Saturday, April 11, 2015

Metamorphosis Revisited

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 (7/27/01)

This past Monday, the IMF released a report on Islamic Finance. Along with the report, it also released a short video titled Four Things You Need to Know about Islamic Finance. After five days up, it has a whopping 388 views.

I tend to think of "Islamic Finance" as kind of like a good movie with a terrible name. Other names it goes by in official circles are "Islamic Banking" or "Sharia compliant whatever", which, as far as names go, don't do it any favors in the West.

The basis of "Islamic Finance" is that usury is forbidden in the Koran. I had a few discussions about this in the comments back in 2009. Among the points I made was that the three major religions all share similar doctrines. In Islam, usury is called Riba, however there is a caveat in Islam that you may lend usuriously to your enemies, just not to other Muslims.

I also linked this History of Usury Prohibition which explains that such sentiments of contempt for usury date back to the Old Testament in Judaism, and go back equally far in Hinduism and Buddhism, many hundreds if not thousands of years before Islam even existed.

And I noted that the meaning of the term "usury" has evolved, especially in the West:

Consider this, the term "usury" changed its meaning in the last 100 years. It used to mean "interest". Now it means "excessive interest". All usury laws today have to do with an upper limit on interest rates. Age-old usury laws prohibited interest entirely.

When usury laws were repealed in 1981, they were simply making way for Volcker's 18% official interest rate, which ran credit card rates up to 40% and higher. These rates were previously called "loan sharking" and were completely illegal.

For example, look at different versions of the Bible. The NIV (New International Version) was begun in 1973 and not completed until 1983. Compare passages from the King James version and the NIV (random example):

Luke 19:23 (King James Version): "23Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?"

Luke 19:23 (New International Version): "23Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest?'"

So in 1983 they could no longer use the term "usury" in its original meaning. In 1983 usury meant "excessive interest", and that wouldn't make sense. So they had to change the word to "interest".

This is a deep subject. Think about it. We know that money is essentially credit, which is also debt, and it circulates, so shouldn't there be a time value to money? Is interest intrinsically good or bad or neither? Is it a relative thing, with many shades of gray? Or is it a simple black and white matter? I know what I think, and I'll tell you in a moment.

In December of 2009, I wrote a post titled Metamorphosis that was essentially about the concepts in Islamic Finance without mentioning Islamic Finance or the other names it goes by even once. The post did, however, contain three pictures of Dubai real estate that were financed in a Sharia compliant way. And the word "Islamic" did appear once in the post, in an article I included about Sukuk, which are the Islamic equivalent of bonds.

In "Islamic Finance", the way they get around charging interest is by calling it "rent". Say you want to buy a house under Islamic Finance rules. What would happen is you would get the money from the bank, and then you would pay it back in monthly installments of the principle plus an additional rent (instead of interest) for your use of the property. So whereas we pay principle and interest, they pay principle and rent.

It's really quite simple, but the implications run deep. Probably the biggest implication is that the lender shares with the borrower both the risks and rewards of the underlying asset. This is basically what my post was explaining. Here's a tweet from the IMF on Monday followed by a short paragraph from Metamorphosis:

IMF @IMFNews Apr 6
Given lenders share in both risks & rewards, should #IslamicFinance be made more mainstream? Read Blog

A system that is built upon equity positions is much more stable as equity agreements are entered into with much more gravity. If both parties share in the risks and rewards of future performance they will take everything more seriously. Also, equity agreements are based on the flexible assumption of variable future performance! A much more realistic assumption.

Don't worry, we are not going to all be Sharia compliant in Freegold. We are not moving toward a world of Islamic Finance. That is not what this discussion is about.

If you read my Metamorphosis post, you'll notice reflections of FOA in it. In particular, you'll notice similarities with his The Wind Will Blow post.

In FOA's post, you'll read about a tractor:

The unnatural convoluted drive, of many, is to use this same "money value concept" to borrow real wealth "use"; instead of borrowing the actual wealth itself to gain said "use".

This second item comes under the heading of trying to get something for nothing and is everywhere in Western Thought!

If we lend an item of real wealth, say a tractor or chair, its future value is unimportant to the lender as long as the real item is returned. It is the "use" that is lent, not the money concept in the form of a trading value. In this process we recognize that, because the value of things change, the debt to be repaid is the item of wealth, regardless of its higher or lower value. Only its "use" changed hands during the lending and repayment of debt. All is well.

And in mine, you'll read about a crane:

Now some items that we find in our planetary inventory are productive equipment items. These are things that if used properly can increase the amount of wealth in the world. A giant crane, for example, can be used to build new structures that can then be valued and traded relative to everything else in the world.

With nearly 7 billion people in the world today, the various tasks of production have been divided to the extreme. For example, you will be hard pressed to find a man operating a crane, who also owns that crane, and also owns the project he is working on as well as the land underneath it. If such a man exists, then it is surely a very small project in his own backyard.

So cranes are generally loaned, leased or financed to those who want to build, by those who want to own (productive capital). And the return to the owner of the crane is a function of the value of the use of the crane. Not the appreciation in the tradable value of the crane itself. Can you see the difference? If someone owns a full equity position in a piece of productive capital, he does so in order to earn a return, a yield based on the value of the USE of that capital. He does not count on the value of the crane increasing in the future so that he can sell it for a profit. There is a big difference! Think about this.

The point of both FOA's post and mine was not what's wrong with banks, fiat money, lending or interest. It was about understanding concepts and principles so that you can see what is inevitably unfolding. The way conventional banks lend for interest is neither good nor bad, it simply is. Same with Islamic banking. Islamic Finance is not the cure for what ails Western finance, but understanding the difference between the two may help you see how the $IMFS will resolve.

The point of both posts was that the resolution of the $IMFS, the cutting of the Gordian Knot, will be dollar hyperinflation and "gold prices beyond imagination," not deflation. Here's a bit from the conclusion of Metamorphosis:


If today's deflationists are correct then the numéraire will remain strong or even grow stronger while the world runs from equity ownership of the physical world into the warm embrace of casual debt creation stabilized by its own Ponzi-like exponential growth pattern.

Think it through. We don't just muddle through from here. We either shift toward equity or debt. We are currently not in stasis.


What about Gold?

Gold is a little different. Yes, it is the ultimate equity position with assured future global liquidity. Yes it is the ultimate wealth reserve as a known timeless claim on anything you may need in the physical world of your future.


I will leave you to do your own math on where the real value of physical gold will come to rest on the other side of morphosis. I have already presented my calculation in other posts.

And here's a bit from the conclusion of The Wind Will Blow:

The tables are turned; deflationary policy will not defend the dollar. Only inflationary policy will. 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.

Above, I asked if interest is intrinsically good, bad or neither. I think it is neither good nor bad, it just is. I think there is definitely a time value to money, but to use that time value on a system-wide basis as a form of risk-free savings or as a wealth reserve is what leads to problems. Think about the difference between conventional and Islamic banking in terms of buying a house. In conventional banking, the buyer alone is exposed to the risk and reward of changes in the value of the home during the life of the loan, so presumably the lender is not.

As we now know, this works well as long as home values are rising, but if they decline, homeowners can be quickly wiped out and go bankrupt or default on the loan. So there is risk exposure to the value of the underlying asset. And in Islamic banking, the lender shares that property value risk proportionally with the buyer throughout the life of the loan, so there is risk there too.

There is always risk involved in lending, yet with fiat currencies we have the ability to eliminate the nominal risk by printing more money (e.g., FDIC deposit insurance, QE, etc…). All this does is transfer the risk to the value of the currency itself, which is exactly where we find ourselves today.

The IMF has two stated reasons for studying Islamic Finance. The two reasons in one word each are stability and inclusion. Inclusion means bringing the Islamic financial world into the warm embrace of the international monetary and financial system, and stability means finding new ways (perhaps by studying the principles of Islamic finance) to avoid another global financial crisis. In addition to banning interest, Sharia law also bans speculation, gambling and short-sales.

Back in 2012 when I first met Aristotle in person, he brought with him the latest edition of the Central Banking Journal, which I found him quietly reading on my sofa one morning with a cup of coffee. That sparked a conversation about what he had told me by email a year or two earlier, about the "many international policy stirrings" he'd been following in the journal which he felt pointed to preparations "for assertively rolling forth the freegold paradigm."

What surprised me the most was that, aside from mentions of gold in the journal, one thing he paid particular attention to was the repeated and frequent mentions of Sharia compliance and Islamic banking rules in the Central Banking Journal. Western central bankers have apparently been studying and discussing this stuff for nearly a decade now, and for good reason. According to the IMF paper, "Islamic financial assets have grown at double-digit rates over the past decade, from about $200 billion in 2003 to an estimated $1.8 trillion at end of 2013. (A large part of Islamic finance—around 80 percent—is composed of Islamic banking assets; the remainder is composed of Sukuk (15 percent, asset-backed or asset-based instruments), Islamic funds (4 percent), and Takaful (Islamic insurance)."

More from the IMF research paper:


Islamic finance refers to the provision of financial services in accordance with Islamic jurisprudence (Shari’ah).
Shari’ah bans interest (Riba), products with excessive uncertainty (Gharar), gambling (Maysir), short sales, as well as financing of prohibited activities that it considers harmful to society. It also requires parties to honor principles of fair treatment and the sanctity of contracts. Transactions must be underpinned by real economic activities, and there must also be a sharing of risks in economic transactions.

Islamic finance products are contract-based and may be classified into three broad categories:

* Debt-like financing structured as sales, which could be sales with mark up and deferred payments (Murabahah) or purchases with deferred delivery of the products (Salam for basic products and Istisna’ for manufactured products), and lease (Ijārah) with different options to buy. Pure lending is allowed only when benevolent (Qard, which is often used for current deposits);

* Profit-and-loss-sharing (PLS)-like financing with two modalities: (i) profit-sharing and loss-bearing (Mudarabah) whereby the financier (investor, bank) provides capital and the beneficiary provides labor and skills (profits are shared, but losses would be borne by the financier who does not have the right to interfere in the management of the financed operation, unless negligence, misconduct, or breach of contract can be proven); and (ii) pure profit-and loss- sharing (Musharakah) where the two parties have equity-like financing of the project and would share profits and losses; and

* Services, such as safe-keeping contracts (Wadi’ah) as for current deposits, or agency contracts (Wakalah), which are also increasingly used for money market transactions.

The principles are rather sound, as you can see, although their Arabic names are a bit off-putting. And as I have stated, I don't really consider these principles to be particularly Islamic, but Islamic finance does provide an existing structure of sorts that can be studied.

It is my personal feeling that these principles reflect changes that will emerge naturally as the $IMFS collapses and Freegold rises like a phoenix from the ashes. That was kind of the whole point of my post, why I called it Metamorphosis, and why I included the illustration of a caterpillar turning into a butterfly.

That's also why I hesitate to even use the term Islamic finance. But don't you find it interesting at least that Western central bankers have been studying these principles for years now, perhaps as Ari views it in preparation for dealing with a new reality?

Here are the documents and tweets released on Monday by the IMF for your perusal:



Ivo Cerckel said...

The Holy Koran says in Verse 161 of Surah An Nisaa’:
“That they took usury, though they were forbidden; and that they devoured men’s substance wrongfully;-we have prepared for those among them who reject faith a grievous punishment.”

When one party gives something of value
and the other party pays him with something,
in this case paper, of no value,
and when one party’s wealth is created out of thin air,
while the other party has to slave and earn to pay off the ill-gotten credit or loan,
is this not devouring of other people’s wealth?

There is moreover a Hadith of Prophet Muhammed in the Sahih Muslim which teaches:
“Abu Said Al Khudri reported Allah’s messenger as saying:
“gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt. (When a transaction is) like for like, payment being made on the spot, then, if anyone gives more or asks more, he has dealt in riba, the receiver and the giver being equally guilty.”

This Hadith of Prophet Muhammed establishes two things:
ONE ‘money’ in Islam is either precious metals such as gold and silver, or commodities such as wheat, barley, dates and salt.
TWO when gold, silver, wheat, barley, dates and salt were used as money, their value was ‘inside’ and not ‘outside’ the money. Hence, it is established that ‘money’ in Islam must possess intrinsic value.
(Imran N. Hosein, “Explaining the Disappearance of Money with Intrinsic Value”, paper delivered at the International Conference on the Gold Dinar Economy, held in Kuala Lumpur on 24 and 25 July 2007, p. 1)

DP said...

Inclusion might mean bringing the international monetary and financial system into the warm embrace of the Islamic financial world.

vizeet srivastava said...

In olden days banks were run as co-operatives. I always wanted to understand how co-operative banking system should work. And it seems Islamic Banking is co-operative banking system.
Again a very informative post.

burningfiat said...

I loved Metamorphosis! Good revisit. Equity and risk sharing is definitely the way forward.

Only down-side IMHO will be need for more paper-work (contracts etc.) to enable a fair risk and profit sharing of these agreements. Therefore I think this model will mostly be used for larger projects.

Normal loans with fixed or variable IR will still be around, also after transition.

Roacheforque said...

Not only interesting, but making perfect sense. Where equity "flows" so runs the current of economic thought. A global twist on the old adage, "he who owns the gold makes the rules".

But in geopolitical terms the translation is: The economies which hold the gold define the banking system. We see this influence today, tomorrow by definition. We see equity stake partnerships in recent hi-profile deals between China and Russia today perhaps as being "Shar'ia compliant" but in essence I feel it more basic than that.

The IMF studies and explains this emerging trend as "Islamic Finance", when what is coming is merely the age-old equity based system which gold, freely priced in the marketplace, has authored since long before Islam.

So your point is well taken.

What I find disturbing is that the IMF has codified "Islamic finance" in this way. It portends much I think in the way the West will portray this new economic reality we are about to be engulfed by ....

Shari'ia law, aside from its faults in human rights barbarism does derive its banking and finance foundation upon an unwavering foundation of equity as the basis for wealth, not debt.

"Debt as wealth" by contrast is a newer approach to banking. Both are age-old concepts, but only one assures the kind of exponential income disparity (and instability) we see today.

tEON said...

Iran, Secret Gold and the Mystery Trade Boosting Turkish Exports
Despite having no significant gold deposits, exports of the precious metal made up 70 percent of the narrowing in the current account gap, according to government data published Friday. A gold importer for 28 of last 30 years, Turkey became an exporter in 2012 when it started paying for Iranian gas in precious metals as a way of circumventing international sanctions that may soon be lifted.

One Bad Adder said...

@burning: - I can envisage a lot of strategic-infrastructure projects going down the equity-funding path (roads, rail, power-generation etc). Essential-services - jointly ''owned" by complicit Gov't ...and BIG business ...User-pays ...forever!

Xavier said...

This is another great post because it ties in and refutes some of the concepts that have floated here recently in the comments, namely that once gold is reset in price things will go back to normal, to debt as an asset, certainly this provides substantive evidence that this won't be the case. What is also interesting is that these concepts are being introduced by the elites that govern the rules of finance, the very same that revolve through the doors of the imf into the bis, it makes for plausible evidence that change is afoot.

One Bad Adder said...

DX is again flirting with 100 and PaperGold is definitely doing its best to spoil the Party.
Trying to mimic the seasonal $PoG uptick (Nov - Jan) however it should capitulate during this week methinks.$ONE:$USD&p=D&yr=0&mn=6&dy=0&id=p14522796477
Several of the alt-currency-pairs still gravitating toward parity - Pointing (I think?) to a - "lo and behold, what a coincidence - let's rationalise the global currency architecture" - moment.

M said...

I don't think it will take that many sellers to get the DXY going the other way. Look out below...

One Bad Adder said...

M: - IMHO it's all they can do to NOT let DXY go through the roof here.
Of course, as Gold advocates we wish it weren't so ...however (and strictly as I see it) the path to FreeGold is (firstly) dependant upon the Dollar complex (DX, $IRX) going Supernova.
No other scenario makes sense (to me anyway;-)

Roacheforque said...

All this noise about 100, when we broke 160 in '84.
There's a LOT of room to move ....

Bright aurum said...

@Wil, OBA ...
US was quite a different animal back then...
What a tide (USD moneyness gone) ...
Everything fits in until it doesn`t ...
The deficit is where the rubber meets the road...
All thanks to the USG swimming naked ha, ha, ha.

M said...


IMO, this is the supernova. One of these days, a paper giant will have no choice but to sell dollars to stay solvent. And since the volume of dollars is so vast, the first one out is going to get a pretty big bang for their buck. At least at these levels.

tEON said...

Ben says the economy recovery is being curtailed by people saving too much...

Bright aurum said...

@ Gary
The savings glut - an old chewing gum rechewed.

Blake said...

Official support continues to wane:

"Foreign residents increased their holdings of long-term U.S. securities in February; net purchases were $12.8 billion. Net purchases by private foreign investors were $23.0 billion, while net sales by foreign official institutions were $10.2 billion."

Bright aurum said...

The current uptick in oil prices is (as it spreads to the other resources as well) a very detrimental factor to the USD IMO. It could convince that very important group we are following - the savers, that they cannot get more 'bang for their buck' in the future leading them to the decision to bring some demand forward thus increasing the velocity of M0/M1. The second group - the traders might do just the same as the credibility inflation sinks. They, as a collective, have positioned themselves in USD denominated securities in the vain hope that when the time is right (e.g. the velocity picks up) the FED will crush the US economy to protect the value of the USD and we all know that this is never going to happen in a meaningful way. So eventually their behaviour will change and a stampede to get out will follow.

Jeff said...


Just as the dollar depends on the kindness of strangers, I suspect the oil price now depends on traders. When the price collapsed the producer sheiks made numerous statements that the high price had been artificial and we might not see 100 again.

Now prices have climbed off the lows, but production has only increased, and the sheiks have not indicated that production will be reduced or made any statements supportive of the price, AFAIK. They have only spoken of keeping the market well supplied and that there is too much trading oil as a financial asset instead of a commodity.

How far will momentum trading take the oil price? And then?

Edwardo said...

Technically, FWIW, my read is that the traders will take oil to the 57-59 dollar range before this ABC reaction off the lows is complete.

Anonymous said...

Lack of comments is interesting.

Maybe the largely American reader base is experiencing cognitive dissonance that they can actually learn something from the Islamic world and FOFOA would acknowledge that?

Or has this blog finally jumped the shark?

Unknown said...

Paper is burning right in front of the worlds eyes. Debt is being consumed.

Unknown said...

Though the headline spins this as if Japan increased US treasuries holdings, the article clarifies that Japan is the #1 holder of US debt because China dumped more than Japan.

Bright aurum said...

@ Jeff
What I see is what I believe and I`m telling you, I have never seen so many cars on the streets. Absolutely packed! Like an order of magnitude more than a decade ago. It is hard to imagine what is happening in places like India and Indonesia...
The world has learned how to burn oil these days; it is the paradox of efficiency and lower prices that makes the plays of the sheiks so obsolete.

Dante_Eu said...


You might like this one:

Central Banks Made The Whole World “Buy Time”... There Are Signs We’re Beginning To Sell It

It seems the “present” is catching up with what was the “future".

Mr orange said...;_ylt=A0LEVzPRWzBV408AZi3BGOd_;_ylu=X3oDMTByMG04Z2o2BHNlYwNzcgRwb3MDMQRjb2xvA2JmMQR2dGlkAw--

Mr orange said...

Jamie dimon seems to think there's not enough room for everyone in treasuries,,,,,,watching the tlt,,,,,,my current thesis is left shoulder formed in October,,,,just waiting on head to form on possible d day,,,,looks like a nice cup and handles formed,,,,,,,where have u gone kyle bass? Where have u gone peter schiff

Mr orange said...

::::::left shoulder started to form in October, completed in jan we shall see,,,,,,,,,,to see Simons thinking there won't be enough room in treasuries you have to also read link to business insider at bottom of yahoo article

One Bad Adder said...

@ Dante:- They certainly spent a lot of TIME on that piece ;-)
...and only some of it makes sense (to me).

My prognosis is derived from a much simpler basis of understanding.

One Bad Adder said...

Mr O: - A rush into the Long-end (of the curve) may well be the precursor to a systemic meltdown however it can/will only be a (short-term) symptom of the overarching Deflationary disease. ...IMHO.

One Bad Adder said...

@Jeff, BA: - You may or may not recall a similar Oil over-production period in the early 1980's.
There's an abandoned Shale-oil Facility not far from my place standing in silent testamony to what happens when "the Cabal" deems it necessary to kill off the competition.
Same 'ol, same 'ol today I feel.

One Bad Adder said...

Here you go: Didn't have to look too far. The "Inflation-adjusted" price provides close to a here-'n-now comparison/example.

Bright aurum said...

Since we are in a chart fight ...
First chartslap:
Worldwide automobile production
Second chartslap: Fuel efficiency improvement
Followed by...
Fuel efficiency plus sales1
Fuel efficiency plus sales2
so far so good you might think but
MPG index seems to be plateauing
and then
DEMAND for fuels is catching up fast
so for most of us being Westerners it is actually not what we see peeking out of the window
it is kind of frightening in a sense.
This is the GRAND SLAM of it all
I am sorry for straying off the topic.

Sam said...

"I think there is definitely a time value to money, but to use that time value on a system-wide basis as a form of risk-free savings or as a wealth reserve is what leads to problems."

thumbs up

Jeff said...

BA, according to this, demand is slack.

Or are the sheiks diversifying from oil because it will be devalued soon?

Bright aurum said...

@ Jeff
Nothing cures low oil prices better than low oil prices.

Schoolboy-Error said...

It will be 'jewish' banking first

Golden Age said...

There is Islamic finance and there is concept of money in Islam. Money in Islam is Gold, Silver or a prevalent commodity of the people in question. As per a saying (hadith) of Prophet Mohammad (pbuh), a time will come when everything will lose its value except Gold and Silver.

Woland said...

an amusing vignette, at the tail end of Jeff's link:

"In 2010, Ali al Naimi escorted (U.S. Energy Secretary) Steven
Chu to visit King Abdullah at his palace in the desert oasis of
Rawdhat Khuraim.
The elderly monarch was in a philosophical mood and took the
opportunity to pose a few questions to the Nobel Laureate Physicist, says James Smith ( U.S. Saudi Ambassador ) who
went along for the visit.
Tell me how the universe was formed, the king asked, in Smith's recounting. Chu patiently laid out the story of the Big Bang theory. "What does that mean for God?" the monarch
said. Chu and Smith conferred for a moment on an appropriate diplomatic response. "There are some things we
know, and for other things we have God" Chu replied.

"And tell me, how did we get all this oil?" King Abdullah asked.
As Chu described how organisms decomposed over millions
of years, Naimi whispered into Smith's ear, " I've told him
this a hundred times."

Greetz, {;<)>>

Edwardo said...

I think it's safe to say that the folks who are rushing in to buy up all of these "cheap" assets do not share the concerns, let alone the perspective, of this blog.

Attitude_Check said...

"He who has the gold makes the rules" This is a glimps of the one possible path of the FreeGold future from the US centric IMF. The present debt based system must be replaced with a credit based system, that does not require exponential debt growth to function.

The GCC nations (all major IMF members) have framed their idea's within an Islamic context, but the main idea's are much broader than only Islamic heritage. This is the first shot across the bow by the IMF to influence what will be the next system I think. It will be interesting who else begins to join the discussion (like the BIS).

Edwardo said...

Perhaps the BIS will, in future, be an acronym for Banking Islamic Style ;D

Bright aurum said...

@ Edwardo
' not share the concerns, let alone the perspective, of this blog.'
It is exactly what is to be expected of such ilk. They had 45 years of experience of churning paper promises for MOAR paper promises and they try to succeed once more.