that a trade could occur at a market discount.
By example, let us say the market value of apples, oranges and banana's are the same at $100 a piece. I would not mind executing a trade of apples for oranges at a supposed market price of $1 each, as I still get value for value, in the sweet item of my preference.
The second however seems indicative of a two-tier market. The 'BIS and super rich' however suggests it to be a very very small group involved in such trades. Given the theses of this blog, this is not outside the realm of reasonability.
I did however take issue with FOFOA's original implication that the field of such players was stretched over hundreds of years and included a vast assortment of people. This to me seems like a unsustainable secret. I am of the opinion this two-tiered market is a much more recent phenomenon and extremely limited in size. Furthermore I am of the opinion that even those actors that have access to that market try their best to suck up what gold they can at current market price, with the understanding that they cannot take enough to break the market.
"Of course old money Giants earn income as well, and they even acquire new assets with some of that income in the present. For that income portion, I imagine they would go to the open market to acquire assets just like everyone else. Remember that Another also said, "Think now, if you are a person of "great worth" is it not better to acquire gold over years, at better prices?"
This slow accumulation "over years, at better prices" would be done at the same price as everyone else. But once you had built up a stash consisting of, say, hundreds of tonnes, which probably took generations to accumulate, it would suddenly have a much greater value than the market price said it was worth. It would kind of be the inverse of this: "It is to say " your wealth isn't as great as your currency says it is"!" In this case, it would be to say "your wealth is far greater than your currency says it is." "
- Fofoa from think like a giant 3.
The above is something I can agree with. (note : I have not recently reread this post, just went looking for the another quote and found more than I bargained for. ^^ )
Lastly I would like to say that the 150 tonne deal spoken of above, that was not executed, is quite irrelevant due to it not having taken place. There is a marked difference between doing a trade and contemplation of such, regardless of how serious such contemplation appears to be. It offers no proof that such a deal could be easily executed, and certainly not repeatedly.
My 2 cents.
Stu etal: - The discussion (above) re: a Two-tier Gold Market misses the point entirely - Dollar-centricity at it's finest ;-)
Another rarely if ever discussed Golds $-value ...concentrating more on it's value-in-trade. FoA however (and a host of like-minded enthusiasts) took the ongoing Gold / Dollar evaluations and kinda skewed Anothers original message ...FWIW. (IMHO)
Stu: You have been asked many questions and I know it can be difficult to keep them all aligned. If it would help I can list them chronologically so as to make it easier for you to guide us towards your understanding?
But there is one truth I have noticed as I have been reading this blog for the past six years. If a question is new and none of the regular commenters can answer it sufficiently, FOFOA will post here in the comment section.
There is no doubt this blog has contributors whose insight is remarkable. Intellectually a tour de force. I wish I could believe whole heartedly in 'Freegold' but I can't. I can believe in a step change revaluation of gold, yes.
My father was a gold bug, and I remember his excitement when Nixon took the dollar off the gold standard. I was 12 years old. Sadly, I am not aware of my father making any money from the subsequent revaluation, but he repeatedly advised others to buy gold!
So yes, I see the central role of gold, and yes, it is likely to soar when the present system collapses. But inherent in Freegold for the individual, the ordinary Joe, is a daily flow in what will have to be tiny, almost microscopic quantities if accounts are to be settled in anything like the instant nature of today's transactions.
I read that Freegold will parallel notional fiat currencies: so how is that so different from today?
Either gold is the day to day, current account settlement device or it is not. If it is not, it is not Freegold. If it is, it has to be embedded in tiny quantities in some sort of transparent medium, difficult or impossible to forge. The logistics of breaking down all the worlds gold to quantities that can be traded day to day seem insurmountable.
I have never seen economic theory so clearly and profoundly analysed as on this blog. If the author and contributors ruled the world, Freegold might happen and I agree it would solve the problems of millennia. But you don't and so I tend to believe Freegold will remain a Quixotic theory. I believe gold will soar in price. I also believe governments will try to confiscate it. Wars will be fought over it.
Matrix
Yes, there was a two-tier market. The aim was to keep $ alive until it could be replaced. Enter € and goal is achieved. Wasn't it with the help of the Barrons that Volcker kept $ in play? What would the purpose be now that $ is no longer needed?
If others had found out during the play (Big Trader did after a while or long time.., depending on perspective). This could of course not be public or known by wall street.., I think we all can imagine some consequences. So yes, at one time it belonged mostly to the Barron who bet their own gold on it..,
So to your question "So does the two-tiered market exist today? I fail to c the point for it to exist, so no. Barron have stopped supporting it and withdrawn selling.
Gentlemen
If the Giants were to send agents to pursue the sort of arbitrage to which Stu refers, would their consequent "cleaning out" of the retail market save them much money relative to the amount they must be spending according to the two-tier market view?
I.e., for pursuing this arbitrage to be worth their while, I should think that it would have to supply much more than 1% of their (e.g. monthly or yearly) requirements. Thoughts?
Correction:
it was Robert, not Stu, who referred to the prospect of arbitrage.
Marco Polo: Gold will not replace currencies. Currencies will be used for day to day transactions.
Currencies will be used for trade settlement.
But final settlement (and the word final is important), if the party desires final settlement, will be paid in physical gold.
"Either gold is the day to day, current account settlement device or it is not. If it is not, it is not Freegold." This statement is incorrect. Accounts can be settled in fiat because fiat can be freely exchanged for gold. Why exchange your fiat for gold everyday if you need to transact in fiat the next day. Just keep your currencies moving and as long as 'final settlement', when you want to save your excess, can be transacted in physical, the economic systems of the world can move fluidly.
I am just curious if this is relevant to free-gold imminency in the present-day.... but what is going on with the price of oil? With oil price dropping, are we back in the mode of the big oil producers accepting some physical gold for payment for oil (at super high prices in that currency so as not to kill the paper market) + X amount of currency, like Another spoke about what was going on in the late 1990's? Or is it different now? Oil in dollar currency is cheap right now. Why?
@Indenture
As long as fiat currency is used to trade, someone, somewhere, somehow will find a way to 'leverage' it.
The scenario you describe is no different to that when the US$ was convertible to gold. The system depended on the nuisance factor of converting fiat to gold. As you say, why would you want to convert your dollars to gold today if you had to go to the supermarket tomorrow? It all fell apart the second trust was lost, because the Fed could not resist the temptation of printing more dollars than there was gold to support.
Unless you hold physical gold in your hand, you do not own it. Whoever you store it with will never, ever be able to resist the temptation to leverage it.
Unfortunately, you have confirmed the Achilles heel upon which the whole theory of Freegold rests: unless gold is divided into quantities so small it becomes almost impossible to contemplate, and circulates freely in those quantities, the theory is null and void.
The rest of the analysis on this blog, is however, unnervingly accurate.
@fool I appreciate your good faith rebuttal. My only rebuttal to your last point is that potential transaction was definitely not irrelevant. The relevant parties were such that I don't think any refiner would have taken any chance at a failed delivery. Meaning I put the probability of them failing to be able to deliver on what was promised very close to zero. I believe you are discounting it at to your detriment, but again I fully understand why you would.
@indenture I also appreciate your efforts and am happy to answer any questions you pose as time and circumstances allow, but there are certain details I wont post about in a public forum and I'm not going to bother wasting time with people who don't engage in good faith or those who engage is childish ad hominems. Fire away.
Freegold means gold will be set free. This small comment would be too long if I went into why this will happen and why the whole world wants it to happen. Just keep in mind those of us that believe in this theory aren’t advocates for freegold, we are simply people that believe/recognize that it is what is coming and are preparing accordingly. No promotion or buy ins necessary.
I’ve seen a lot of questions over the years that are all summed up as, “how can you stop people from lending out paper promises for gold?” That seems like such a tough question to answer because the premise is all wrong. The correct question would be what purpose would any government or person have for lending or borrowing paper gold under freegold? The answer is none, which is why gold lending won’t happen. If you think there would be a benefit (such as “getting a rate of return on a dead asset” for indivduals or “being perceived to have more gold than you actually have” for governments) then I would say to you that you have not fully grasped what completely free gold will look like and how it will function is a clean floating exchange rate monetary regime.
Stu, you mentioned that you dont think that it is agreed upon on who gets gold. You could be right. It could be a free for all or, in my opinion, TPTB decide who gets what until everyone gets their share based on past debts. I think this is the case, otherwise Russia or China would just buy it all for a fraction of their reserves. Also, wouldn't USG be buying gold like crazy? Or would that not be fair?
"what purpose would any government or person have for lending or borrowing paper gold under freegold?"
The same purposes as they lend or borrow paper gold now?
Sorry, but what enforcement agency is going to make anyone stick to the script? Freegold relies entirely on a voluntary agreement between all concerned, a realisation, that the new rules should be adhered to. This is unfortunately not human nature. The gold standard is an object lesson in people initially agreeing to do 'the right thing', only for it to fall apart.
Agreed, Freegold would be great, noble, honourable. But the way it looks to me, there are massive holes of assumption and trust that just do not stack up. I think I may be going mad as I seem to be the only one who doesn't 'get it'.
@MarcoPolo
http://fofoa.blogspot.com/2013/05/glimpsing-hereafter-2.html
http://fofoa.blogspot.com/2013/02/checkmate.html
I'm not going to bother wasting time with people who don't engage in good faith or those who engage is childish ad hominems.
Hm.....
You and matrix should meet behind homeroom and share your comic book scribblings and race for the sticky cookie. I like your odds.
I guess in your world this is not ad hominem, right? And I guess also in your world pointing out that your "inside" information is not very remarkable constitutes argumentum ad hominem. XD
???
Stu, Marco and others:
I do want to sincerely thank you for stoking a debate/back and forth discussion concerning Freegold. Questions about the next currency system stimulate thought, and isn't that the reason we are here? Every time I answer a question or post a comment, I learn or relearn something about Freegold that I might already think I know, don't yet know, validate what I perceive to know, or as more often than not, realize there is more to know.
This discourse of deliberation makes FOFOA's Freegold Site one of the premire 'lounges' for intellectual economic conversation and your presence and contributions add to it's overall enjoyment.
@MarcoPolo
I'm afraid you did not understand my comment at all. My entire point was that there would be no enforcement agency or new rules necessary for an act that has no benefit.
Marco Polo
ironically gold will not be important in freegold...except for savers. Picture a world in which most people still don't own gold, never think about it. they remain focused on the smallish amount they have saved for retirement. They might hear that 'the rich' still buy and sell gold and at a high price' but it won;t be quoted in the financial news like it is as a commodity. Currency will remain dominant, fiat has many wonderful qualities and i suppose cryptocoins could too.
I'm sorry but after years of biting my tongue... the boobs on the gold coin Liberty lady are just wrong. That may have passed for sexy in the French revolution but in this age of instant porn she should get them tightened up a bit.
Motley Fool,
Are you afflicted with the vice of philosophy? Because your comment made me think of:
http://en.wikipedia.org/wiki/Correspondence_theory_of_truth
I have no idea how old a higher market might be, but it seems to me the secret is quite badly kept. We are discussing it, ANOTHER discussed it, the history of the London Gold pool is well documented. I would be interested in a wikileaks document spelling out all the details, but I don't need one because I don't agree with correspondence theory. I'm more of a
http://plato.stanford.edu/entries/truth-coherence/
kind of guy. :)
Strange. I was just thinking the same thing the other day, Mdv.
Perhaps when the paper market goes tits up they can reset them along with the price of physical.
@poopy i would suggest you simply missed where I tried to honestly engage you in a friendly way and you called me a bloviating know nothing, but we both know that even you don't believe that you made any attempt at an honest interaction.
@MdV,
Perhaps they are a bit perkier on coins traded in the upper tier?
"No. It is a theory and always will be a theory. The word 'theory does not mean it is 'disputed'.
The difference between theory and law is not one of "truth- or on how confident we are about it. It is not a difference in degree. Theories are not 'inferior facts. Theories don't graduate to become "laws" by being "proven.
A law is a kind of 'fact' an observation that appears to be universally true everywhere we look. A law is usually a single statement and expressed in terms of an equation.
A theory is an 'explanation' for facts. A theory can embody a large set of statements which can grow as the theory expands to explain more observations more facts. It explains facts. It cannot "become" a fact.
So what we call the 'germ theory of disease* started out as the 'explanation' for many of the observed 'facts' about diseases how they spread what causes them to be worse why hygiene can reduce their spread. But it has expanded to everything we know about bacteria and viruses virulence, pathology epidemiology etc etc all of these subsets of what we still call 'germ theory. It is and always will be called "theory not because anybody disputes whether microorganisms cause disease but because all of it together is an 'EXPLANATION' for facts.
Just remember that when people say the theory of X" that does not mean 'The disputed fact of X" it means "what explains X. or is explained by X ".
The theory of gravity is NOT the "dispute over whether gravity exists" (that is not on question) it means "what explains gravity or what is explained by gravity".
The theory of evolution is NOT the "dispute over whether evolution exists" (that is not in question) it means "what explains evolution, or what is explained by evolution.
Ditto the photon theory of light. The atomic theory of matter. The plate tectonics theory of geology. The heliocentric theory of the solar system. And on and on
A theory is NOT an unproven fact or unproven law. A theory is an 'EXPLANATION' for facts sometimes even an 'EXPLANATION' for laws."
Stu, hence you are talking about refiners and sourcing the metal. you were dealing with scrab metal and gold freshly mined and perhaps even gold not even mined. youre still in the fishbowl. Never left it. what if i say gimme 150tonnes now and another 150 tonnes tomorrow mornig. cause my second private cargojet is in repair and the third has to fly the cars of my nephew and his friends to germany, i have to fly two times. But you now, if you can chose your stewardess yourself, fliing s not that bad.
Jeff: "It is an opaque market to outsiders, but not to everyone; do you think it was opaque to ANOTHER?"
Me: Yes. Even to an insider, the market is opaque. Nobody sees all of the transactions, though I think Another saw a lot more than many.
Jeff: "This facile notion that a two-tiered market hasn't been proved therefore doesn't exist is a fallacy. Absence of evidence is not evidence of absence; there isn't even absence of evidence, but the evidence is circumstantial."
Me: I never made the argument that you suggest I made.
Jeff: "There is no arbitrage opportunity because arbitragers aren't invited to play."
Me: Do you really think a giant who wants to buy XXX tons of a fungible and untraceable product will say "Sorry, but I do not want to buy those XXX tons from you because you are not in the club"?
Jeff: "You are also thinking like a 'poor trader'; a real Giant isn't trying to make his year by breaking the gold market. He isn't in it for a profit."
Me: Where did I suggest that a Giant is trying to break the market? Where did I suggest that anyone is trying to break the market? Where did I suggest that a Giant is in this for the profit? Supposedly the Giant wants his hold and he is willing to pay a multiple of the spot price for it. Not just a hefty premium, but a multiple of the spot price itself! A multiple! I say that is a golden opportunity to arbitrage, and it has nothing, nothing to do with thinking like a "poor trader". The trading mentality that Another criticized was people on the beaching kicking water at each other, betting on the next movement in the spot price. What I am talking about has nothing to do with movements in the spot price.
A question for frankthetank: Aside from aircraft cargo limitations (ha!), why would a Giant have a sudden need for 150 tons on day 1 and another 150 tons on day 2? If Giants are so big that they never panic (only the ants panic), then what's the rush? I can see how short notice for a large volume might lead someone to bid higher than the market, especially if there was concern about what the market might be able to supply all at once. But Giants are not the type to say "I need it all, and I need it right now" -- at least, not based on the picture I had of them. I thought of them as the slow long term types.
I think the two tier market thesis makes more sense if applied to unusual cases where a Giant might act with uncharacteristic haste, or where we are talking about temporary tightness in the market that may come and go. It's a bit harder to accept as a permanent feature of the market.
Got me there robert. Im still an ant. Not quiet. More something like a bacteria. Most time its still difficult to think real big. Anyway stu is quiet clearly talking about a deal, which would take place in the lower tear market, even if there was another matket. It proves nothing. Especially as it did not work out because the gold could not be delivered in time.
Jeff
I skimmed the two opposing theories. You can absolutely place me in the correspondence theory of truth category.
My brief summation of the two would be, the correspondence theory says truth relies on reality, whilst the coherence theory says it relies on accord with other propositions. I'll go for reality every day.
It's more about how you arrive at truth; According to one view, the coherence theory of truth is the "theory of knowledge which maintains that truth is a property primarily applicable to any extensive body of consistent propositions, and derivatively applicable to any one proposition in such a system by virtue of its part in the system" (Benjamin 1962). coherence theories of truth do not claim merely that coherence and consistency are important features of a theoretical system — they claim that these properties are sufficient to its truth. To state it in the reverse, that "truth" exists only within a system, and doesn't exist outside of a system.
Stu: Thanks for the information that you added here.
I believe that the difference between the 2 tiers are simply a function of how important it is to avoid public scrutiny. So in times of crisis, the difference would be high for smaller hoards, in times of peace the difference will be smaller for larger hoards. Also in the past information did not travel very fast, so that would allow the difference to be larger.
I think your experience makes sense because, 2011 was a time of peace, gold was pretty expensive, internet existed, so I would expect the difference between the two tiers would be lower than ever.
For old money, collecting gold is not that important, they already have enough. It is the new money that wants to get the gold hoards. But they can only get it in large quantities when an old money falls into bad times. In that case only the higher tier would be invoked. A new money wants the gold, and an old money wants to sell, and they want to keep it away from the books. That last part is very important.
The other case is when the hoard is used to exchange for something that cannot be bought with money. Eg Political favors. But that requires trading with despots. You cannot trade such favors with democratic govt heads.
I would think that we are at a time when the two tier difference would require a very large hoard, except in socialist countries, where having such huge amounts of wealth maybe a crime. In any case I agree with you that its not important for the central thesis of Freegold.
I wish there was less name calling in this case. It shouldn't be a crime to share your experiences.
Jeff... after reading 2 pages about coherence I did not encounter a single example of what made it different. I assume 'proposition' means an if/ then statement (rather than 'you'll do what for 20 buck?'). I cannot honestly say I understand it's meaning.
Now 'the cat is on the mat' I can understand if some one says that is true (assuming she's still there and since she's a cat she never moves).
What are the best posts on this blog? The top 5.
I'm not up to speed on this two-tier price scheme, but so far I gotta side with Stu and Marco. Why would somebody pay a huge premium when all he had to do is wait over an extended period for the order to be filled at much lower prices? Gently feeding the orders so as not upset the market.
@anand srivastava
avoid public scrutiny
Very true. Giving me a different spin on Another's quote "If you are one of "small worth", can you not follow in the footsteps of giants?" as in not following in the footsteps of massive buying by hedgefunds (who-ever) with highly visible purchases.
Potentially meaning that Shrimp's buying small amounts over time is also being discreet (under the radar.) Large 'spot' buyers are totally visible not adhering to one of the cardinal rules of wealth preservation - discretion.
For old money, collecting gold is not that important, they already have enough.
I don't know how true this is. They didn't get to be 'old money' by being 'satisfied' with their wealth-preservation position. If their amount of gold is a percentage of the total and newly mined production continues to expand - wouldn't they want that to stay at par - if not always increase?
Did Another lie? Possibly, everybody lies, as Dr. House used to say.
That A's predictions were wrong sometimes, is not lying, it seems natural as he was not Jesus. Honesty is just applicable on past things. Was A dishonest?
We invested quite some effort about his identity to get an authentic context of his writings. I'd say the person identified matches with many things surprisingly well, though, as in science, debate is still open.
But a couple of personal attacks on Mr. A awhile ago rather strengthened my view as it appeared the usual suspects then must also acknowledge his identity.
Imagine a man in his late eighties, writing his legacy, would he lie?
(interesting fact, just seen that he widowed in 1996, makes me think on life circumstances leading to his writing)
MdV,
I'll have to respectfully disagree with you on that one. Gravity is a beautiful thing.
Michael dV
From what I surmised, the big difference is that the coherence theory has no necessary relation to reality. If you are able to construct a set of logically consistent propositions that would be coherent truth, regardless of whether any such corresponds to reality.
Objective versus relative truth, in a few words.
As they say, think like a giant.
If you have some large quantity of currency, and you want that currency to become gold, then obviously it makes sense to transition slowly, over time. The faster you make the conversion, the more likely you are to raise the price. I don't know what the numbers would actually be, but certainly at a small enough rate you don't move the price at all, but at some point if you're purchasing a large enough quantity every month the overall price will rise a bit. The more you push the monthly quantity, the more likely you are to push the price up. I don't think anyone would dispute that.
So again, if you're moving some fixed amount of currency into gold, then it makes sense to take your time. I don't see any reason for a two-tiered market here. The problem comes when you have such a large volume of currency coming in every month that you're above the point of pushing the price. You can't just slow down your gold purchases to a level where you're not pushing up the price, because then you're building up a backlog of currency that keeps growing, and you need to do *something* with that currency. As was explained in the first two think like a giant posts, you reach a point where you simply can't spend all the currency coming in every month. So then you either reduce your productive output to reduce the currency coming in to a level you can manage (e.g. pump less oil out of the ground), you give your wealth away (either donate the excess currency to charity/artists, or lower the price of your product), you push up the prices of some other sort of non-consumer asset (e.g. artwork, stocks) or you find some creative alternative.
The two-tiered pricing structure makes sense as a creative alternative to me. I think that all of these mechanisms for dealing with excess currency are in use, to varying degrees by different giants at different times, depending on each unique set of circumstances.
As someone who will spend my whole life concerned with not having enough currency coming in, it's difficult for me to put myself in the shoes of someone with the opposite problem. Also, I'm only focused on my own lifetime, not on many generations. These two features of my perspective are baggage which will prevent me from ever truly understanding and accepting that things like a two-tiered market exists. I would never be able to figure out that such a market even *could* exist without significant help from our host.
I suspect that this is also true of most billionaires today, who came into wealth more recently, and have similar baggage which prevents them from seeing this creative alternative option. I suspect this is a driving force behind the rising prices of artwork, stocks, and other types of price-unlimited assets. But that's another topic.
Et tu, Motley Fool?
Mdv, I thought my quote explained it pretty well. Coherence theory is why I believe in a two-tiered market. The circumstantial evidence for a higher market and the many other aspects of freegold theory which are consistent with it make a two-tier market not just possible but necessarily true. Freegold is not a buffet from which one picks and chooses; it is true or false.
You can see where the correspondence view as espoused by Stu and Motley Fool falls short; it isn't enough to say that freegold theory is correct even without a two-tiered market; they have to explain why that is true. They won't try. Blondie tried and failed to tweak freegold; it can't be done because there is no coherent way to rearrange just the parts of freegold that one likes.
And just because Stu hates religion, what was Jesus reaction to the rich young ruler? Think long and hard on that.
I've still got those 30 silver pieces....
@jeff I don't feel like you've adequately made the case that a two-tiered market MUST be true for freegold to be true. I suppose if you can convince me of that, you will convince me that freegold is also not true, but I don't see it. And the whole " you must accept everything or nothing" thing strikes me as nonsense. To think this blog has every minute detail figured out or its all bunk strains credibility, simply a bridge too far.
Ditto Jeff.
I always considered the two-tier market as a integral part of what Another was trying to say. ("Hear me now what the wealthy and powerful know ...")
Not because he (or she) was some saint wanting to help (or dupe) everyone. But because he saw it as inevitable that the two-tier market will become one, out of necessity. Based on a free floating physical gold as a saving medium. And You too could benefit from it, by using some simple steps! :-)
Now, one might think, that was then, now is now, things have changed. Or, have they? The more things change the more...
What if, not only there still is a two-tier market, but is valued much higher then when Another was around. Possible? Time may tell. :-)
@Stu, you really stirred up a hornet's nest with your statements LOL ! Regarding the 2-tiered market in gold, I do believe it exists today, but am unable to speculate on its details, as I am totally ignorant of its workings.
Regarding Another's thoughts on the 2-tiered market (before and) during his time, I would think that it really is there, especially as the Saudi gold was bidding (behind the scenes) for physical gold. And as someone stated in a prior post, their excess income in USD was way much more than the world's global gold production!
And I would like to point out that Another/FOA posted that Big Trader (from The East) found out about the hidden gold trades, and spoiled the party of the Saudi. As a newcomer, with the Chinese mindset of getting a better price, I would all my best to cut you off at the source (if possible) of the physical gold. That means buying directly from the mines, etc. Since the Western Powers have been running the gold price control (and gold ownership) to support the USD, the Kungfu Boys used this opportunity to acquire at a lower price!
As for Freegold Paradigm, this 2-tiered gold price is not necessary for its implementation. IMHO, Freegold means that gold is freed from its shackle to any and all currencies, to assume any useful or useless role. Gold does have a useful role - as a Storage of Value.
What is the value of gold? Here is my thesis:
There is approximately 170,000 Tons of gold mined.
This is 170,000,000 Kilograms of gold.
This is 170 Billion Grams.
This is 170 Trillion Milligrams.
This is 170 Quadrillion Micrograms.
This is 170 Quintillion Nanograms.
The world is estimated to be 6.6 Sextillion tons. This means:
Each Microgram of gold = 38,800 tons.
Each Nanogram of gold = 38.8 tons.
Gold can always contain all the wealth of the world. This means the total value of all the labor of the world's 7 billion people for 35 productive years + the value of the 7 billion lives + the value of all the minerals, water, land + the value of all non-living products, houses, cars, planes, etc. + the value of all the agriculture that can be produced for the next 50 years.
If you can, denominate this in a(ny) single currency of today, in terms of today's purchasing power. What is the nominal value? Then divide this notional value into gold. What is the result?
Let's try the US Dollar, today. Is it 1 USD per microgram of gold? Or is it 1 USD per nanogram of gold?
Jeff I was a math major but the philosophies escaped me. I read some Russell and was forced to read some minimum of others to get out of college but thinking about thinking is just not what I enjoy. I will have to submit to your opinion as I just don't want to make my brain hurt.
I understand the two tier market by the fact that their are so many groups out there that CANNOT spend all of their dollars and the pile starts building up. What I do not understand are the mechanics. How can SA or a giant build up 100 billion USD and trade it for gold? Wouldn't the transactions go through the SWIFT system? Clearly cash is not going to be involved. I do not understand how 100 billion USD can be exchanged without being noticed? I have asked these questions before and asked for links but without response...
Eric
What is the future revalued price of gold? Is it, its current value realized? Or is it, a new price based on its new function. I think, gold already does its natural function for the big boys. If that's the case why wouldn't they already be trading it for its fair value at $55k.
I was a consultant to a very large sovereign wealth fund (and I mean Large) from 2012 through August 2014. I witnessed several Gold transactions most of them small (under 25 tons), but there were two transactions over 90 tons. In one case we bought the gold from a CB and in the other we bought from another large sovereign fund. We got the gold for under spot in each transaction. So, as far as two tiered pricing goes it just does not exist. Even if it did exist it could be circumvented by purchasing multiple lots of gold from different sellers.
I think Sam really nailed this issue with "I think you are demonstrating some serious naivety if you think the CB’s and super producers of the world won’t know what the value of gold is until it flashes on a kitco screen."
If the historical path to freegold is true, then Giants must know gold's true value and therefore trade in size amongst themselves at this true value.
As someone who has escaped a literal brainwashing cult, I am acutely aware of how cognitive dissonance works due to using it myself previously and having to deal with it now on a frequent basis with family. I don't think there is any of that happening here, because there is strong inductive reasoning for the two tier system. Do two anecdotes about ~100 tons of gold trading at spot disprove the theory? Not in my opinion. See Sam's quote above.
Sorry, I also want to mention I don't believe Stu or Stan would have any reason to lie and that is why I believe their anecdotes. The apparent contradiction between the two tier theory and their anecdotes warrant more investigation and thought. It's way above my head, though. I hope FOFOA weighs in on this.
Okay, two lists. First the evidence in favor of the permanent two tier market:
(1) Two tier market was known to exist at the time of the London gold pool
(2) Another told us about it
(3) Supported by inductive reasoning, particularly if giants move in and out of gold in very large quantities all at once, rather than spread out over long periods of time.
Evidence against:
(1) Anecdotal stories from participants on the board who were involved in large gold deals
(2) Statements from Bron about availability of 400 oz bars for right around spot
(3) Reasoning from the nature of giants as S L O W accumulators who do not panic trade
(4) Reasoning from the fact that arbitrage typically eventually closes any gap in pricing
(5) Reasoning from the fact that Russia has an collapsing currrency to defend, an abundance of gold, a shortage of dollars, plenty of incentive to expose the weakness of the dollar . . . yet seems mired in its current position
(6) The fact that Another and FOA made their predictions 15 years ago and freegold has not happened yet, meaning they may have been wrong about how deep and liquid the physical market actually is.
(7) Another may have been referring to a temporary phenomenon resulting from shuffling leading up to the Euro launch
(8) Distinguishable from balloon dog because it is a fungible product
(9) From the limited information available to us (granted the market is opaque), the physical market should be a lot tighter than it was 15 years ago given that China did not ramp up import until years after they started posting.
(10) Even if Giants recognize the true value of gold as being much higher than the current spot price, there is no obvious incentive for them to pass up the opportunity to save their surpluses in gold acquired at market prices.
Did I miss anything?
"Did I miss anything?"
Yes. Numbers 1,2,3,4,5,6,7,8,9,and 10 in the "evidence against" section do not actually represent evidence at all
"If you are searching for facts you will find them,
but the items you find will not be true!
Did you think that the high powered world of the LBMA
would operate in a fishbowl for all to see?
We cannot take what is on the outside as evidence
for what is on the inside. To find the answer, work with
inside assumptions and extrapolate them to the outside!"
-Another
The market that Another was describing was not exactly the two-tier market that has been speculated on by FOFOA.
As gold and oil fell it offered giants the opportunity to acquire gold at lower and lower prices. Another and the LBMA clearing stats from the 90s make that clear.
So by the time that gold and oil started rising, giants had accumulated most that they needed. As Another said, gold was cornered and it didn't take place through a two tier market, it took place through a falling spot price.
Even here at this blog, we have some people coming out of the woodwork and saying to you that they were involved in large gold deals at spot price. They have put themselves on the line.
Does anybody have a shred of evidence for a two tier market? Don't tell me to "go back and read everything again" which is an insult. I've read everything by Another, FOA, and FOFOA.
100 tonnes of gold is real treasure, like the Mona Lisa and other precious and antique treasures. These treasures are rare and coveted by the super rich. A kilo of gold is just a commodity, a super rich person who buys a $70,000,000 painting has no interest in spending months and years of their life collecting kilos of gold here and there from commodity sellers to obtain treasure, or months and years learning to paint fine art to obtain treasure. The super rich want just the treasure. 100 tonnes of gold already sitting in a vault owned by one super rich person and coveted by other super rich people is the real treasure in the two tier market. Just ask any super rich person.
tEON:
For old money, collecting gold is not that important, they already have enough.
Sloppy me:-(. I meant that for old money its not that important to pay the higher price. They can collect slowly. The new money, if they understand gold, would find it more important to pay the price.
Stan:
CB and sovereign funds cannot make such off the record deals. They must do everything in the open. So these deals do not disprove the two tier market. I am not sure if Stu's deals were similar.
Also some commentators are saying that Russia should sell its gold at a much higher price. They forget that there will be no buyers of gold at those high prices. Nobody will buy at a high price in the open. For causing trouble to the US, Russia will have to BUY gold in the open. At the present times, it would have to be at least 500tons, I think, still only 20Billion at the current rate.
I do not think a two tier market is important for Freegold.
I think the important point is that the current system is not stable. US cannot consume forever. And the current stagflation is the symptom. Till now the system grew because the countries could grow by producing, without letting their people grow. Now we are in a state where there are not enough consumers for the production to grow. The US people are not rich enough to buy that production. Now growth can come only if the people in the producing countries grow richer. For the people to grow richer they must earn more, so inflation must reduce, and the production must be internalized. We are at the point where govts are starting to do that for their countrymen. This means that the consumers must let up their consumption. The US must stop consuming. This can only happen when the current system breaks. So we are at the breaking point.
How that breaking point is achieved is a different matter. It could be in a number of different things going bad.
Now Freegold theory proves that Freegold will be sufficient to fix the current problems in the system. This does not prove that Freegold will be the next system. But it likely to be because it is the smallest change required to move from current system to the next system. The only thing that needs to happen would be to kill the paper gold. Note: USD demise is baked in the cake. It does not require freegold. Freegold only requires paper gold to die, everything else will be a consequence of the death of paper gold.
Also I don't believe that anybody wants the next system. Not even all freegolders :-). Some are still stacking, and could add more if the current system goes longer. And definitely not the Giants. For them the transition would be a time of chaos, a time that is bad for business. They may not like the current system, but they don't hate it enough to kill it outright. This includes the public giants including Russia, which is still stacking. Europe is happy waiting. Saudis have a lot of cash collected, which they can use now, with oil cheap.
What do Giants do when they can't buy gold? They build the Burj, they buy the Balloon Dogs. They spend the excess. Once Gold is unshackled they will be able to buy gold freely for the first time. But that doesn't mean they hate the present system, that they want to go into Chaos.
No Freegold does not depend on the Two Tier system existing. It must exist if gold is not available freely. Just like a Black Market exists when Drugs or Alcohol are prohibited. But it affects only a very few giants, and for them also it is a rare possibility. Gold is simply not available in the present. But its not so important to break the system. If the system can continue for sometime longer, without them losing much, they will let it continue. Yeah at present they do not have ways to save money, but still they can get small amounts of gold at a much cheaper cost. So even if they are wasting much of it, is acceptable. I guess we can think of that as a tier too. Buy gold for X amount and waste 40X, still you are in the balance :-).
Anand, I agree completely that a two-tier market has no place after the transition. As Dante said, the two will become one.
You actually agree when you say it must exist when gold is not available freely. That is the current situation where gold is not available freely in size. ' Gold is simply not available in the present'. Agreed.
We can arrive at the necessity of the higher market with no evidence at all, due to the coherence of the other propositions of the theory. This is why absence of evidence is not evidence of absence.
But our case is stronger than that due to circumstantial evidence. Coherence FTW.
Random Man,
Please go back and read everything again.
Wow, we are so fortunate to have yet another connected insider here on the blog, a consultant to a very large sovereign wealth fund (and I mean Large) no less. I have been long waiting for this blog to finally attract such people. Maybe we can finally nail down this Freegold thing now that we have some real professionals on the trail.
I am looking forward to the hearing thoughts from the newer commenters. Clearly they see error in the current interpretation regarding a two-tiered market. Perhaps they see some other issues that need correcting as well. After all, the scarcity of gold in mega size lots is a rather fundamental concept here at the FOFOA blog. I hope both will take upon themselves to write often and in depth.
I apologize for my rudeness earlier. I simply didn't realize how this blog has changed. I need to shut my mouth and listen now that the big fish are schooling here.
From the top of Think Like A Giant 3 that apparently was not read by several of you:
"ex•trap•o•late : to infer (an unknown) from something that is known or assumed; conjecture.
I have an extrapolation to share with you. It is backed by sound logic and Another, if nothing else. Another wrote, "To find the answer, work with inside assumptions and extrapolate them to the outside!" That is what I will do in this post. "
There is no proof. If you need proof please leave.
The world's people seek to store wealth for later consumption. Gold is the best way to do that at present. (unless you like today's stocks bonds or RE).
There are 3000 new tons each year. At 30+ million per ton that is just say one trillion in which to store many trillions of wealth.
China alone needs to store the 4 trillion it holds in reserves (that it now realizes are never going to be redeemed for wealth.)
If you had 4 trillion of soon to be worthless reserves what would you be willing to pay for gold?
Stan E
was there actual physical movement of the gold or was it from allocated (maybe at the BIS) to allocated?
@matrix Ignoring, once again that I never described myself as a major insider and went out of my way to say other wise I do think you touch on an important point. There are two things that are assumed here to be true, but in my experience may not be.
The two tiered market and an assumption that physical gold is somehow very scarce and hard to come by. I can only share my experience and of course it may be leading me to an incorrect conclusion. But based on my experience and publicly available data I do not believe a two tiered market currently exists and I do not believe physical gold is anywhere near as scarce as assumed here, and likely wont be until the moment of a transition.
Oh, and since I'm becoming quite unintentionally the board villain, I believe the concept of GLD as a coat check room has been thoroughly debunked by Bron and screwtape files. I notice that doesn't get mentioned much here anymore either.
I can only assume the contributors here have invested a lot of their savings in gold, as have I...why aren't you eager to challenge freegold? Why so defensive? Isn't that counterproductive to confirming this theory?
Nice post, Anand.
I would, however, change the wording of the following sentence slightly...
I think the important point is that the current system is not stable.
to read: I think the important point is that the current system is not stable or sustainable.
The lack of stability is now readily apparent, whereas the system's terminal character seems, inexplicably, not so obvious to a substantial number of onlookers. As you state, U.S. citizens are not able to afford the imports/foreign production. In this stagnant economy, which is characterized by more good paying jobs being lost than created, annual increases in living costs (present energy price relief notwithstanding), and stagnant wages, the $IMFS is destined for a complete state change.
Jeff,
Regarding evidence, I would argue, and perhaps you would agree, that there is evidence, but not of the sort that anyone and everyone would recognize as such. Alas, that sort of (absence of) evidence (is not evidence of absence) will only be unmistakably apparent after the fact.
Robert, Stu Ungar and others have been honest, transparent, civil, willing to engage and they have been met by disdain and hostility.
Freegold the theory, both in general and particular, has thus far shown no predictive power, and remains speculation for 17 years and counting.
This can change any time yes, but you are running out of time. If something doesn't happen soon then many at this blog have alot to reconsider.
I suspect this is the reason for the snappiness and cultish behavior. The patience is wearing thin, that much is obvious.
To recap, the story so far:
After six years or so of very close study and reaching Fifth Dan Black Belt (AKA "Pink Sock") in Freejitsu, the one issue I have with the whole Freegold theory, which I still totally am onboard with and am only inadvertently setting myself up as a sort-of-sock-puppet-villian-but-not-really, because I am just like you all in being overweight physical gold and crossing my fingers for the Freegold pay-off, is:
There have been no "stupid foreigners" who supported the dollar to suit their purposes.
Oh, and I see no evidence to support the idea of a two-tier market that I as a mere pleb am not privy to. Therefore, impossible.
Ah yes. The Coat Check Room is bullshit, cuz Bron.
But, apart from just these three, for now, little issues... we're all friends together and totes on the same page! Don't be naughty, naughty bullies now. I am not the Trojan Horse sock puppet you might be forgiven for thinking I am.
And they all lived happily ever after.
Random Man: I agree with you. If Freegold (the theory) is more than just a discussion piece we would have seen clues that the world economic community embraces and approves of this theory.
I had a hard time with the two tier gold price theory myself but consider this;
Let’s say that the US wanted to expand its physical gold reserves by 1,000mt or 32,150,000 troy oz. At present shrimp prices that would require the US to print or type into a computer screen a little over $40 billion dollars. So we go to the China and say hey we would like to exchange $40 billion dollars for 1,000mt of physical gold? What do you think China’s response would be? No way.
Now let’s look at the same scenario only it’s China that wants to exchange just 1% of the excess US currency it has for a 1,000mt of the US treasury gold which is again $40 billion dollars at shrimp prices? No way again, right? So what is the giant price for gold that would enable physical flow among giants?
Let’s say China sweetens the offer to the US and says how about the entire $4 Trillion you owe us for 1,000mt of physical US Gold or almost $125,000/oz. Now the US is listening are they not? Five years of US gold mining supply in exchange for canceling out our paper debt to China? Doesn’t sound so bad now does it?
Now imagine SDRs with a 10% gold backing at shrimp prices. If gold flows among giants at 10x the shrimp price the SDR would be 100% backed by gold at giant prices would it not? We now have an international currency for keeping track of trade imbalance with the physical flow of gold happening at 10x the shrimp prices in order to periodically clear those imbalances do we not?
The key question in my mind is why the next system won’t still have these two gold price tiers, giant and shrimp?
My answer is that if a significant portion of the net producing shrimps catch on to this it won’t? If say their paper claims go up in smoke in the next few years, enough may reconsider what they thought they knew about attempting to storing wealth in IOUs? Maybe enough will want to be paid in full the next time the have a few more currency units in whatever form in their account?
Storing wealth in physical things, the apex of which is gold.
I demand evidence.
Stu,
I think you'd garner more respect and civility if you were more honest and forthright in your approach. For example, if you didn't insidiously and deceptively pretend to be in agreement with the framework presented in this blog while revealing with everything you say that you substantially disagree with it, we might be able to have a real discussion.
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