Wow, I can hardly believe it's been nine years. Where the heck has the time gone, and where the heck is Freegold? ;D
A little more than two years ago, I changed format to an NFF (not-for-free) blog in order to keep me enthused and engaged, and more importantly, to keep out the trolls. I wished FOA had done that rather than quitting, so that's how I view it. I have hundreds of subscribers, and when they quit, so will I. The Freegold Speakeasy now has 100 posts and 20,000 comments.
This being the anniversary of this blog, I have started a new tradition of sharing some samples from the Speakeasy with you, the tired, poor, huddled masses, yearning to escape the wretched refuse of the free internet, teeming with trolls and misinformation. For you, the homeless and tempest-tossed, I lift my lamp beside the golden door! For you, from back in June, here's No Fix, No Peg, No Reserves:
No Fix, No Peg, No Reserves
"One way to address the issue of the management of foreign exchange reserves is to start with an economic system in which no reserves are required. There are two. The first is the obvious case of a single world currency. The second is a more useful starting point: a fully functioning, fully adhered to, floating rate world.
All requirements for foreign exchange in this idealized, I should say, hypothetical, system could be met in real time in the marketplace at whatever exchange rate prevails. No foreign exchange reserves would be needed.
If markets are functioning effectively, exchange rates are merely another price to which decisionmakers--both public and private--need respond. Risk-adjusted competitive rates of return on capital in all currencies would converge, and an optimized distribution of goods and services enhancing all nations' standard of living would evolve."
-Alan Greenspan (1999)
It's a simple concept: In a system of free floating exchange rates, no one needs foreign currency reserves, because there’s nothing to defend. The exchange rates just float. If foreign currency is needed for some liquidity reason, we have the technology today to do currency swaps in any amount, on a moment’s notice, so no one needs foreign currency reserves, and the world doesn’t need a reserve currency. It’s a simple concept.
I wrote this last month in a comment:
"In Bretton Woods, it was something we did. It was mandated that fixed exchange rates be defended by accumulating dollars. Then Bretton Woods ended, and five years later, floating exchange rates were officially authorized by the same body that had created Bretton Woods, but everyone basically did their own thing, which included supporting the dollar and buying US government debt.
We could certainly stop selling debt, but by now we have become addicted to it. And even that would not stop them from accumulating dollars. We didn’t create the Eurodollar, they did. We didn’t ask them to buy our debt, they just did, and we liked it.
Triffin’s dilemma was first talked about in the 60s, while Bretton Woods was still in effect. The bottom line is that, with fixed exchange rates, you need a reserve currency, but with floating exchange rates you don’t. Today it’s really just inertia that keeps us thinking in terms of one currency being the reserve. In truth, it is not necessary.
Of course Triffin’s dilemma still applies, but because it’s something we don’t control yet are dependent upon for our status quo, there’s no real point in talking about it. Some think we can just slither out of it without disturbing anything, by simply replacing one reserve currency with another, or with a basket like the SDR, but they never actually discuss the ramifications of doing so. […]
The problem is that the global financial system is basically the remnant of the past 45 years of using the dollar as the reserve currency after it wasn’t really necessary. It's like a giant abandoned nest, or hive, or house of cards, built upon the dollar being used as a reserve currency for decades after it was no longer necessary to even have a reserve currency. But the switch will have to bring it down, so no one wants to switch.
However, because it is not discussed in these terms, the switch is occurring anyway. I’m sure some people are aware of what’s likely to happen, and some aren’t, but it’s probably not spoken about except in certain circles, and then only in whispers, for fear of waking the beast. But it’s happening nonetheless.
What is obvious to us, is certainly obvious to others, but not necessarily widely so, because it can’t be discussed openly. And because it can’t be discussed openly, for fear of waking the beast, some officials are still trying to slither out of the dollar reserve system without disturbing the giant house of cards built on top of it. And those who know what will be the likely result, can’t really stop them. There’s nothing they can say. There’s nothing to say. The only thing there is to do is to know, prepare (on the personal level), and watch."
Later in the speech quoted at the top, Alan Greenspan talked about the Asian Financial Crisis, which happened in 1997. He explained that the Asian countries which allowed their currencies to more or less float, like Taiwan and Singapore, fared far better than the countries who tried to defend their peg to the dollar, like Thailand and South Korea:
"Between 1992 and 1997, yields on a broad range of emerging market debt instruments fell relative to those on comparable debt instruments issued by industrial country governments. But this pattern reversed sharply with the onset of the Asian financial crisis in the second half of 1997, and again following the ruble's devaluation in August of 1998.
These changes in foreign investors' willingness to hold claims on emerging market economies had a particularly severe impact on currencies operating under fixed or pegged exchange rate regimes. Accordingly, those countries' foreign exchange reserves, and reserve policy, played an important role in the recent financial crises.
In both Thailand and Korea the monetary authorities allowed their foreign exchange reserves, net of forward contracts and other obligations, to fall almost to zero. Once this became obvious to market participants, subsequent downward pressure on the baht and the won intensified substantially. In contrast, a number of countries (Taiwan and Singapore, for example) introduced greater exchange rate flexibility without exhausting their foreign exchange reserves. These countries did not suffer the same violent downdrafts in their foreign exchange markets."
There are a few issues I need to explain in the context of this post. It's all stuff I've written about before, but maybe not quite in this context. Like, what is the purpose of reserves? What happens to existing reserves if they are no longer needed? And what about the gold reserves?
When I say "reserves," I'm talking about foreign currency and gold. To be more precise, it's claims denominated in foreign currency against non-resident institutions (US Treasuries being the most common) and gold. I discussed the definition and treatment of reserves under the current system in 2011, in RPG Update #4.
Reserves are a subset of assets on a central bank's balance sheet. On one side are its liabilities (its currency), and on the other side are its assets, which include domestic currency assets and reserves. Reserves are a portion of assets on all kinds of bank balance sheets. Bullion banks have physical gold reserves. They are needed for clearing, and delivery/allocation requests. Commercial banks have reserves in the form of cash and claims on their central bank. They are needed for clearing, withdrawals, and to meet regulatory requirements.
Central bank reserves are no longer needed for clearing, delivery, allocation or withdrawal, now that Bretton Woods has ended and currencies are no longer redeemable in gold from the central bank. The only thing central bank reserves do in a clean float is sit there. If they move, if they change, then it's not a clean float.
When I say that in a clean float, reserves aren't needed, that means no change in volume, either way, up or down. It doesn't mean any CB should get rid of its reserves. That wouldn't be a clean float. Any change in reserves, up or down (in volume, not value), by the monetary authority or central bank, is manipulation of the exchange rate. Reserves may fluctuate a little over the short term for liquidity reasons, but any permanent change implies exchange rate intervention.
In fact, in a true clean float, the central bank shouldn't be involved even for liquidity reasons, that is, temporarily supplying foreign currency reserves to its own banks that are involved in foreign exchange. Those banks should be obtaining all the foreign reserves they need from the interbank market. So the only liquidity central banks should need to supply is that liquidity they can print from thin air. Greenspan said this too:
"Only liquid reserves denominated in domestic currency would be required by public and private market participants. And in the case of a central bank of a fiat currency regime, such reserves can be created without limit."
You can't run out of a currency you can print, but you can run out of reserves if you fix or peg your exchange rate. That's what happened to Thailand and South Korea in the Asian Financial Crisis. They ran out of dollars while trying to defend their dollar pegs. That's when they became vulnerable, and that's when the market attacked. If a currency becomes vulnerable because its CB is running out of reserves defending a peg, you can make billions attacking that currency, like George Soros did with the pound in 1992:
"On September 16, 1992, Black Wednesday, Soros's fund sold short more than $10 billion in pounds, profiting from the UK government's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or float its currency.
Finally, the UK withdrew from the European Exchange Rate Mechanism, devaluing the pound. Soros's profit on the bet was estimated at over $1 billion. He was dubbed "the man who broke the Bank of England." The estimated cost of Black Wednesday to the UK Treasury was £3.4 billion." (Wikipedia)
So why would any country want to put itself in such a vulnerable position? In truth, there is no good reason. Part of it is just old habits left over from Bretton Woods, part of it is an irrational fear of having a "weak" currency, and part of it is just good old fashioned ignorance. In Britain's case, they were participating in the ERM, which was like a mini-Bretton Woods for Europe, fixing all the European exchange rates to each other in preparation for switching over to a single currency, the euro.
The problem was, it took a decade longer than expected. ERM started in 1979, but as I have explained many times, fixed exchange rates are not the same as using a common currency (even though a certain Nobel Prize-winning economist seems to think they are). In both a common currency area and in a clean float, the adjustment mechanism is automatic, but under fixed exchange rates, imbalances just pile up until the fix breaks. And with the ERM, it took 13½ years to break the pound's fix.
Now, bear in mind that exchange rate manipulation goes in both directions. The difference between the UK, Thailand and South Korea in 1992 and 1997, and what the Europeans did starting in 1979 and China in 2001, is that the former were trying to support their domestic currency while the latter were supporting a foreign currency (while also suppressing their own). When you do the former, your reserves decline and can run out, and when you do the latter, they increase, but make no mistake, both are exchange rate manipulation.
So, any change in the monetary authority's reserves, either up or down, is exchange rate manipulation. An exchange rate peg or fix requires increasing or decreasing the monetary authority's reserves in defense of the fixed or pegged exchange rate. Fix. Peg. Reserves. No fix, no peg, no reserves. Get it? Got it? Good! ;D
But what about the gold? Well, first of all, you must understand that gold could be used to fix and peg exchange rates during Bretton Woods, only because one of the currencies was, itself, fixed to gold. And by "fixed to gold," I mean defined as a specific weight of gold. The US dollar was defined as 1/35th of a troy ounce of fine gold. So you could defend a dollar fix or peg by buying or selling either US dollars or gold, as they were fixed to each other by definition. But once that fix was broken, gold went from being a currency to being an asset.
Now this part's a little tricky, but important to wrap your head around. Gold being a currency prior to the 70s is different from it being either money or a metal used for coinage. As I have explained, with coins, the "money" part is the token name and number stamped onto the metal, not the metal itself. The value represented by the imprint must be greater than the value of the metal, or else the money aspect of the coin will be destroyed in favor of the metal's value as an asset.
Think about our coins today. They are made out of brass, copper, zinc, manganese and nickel, none of which are considered money, or even monetary metals. It's the stamp on the coin that is the money, not the metal itself. But gold was different, because the token name itself (the "dollar") was defined as a specific amount of gold. And that's how you could have gold bars, or even gold nuggets, that were worth the same as gold coins. Gold was a dollar, and dollars were gold, by definition. Not the best system, but it's important to understand what it was.
So gold was a currency. Currency is a subset of money, and gold was a subset of currency, so gold was currency, because of that definition of a dollar. Copper is not currency. See the difference? If you have a pile of copper, that is an asset, not money. So when the definition of a dollar as a specific weight of gold was voided in 1971, gold went from being a currency to being an asset. This is relevant to the subject matter of floating, fixed and pegged currency exchange rates because, as a member of the currency club, gold flowed in the monetary plane, opposite the physical plane of goods, services and assets, both physical and financial. But now gold flows opposite the monetary plane, at least from a national accounting perspective.
The fact that central banks still call their gold "monetary gold" is really just an anachronism. But when you finally realize that, in Freegold, the CBs' "monetary gold" is just going to sit there for, oh—let's just throw out a number that FOA used—the next thousand years, perhaps it makes some sense to distinguish it in that anachronistic way.
"The one thing that was negotiated into the EMU was gold's place in the world. Indeed, this is where the ECB and BIS knew their oil neighbors well. By signaling gold to be an asset, not a currency, it could be promoted to rise outside its commodity range without competing with the new currency. With the history of the dollar's use of gold, America's war on gold and its locked in political stance on gold, Old World Europe played a Master Stroke."
Now don't read this in the way that people so often do which completely misses the point. Don't read it as some sort of failed timing prediction. Read it as what it is: a very high level understanding of gold and currency being explained simply enough for even you to understand. As I said, gold changed from being a currency to being an asset as soon as the dollar's golden definition was voided. But as we know, the US became locked in a political stance toward gold that not only ignored it, but left its price on the books at a ridiculous $42.22 per ounce for the last 45 years.
What the EMU did in the run-up to the euro's launch was exactly what he said. They "signaled" that gold was an asset, not a currency (which it already was, but hadn't been officially "signaled" by any government or CB), that could rise in price just like any other asset. Of course, as we know, the LBMA bullion banks have been trading (unallocated) "gold" (credits) as a currency (XAU/USD) for a long time now.
"In ANOTHER master stroke, the BIS knew that the entire bullion house structure was endorsed and supported politically, to frame gold in a dollar price band. Outside that band, up or down, these paper markets cannot function. Especially if the driving force becomes a physical demand that drains all settlement credibility from contract gold. There will be no squeeze in these markets now, as they will be allowed to kill themselves by trying to save themselves. Inflating the supply is that process. The loss of such credibility will eventually come as trading just stops, virtually closing the dollar contract markets as we know them. Opening the door to an ECB sponsored physical market."
Again, please try to avoid the temptation of reading this as a failed timing prediction. That's not what it was then, and it's not what it is today. It's an extremely high level understanding of the gold market that is as true today as it was in 2001. The Europeans (BIS) of course set up the whole "bullion house structure" (the LBMA) and endorsed and supported it politically as part of their plan to support the dollar until they could launch the euro.
They "knew" it because they did it. They also knew that it acted very similar to, and almost as a proxy for, the old gold-denominated dollar. Think of it like this: The bullion banks are analogous to the US Federal Reserve during Bretton Woods. Like the Fed then, they have a token currency (XAU/USD) which is defined as a specific weight of gold (1 troy ounce). Like the Fed then, they can print the token currency at will, and in response to demand. And when it's strong or wants to rise, like the dollar from 1945-1952, physical gold reserves will flow in and accumulate, and when it's weak or wants to fall, like the dollar from 1958-1971, physical gold reserves will flow out and diminish. "Especially if the driving force becomes a physical demand that drains all settlement credibility from contract gold," just like the dollar circa 1968-1971.
They knew this was how the paper gold market worked, because they were the ones who "endorsed and supported" it politically, for a purpose. And because they knew how it worked, they also knew how it would end. It hasn't ended yet, but that doesn't change a thing. This is, and always has been, how the paper gold market will end—just how the gold-denominated dollar ended.
FOA (08/02/1999; 12:59:44 MDT - Msg ID: 10156)
"Isn't it interesting how quickly the LBMA was born to market gold, in the late 80s in response to this new [euro] initiative. Their first purpose was to create a paper gold market to trade commitments of [European] CB gold.
[…]
Aristotle, when the dollar went off the gold exchange standard in 71, it was the modern day equivalent of destroying the gold market. Back then, all dollars were "gold loans" in every sense of the word! The world dollar market was the gold market that everyone used. When that market failed, because there wasn't enough gold to deliver against the "gold loans", everyone was left holding "empty gold loans" in the form of dollars!
Yet, today, tell people that the gold derivative markets that represents 90% of the entire gold market is going to fail from non delivery, and they don't conceive it can happen! This is an arena that isn't even a government treasury production, as the dollar was back then.
[…]
Throughout the net, gold thinkers continue to look for a return of "inflation" to bring back the "good old days" of "bunker Hunt silver" and "fast rising comex gold"! The future may not repeat the past. We shall see. In the days to come, we will do well to consider following in "The Footsteps Of Giants" as they continue to lead in a direction of "physical only" gold."
Unlike the dollar, though, it's difficult to track the LBMA's reserves, because the private gold market is, for good reason, very opaque. GLD, however, is a proxy that we can watch. The pattern is quite similar. With US gold reserves, we see a steep rise from the end of WWII until about 1952, and then a plateau from '52 to '58, and then a steep decline until the definition of a dollar as a weight of gold is discarded in 1971. Curiously, they pulled the plug while they still had about 8,500 tonnes left, which makes me wonder if the LBMA will do something similar.
Gold is a means of settlement for the private sector, and at the personal level. I'm talking about physical gold, and I'm talking about in Freegold, after the transition. Call it savings, call it wealth, call it the focal point tradable wealth item par excellence, or call it whatever you want. It will be a wealth reserve that puts anyone and everyone on equal footing. It's what I wrote at the end of Money or Wealth:
"Regardless of any impression my early posts may have given you about gold being important for settlement at the national level, I want you to understand that anytime a CB/country buys gold to increase its reserves, it manipulates its currency. And while having an initial CB gold reserve is needed, Freegold is the antithesis of countries settling imbalances through gold. Countries correct (not settle) imbalances though floating monetary exchange rates, private entities settle imbalances (monetary balances) by buying wealth (gold, or any other physical-plane item). Having wealth means you settled unsettled imbalances, i.e., monetary plane balances."
This is a key difference between Freegold and Freefiat. If any of you remember Freefiat, Victor and Blondie's distortion of Freegold, you'll recall that Blondie's seminal idea was about gold's "function." He started calling Freegold "AG", meaning "after gold starts functioning." BG was now, "before gold" could function properly. He wrote:
"What is relevant is how gold functions. This is the future paradigm, one in which gold functions."
What he meant by "function" was that gold, or the fluctuating price of gold, would have an influence on currency and price inflation. His idea was not a separation of gold from currency in terms of influence, but simply a reversal of their traditional relationship. Whereas it has long been a goal of monetary thought to keep currency stable in terms of gold, even at the expense of price inflation and deflation in goods and services, Blondie's "AG" (which became Victor's "Freefiat") was all about keeping currency stable in terms of goods and services (an inflation target of 0%) while the price of gold "fluctuated wildly" as a kind of shock absorber, or monetary damper. Here was Freefiat's seminal moment:
Someone wrote:
"I think that post-transition a currency manager who manages his/her currency with the aim of keeping it stable in gold will outperform a currency manager who tries to target prices."
Blondie replied:
"ECB has the correct policy already in place, and they're not targeting gold. You want stability with the stuff people use if you want to keep them happy. […] That’s my point about WJB (William Jennings Bryan): he decried the pain of deflation gold was imposing at the time, the same pain which I suspect will be felt AG if currency managers attempt to keep their currencies stable in gold. Money is credit, and people don’t like being debtors during deflation. Once again, this is a terrible business model, so I can’t see the motivation. The better policy is to keep the currency stable in goods and services."
Victor put it all together:
"AG, in every given currency area, the real price of gold needs to fluctuate, just as it did before 1922 in the international gold standard.
Now, let's say the issuer of the fiat can freely choose how to manage it.
1) If he manages the fiat to be stable with respect to gold, this means that the real value of the fiat will fluctuate (simply because the real value of gold needs to). Depending on the international trade flows, your currency area will experience periods of inflation and periods of deflation in terms of your fiat. Before 1922, these price swings could be quite wild. I suppose people would have serious difficulties with the deflationary phases (unless you run your banking system in a way very similar to the old hard money times).
2) If he manages the fiat to be stable with respect to goods and services, he will never have any significant deflation in his fiat, but always a benign small inflation - this is what the ECB is targeting at present. The gold price in terms of fiat would then fluctuate and adjust the international competitiveness of the currency area.
The medium of exchange, i.e. I owe you E50 which is a large bag full of groceries, remains about one large bag of groceries. Exactly what you would expect. The gold price, however, fluctuates and transmits price signals as to whether saving in gold or investment in MoE denominated assets is more desirable.
I'd go for (2)."
And finally, Blondie corrected Victor in his last comment ever on my blog:
"VtC,
If you’d go for (2), as I would too, you’d need to adjust your terminology:
"The medium of exchange, i.e. I owe you E50 which is a large bag full of groceries, remains about one large bag of groceries. Exactly what you would expect. The gold price, however, fluctuates and transmits price signals as to whether saving in gold or investment in MoE denominated assets is more desirable."
Because your currency now performs as the “savings” vehicle, and gold as the “investment”.
Gold is not a SoV, nor is it a UoA except as a tautology.
Currency, finally, really does it all, all three monetary functions (actually all four if you want to include the standard of deferred payment).
But only AG. Only with functioning gold."
Victor's mind was from then on blown, and he replied to Blondie by email thusly:
"Blondie, you are a genius. This was an eye opener. I had it right at the technical level, but as long as you cannot spell it out, "gold is an investment", you haven't really understood it. I suppose we need to get back to the drawing board and rethink the various steps. Why did we think gold was "savings"? […]"
I bring all this old Freefiat stuff up because, in a way, I owe Blondie, Victor and Freefiat a huge debt of gratitude. It was only against the backdrop of their distortion of Freegold that I was able to finally finish the Freegold puzzle. Freegold is not a complex currency management scheme to achieving 0% price inflation through "functioning" gold, it is simply the clean float. It is the most simple of systems, because the adjustment mechanisms are all automatic. It's what Alan Greenspan called an "idealized" system, "a fully functioning, fully adhered to, floating rate world," in which "no foreign exchange reserves would be needed," and in which "an optimized distribution of goods and services enhancing all nations' standard of living would evolve."
By the way, Victor's idealized (Freefiat) system is still a complex currency management scheme, where the public sector actively buys and sells gold in order to balance private sector trade and foreign investment. This is a fix, it requires reserves, and there's no automatic adjustment mechanism because the public sector is constantly supplementing the private sector with either the printing press or public gold.
The big irony, and the most surprising conclusion drawn from this line of thought, for me at least, is that the US's treatment of its gold reserves following 1971 is actually the model for everyone else come Freegold. Freegold, after all, is really just the world finally finishing what it started in 1971, and was collectively and officially agreed to in 1976 at the Jamaica Accords.
We've all "grown up" in terms of our gold education learning that the Nixon Shock was bad, that the US Treasury taking the public's gold away from the Fed and replacing it with certificates was bad, that the US ignoring its public gold, even putting it in "deep storage", was bad, and that leaving its value on the books, and even on the central bank's balance sheet, fixed at an arbitrary and meaningless price of $42.22 per ounce was bad. But I'm telling you now, this will all be what makes the most sense for the treatment of public gold reserves by all CBs once Freegold is well underway.
Don't get me wrong, though. This in no way negates or delegitimizes the genius of MTM gold on Line 1 of the Eurosystem's balance sheet. That was a master stroke in terms of promoting gold within the current system (the $IMFS), and "signaling" that it's an asset, not a currency, that can rise without competing with the euro currency. It was also a master stroke in terms of weathering the transition away from the dollar reserve system.
Think about it this way. When the dollar dies, most of the reserves on most central banks' balance sheets will go *POOF*. Simultaneously, the gold portion will be revalued and will fill that hole, and then some. So it's good to have gold reserves for the transition, and it's good to promote gold for the people. But in Freegold, that public gold will just sit there, except in the case of an extreme emergency or war.
Now think about the magnitude of the revaluation in terms of the central bank's balance sheet. I'll use the latest Eurosystem quarterly for example. Right now, assets and liabilities on the Eurosystem's balance sheet stand at €4.1T each. On the asset side, about 18% of the assets are reserves, 8% dollars (and other foreign currencies, but mostly dollars), and 10% gold.
So let’s hyperinflate the dollars down to zero, and revalue the gold to $55K in today’s dollars. Converted to euros at today’s exchange rate, that’s €49,118 per ounce. That’s a 42.28X revaluation in terms of this balance sheet. What that does to the balance sheet, however, is it makes it look absurd. The revaluation would raise the assets total to €20.5T, of which the reserves (now only gold since we zeroed out the foreign currency) would be a whopping 83.5% of the balance sheet.
To keep the liabilities side in balance with the assets side of the balance sheet, the revaluation "windfall" will be added to Line 11 on the liabilities side. Line 11 is how they make the balance sheet balance each quarter with revalued foreign assets, but more importantly, it represents a liability of the Eurosystem back to its member National Central Banks. It essentially represents the portion of reserves in excess of what is needed. It goes up and down as exchange rates fluctuate, but ever since the launch of the euro in 1999, it has stayed within the range of 9% - 18% of total liabilities.
It could potentially drop below that range, and you don't want it to go negative, so ~10% is a reasonable pad. But with Freegold, line 11 will suddenly become 82% of the liabilities on the balance sheet. That will look absurd and be distracting from the rest of the page, especially since reserves are meaningless at that point, and the rest of the page is the meaningful part.
What will make the most sense at this point will be to basically do what the US did with its gold. What I’d do if I was the ECB at this point is “return" most of the gold to the members (of course it was only ever a technicality of joining the euro, the gold never moved or changed ownership, so this "return" is just on paper anyway), leaving just enough so that, at its new MTM value, the balance sheet balances. That would be about 460 tonnes, less than the 504 tonnes the ECB claims for itself, meaning 100% of the national gold reserves could be “returned” to its owners, to be put in “deep storage” where it would lie very still for the next thousand years, and all national gold would finally be set free from its currency, as it should be in Freegold.
It would also make sense for them to stop marking it to market on the balance sheet, since it’s not needed anymore, except to balance out the liabilities once, at the beginning. Why mark reserves to market if you don’t need them anymore? It would only complicate the balance sheet process unnecessarily at that point. So what I’d do is freeze the price on the books and forget about it, not at $42.22, but at €49,118. The price is going to be very stable then anyway, but I can’t think of a good reason to keep changing it on the balance sheet every three months. And if you're not going to do that, then there's no need for line 11 anymore, and without line 11 and its 10% pad, the ECB would only need to keep 201 tonnes on its balance sheet. So that's another 300+ tonnes that could be "returned" to the core euro countries.
When all is said and done, it will look a lot like the Fed and the US Treasury's treatment of gold for the last 38 years or so, with the public sector's gold untouched and forgotten in "deep storage", its "price" locked on paper, and the central bank with no need for reserves of any kind. Isn't it ironic? Kinda like the future monetary system I call Freegold having almost nothing to do with gold? ;D
Four years ago, Freegoldtube made a video titled "What is Freegold?" It evolved out of a series of events that began with the stunning collapse in the price of gold, from $1,600 down to $1,380 in first half of April, 2013. That collapse caused Jim Sinclair to email me asking about Freegold, which caused him to then make some confusing posts on his own blog about Freegold, which caused Ein Anderer to suggest that we were in "urgent need" of a short and simple explanation of Freegold.
He persisted, which cause me to respond two days later thusly:
Hello ea,
What you request is, unfortunately, impossible. It is not possible to explain this quickly and simply. The best that you can hope to do is to ignite the interest in someone so that they will expend the same effort that you have expended. You are kind of new, but in time you will see that I am right. Until then, anyone and everyone is free to do what ANOTHER, FOA and I have apparently failed to do after years of effort. ;D
Sincerely,
FOFOA
Apparently I'd thrown down the gauntlet with that response, because several people immediately began taking up the challenge. Freegoldtube made the challenge official at the original Speakeasy, posting the question here simultaneously. In the end, 36 people contributed their own brief definitions of Freegold to the video. They ranged from a single line, to several paragraphs. I'm not sure if anyone totally nailed it, but taken as a whole, the video is very good!
___________
Solitary Monk is the Speakeasy member who's been on the Gold Trail the longest, having read A/FOA on the USAGOLD website from around the time they first began posting there. He's also the source of AFTER (THOUGHTS!), for those who don't remember.
Anyway, I recently asked him a series of questions, culminating with this one: What is Freegold? Here was his answer:
Freegold is when ALL physical gold is 1) FREE from official money systems, 2) owned FREE of all other claims, and 3) is FREEly traded.
I believe that all three conditions are necessary, and together they are sufficient.
If all three of the above conditions are met, then: There would be no full or partially gold-backed currencies, and no ability to exchange currency at the central bank for gold at a fixed exchange rate. There would be no paper gold or other gold derivatives. Gold would not be loaned. Gold would be easily traded at full value. Currency (official money) would be used as the medium of exchange and for credit. Gold would function as the best store of value. The MOE and SOV would be separate. A mechanism to balance international trade would arise naturally.
I’m led to the above brief description from just a few of Another/FOA’s posts. Their first use of the term “Freegold” was as the heading of a post from Trailguide which included this:
2/14/2000; 18:20:51
In our modern world we must remove gold from the official money system, place it in a free market and people will use it as wealth money, not borrowing money. Then the fiat can come and go as the wind!
And here are two more relevant quotes:
Sat Mar 07 1998 13:25
gold, while allowed to be "freely convertible" into any currency, is not allowed to trade "freely". Its price is managed.
5/3/98
Gold is valued by the number of outstanding claims against it. […] The Euro group is going to force those claims into real bids instead of just claims!
At the time Another/FOA wrote, and still today, gold is effectively free from official money systems except for the management of its price. And it is traded freely, except for the management of its price. And the way the price is managed is by creating multiple claims on the same ounce of gold which forces the price down.
So, all that remains is for all but one of the claims on each ounce of gold to vaporize.
Sun Nov 23 1997 09:18
"When a thousand hungry lions fight over one scrap of food, small dogs should hide with whats in their belly".
In the “What is Freegold?” video, Polly Metallic (at 18:22) and Nickelsaver (at 19:09), both stated, in their own words and at slightly greater length, the same three conditions I listed above (and they also listed some of the consequences). They got there first, so they both deserve gold medals.
"Gold is not money, not currency, not an investment, it is wealth."
-Another
_________
This is a repost from the Speakeasy:
There's been a lot in the news about money lately—negative interest rates, the war on cash, the dollar shortage, Venezuela's collapsing currency—and we use that word, money, to mean so many different things that it can be confusing, so I thought it was a good time for another post on the subject. What is money, really? And what should we do to fix it?
Back in 2014, I wrote a series of three very long posts, Fiat 33, Dirty Float and Global Stagnation, which explained, at length, my view of the future monetary system I call Freegold, which, ironically I think, has almost nothing to do with gold. Two weeks ago, FoNoah emailed me about the series:
"Hello FOFOA - Happy New Year again to you and Mrs. FOFOA
I have just finished RRTFB Trilogy - Fiat 33, Dirty Float, and Global Stagnation. This time around I kicked the wife out of the house and sat in a quiet corner for three days straight. I made sure I understood each sentence before going on to the next.
"So now my question to you is whether or not the beginning of Fiat 33 finally makes sense to you. I hope it does."
Yes it does, and it only took me 2-and-a-half years to get there! The Trilogy is a bloody MASTERPIECE."
That line he quoted was from the end of Global Stagnation, where I asked the reader if I accomplished what I set out to do six months earlier. When I started writing the first one in June, I knew what I wanted to say and accomplish from the very beginning, but I also knew it would be difficult, and take time and more than one post, though I didn't know how many. So I actually ended Global Stagnation in December with a long quote from the beginning of Fiat 33 from June. Here's an abbreviated excerpt of it:
"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.
[…]
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."
It's kind of like how hyperinflation has almost nothing to do with "inflation" except that it's part of its name, and in fact has more in common with deflation. Freegold in terms of money and the future monetary system has almost nothing to do with "gold" except that it's part of its name.
But you'll notice from the title of this post that it's not only about money. It's also about wealth. And you'll have hopefully caught in the Another quote at the top that gold is not money, it's wealth. So this post is indeed about both, money and gold (wealth). Did I catch your interest yet? ;D
"Put yourself back in time, back when gold was base money, circulating coin, and monetary reserves. Now picture the banks as the gold middlemen, and the bank vaults as their warehouses of gold. Money was gold. That's not to say all money was pieces of gold, but money, which is mostly credit, was denominated in weights of gold. So it is fair to say that, while all gold was money, not all money was gold, and gold was only a small subset of money.
I know that gold bugs like to say "gold is the real money, and all else is credit," roughly paraphrasing JP Morgan once upon a time. But FOA proved, beyond a shadow of a doubt in my mind, that money of the mind, an association of values held in our heads, and therefore credit, was the pure concept of money as it grew out of antiquity, and that gold was something different. Gold was tradable wealth, while money was just a useful concept, and trying to combine the two turned out not to be the best use of gold. Please see Moneyness and Moneyness 2: Money is Credit for more on this subject.
I'm sure that most of you are familiar with the parable of the Goldsmith, but here it is again:
I called it a parable because it's not totally true. While it does a good job illustrating the concepts of credit money and fractional reserve banking for the purpose of this post, it is way too simplistic in the way it characterizes them as a duplicitous scheme. The pure concept of money has always been, basically, credit. Gold, the most tradable wealth item, ended up as the reserve in fractional reserve banking, which, as I said, was not the best use of gold. But I'll get more into that concept in a future post…"
This is that post, so welcome to the future! ;D
Now let's take a journey of the mind even farther back in time, all the way back to antiquity. In the course of this journey, I will rely on what I learned from FOA, not what I learned elsewhere, when thinking about gold and money in antiquity. The reason I think this is necessary is in order to separate "the money concept" from "gold as tradable wealth" which, as far as I have seen, no one else has done.
In antiquity, gold was used as a medium of exchange, another term for tradable wealth. The pure money concept as explained by FOA is human credit, which is essentially "money of the mind". Both existed in antiquity, as did many other mediums of exchange or tradable wealth items.
Building upon FOA, I tend to think of three spheres of trade in which the ancients would have engaged each other. The three could be described as distant, local, and "among trusted acquaintances" or what we could call "super-local". As FOA explained, gold was best suited for distant trade, and, therefore, gold was always "On the Road," a phrase used 15 times by FOA in Gold Trail 3.
Credit would have been mostly used on a "super-local" basis, or "among trusted acquaintances," and other media of exchange, other forms of tradable wealth, would have been used "locally", like at the town marketplace. Credit is scalable, both in quantity and duration, or length of time required for clearing, and it would have been scaled in proportion to the level of trust between trading counterparties.
As an example of the "super-local", I like to imagine a bar like Cheers in ancient times, where everyone knows your name and, therefore, everyone drinks on credit. Everyone runs a bar tab. The bar tab is a handy device because it is generally one-way credit. The bar owner extends credit to all of his patrons each night, and they settle up on a regular basis rather than having to barter for each and every drink. It's merely a convenient device for a mental exercise.
The point of this exercise is many-fold. It is to understand how money (credit) and barter (settled or completed trades) coexisted at the same time, not that money emerged from barter. It is to retrain your brain to be able to separate the money concept from barter, even where gold coins or other tradable wealth items were traded. And it is to be able to visualize the process, over time, whereby gold became the focal point tradable wealth item.
In order to run a super-local credit system, you need a unit of account. It could be anything. It could even be different for each patron. Perhaps our ancient bartender simply kept track of the number of drinks for each patron, and then settled up later depending on their trade. Or perhaps he kept track using each patron's trade. Like the egg farmer owes so many eggs. Or perhaps he used some other unit of account, like pieces of silver or gold. It doesn't really matter, and it could have varied from bar to bar, and community to community.
Over time, of course, a standard unit of account would be easier and would therefore spread from town to town until everyone used the same unit of account. Perhaps it was pieces of silver. One of FOA's points was that it is more common to find hoards of silver coins in ancient digs than gold. That's because, as FOA said, silver would have been a common item of trade, and it would make for a good unit of account in ancient credit.
In terms of local (but not super-local) trade, barter would be the order of the day. You can imagine a bustling marketplace where trade consists of haggling over relative values and goods on offer. Over time, gold and silver would emerge as good media of exchange, but still that would not entail the money concept as explained by FOA. Eventually a system of scrip would emerge, as in Fekete's 'Fairy' Tale (found in this post), and in that case, the scrip would represent the expansion of the money concept from the super-local sphere into the local sphere.
A scrip system is a system of short-term credit amongst a limited group of relative strangers. The scrip itself becomes a medium of exchange, but only for the limited scope of the fair itself. The clearing of the scrip would entail the return from the monetary plane to the physical, from money back to barter. You don't want to go home carrying a credit slip from a stranger. You want to go home carrying either a good or a tradable wealth item.
Beyond the super-local and local was distant trade. This was where gold was used. As FOA explained, a very small amount of gold in the world carried a tremendous value in antiquity because of the way it was used.
"All throughout these early times, prior to BC and into some AD, people didn't see these gold coins as we think of money today. These various gold coins had tremendous value, but they were just gold pieces. They were wealth for trade like everything else was.. That's simple logic, I know, but the vessel of oil, for instance was just as tradable as a gold coin. In fact, within most of the medium sizes city states of that era, barter of like goods was just as good or better than gold coin. One's life was better if he owned wealth he used."
Gold's highest value in antiquity was to be, as FOA would say, "On the Road." Imagine you are a trader in antiquity, heading out to distant lands in search of fine silk or whatever it is you are after. You will need to bring something of value with you to trade for those things you hope to obtain. So, whatever wealth you have before you hit the road, you will want to trade it for the item that carries the greatest value in the smallest package and lightest weight. That was gold.
If a stranger rolls into your town wanting to obtain a cart full of your fine oil or furs, you will engage him in barter, not credit, because he is an out-of-town stranger. He will offer you gold and you will take it. You will take it because you know how valuable gold is to "on the road" traders, and you know that when the next one leaves your town he will trade all of his wealth items for gold, because that's what you take on the road. That's what gives gold its tremendous value—the way it is used.
There were a number of points that FOA was making in Gold Trail 3:
1. Gold was not money, in fact it was practically the antithesis of money in ancient times. If you understand that money was credit, and that credit was used proportionately at the local and super-local levels, gold was the tradable wealth item used where money (credit) couldn't be used, over long distances between strangers.
2. Gold had a far higher value in ancient times than we tend to imagine. Too high, in fact, to be used as "savings" by normal people. Too high to be hoarded! Lifetimes were shorter, wealth scarcer, and he who underconsumed to save for later would save, as FOA said, "wealth he used."
"Humans of that period didn't live all that long a time span. Even though some accounts prove otherwise, the majority of life went by rather quickly. If you were a regular part of society in general, your wealth was what you had and consumed during those short days. There were no banks or investment houses and the average person's return on a wealth unit was his length of use and its quality of life enhancement. More to the point, this logic made these guys spenders of gold, rather than savers! If you had gained gold in trade, for your services or goods supplied, you had no reason to save it. There was no other money that needed to be hedged against value loss…
For longer savings, even for those of above average means that had all they wanted, people tended to spend their most valuable gold coins first, while saving the least valuable (bronze, silver, iron) for emergencies and later use. To us, today this sounds strange, but place yourself in that time. It was better to build your most useful and needed store of things while times were good."
3. A much smaller quantity of gold existed (and sufficed) in antiquity than we tend to imagine.
"It's becoming more and more apparent that average people of that time quickly traded (spent) their gold for something useful of value, for both them and their family. They didn't have the excess we know today. In modern nomenclature; this logic dictates that a much smaller amount of gold money circulated and circulated faster than many supposed. All forms of jewlery and art objects were in the same situation."
This last point was, I think, what sparked the discussion about ancient gold in Gold Trail 3 in the first place. Just prior, at the end of Gold Trail 2, the subject of vast hoards of "black gold" had come up in the discussion forum, and this was how FOA chose to address it.
My point in revisiting this discussion here is that gold's true value comes from the way it is used, which is not necessarily the way it is described by the hard money/gold bug camp.
Now jump ahead, in your mind, from antiquity to the Renaissance period, and think about the differences. Witness the emergence of international banking families and the beginnings of an international monetary system. Yes, coins, both gold and otherwise, were a big part of the system's development. But as we earlier witnessed the expansion of the money concept from the super-local to the local with the use of scrip at the fair, here we can see the expansion from the local to the distant with the addition of international clearing organizations in the form of these big "evil" banking families.
A busy scene in a 15th century Medici bank.
Also remember that, in terms of FOA's pure money concept, it was the numbers stamped on the coins, and not the metal itself, that was money. The fact that gold was used in this way was probably an essential step, or at least a helpful one, in the expansion of the money concept from super-local to local to distant. But, as FOA said, it was not the best use of gold:
"To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item. In proper vernacular; a 1930s style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature."
So, in antiquity, gold was tradable wealth just as it is today. But, in antiquity it was "on the road," which is not necessary today, because we now have a functioning international monetary system enabling money to be used in distant trade. Also, today, we have the need to save for retirement, which was a little different in antiquity for the reasons FOA explained.
Let's take a quick look at gold's unique set of physical properties:
Scarcity: It's not all that scarce relative to other things, but it also doesn't grow on trees, which is actually what is meant by scarcity as one of gold's properties. It takes considerable effort and luck to find it directly in nature. Fungibility: This is what sets gold apart from, say, diamonds. An ounce of 24K gold is the same anywhere, they are mutually interchangeable, and we can specify an amount of gold without having to be specific about which actual piece of gold is being referenced. Recognizable: Gold is easily recognizable and relatively easy to authenticate. Divisibility: This is what sets gold apart from, say, the Mona Lisa. Gold can be divided almost infinitely without losing its value. Portability: This is really a function of gold's high value, but it was very important in antiquity. It's a little bit circular and self-referential in that gold was portable because it was very valuable, and it was so valuable (back then) because it was so portable, because it was so valuable, because it was so portable, and so on. Malleability: Gold is easily shaped, which is how and why it traded in many different forms, like jewelry, art and coins. Durability: This is the big one. It's very hard to destroy gold. Easy to lose, but difficult to destroy. It's pretty: And shiny. I imagine its shine was always more alluring than its yellow color, but that's just my personal bias. Gold has high reflectivity, but silver is even more reflective than gold.
I think these properties offer a good explanation for the beginning of gold's journey through history, but not its true value. Value comes from how we use it. To explain what I mean, let's look at which of the properties were most important to its "on the road" use in distant trade, before we had an international monetary system. I think the facts that it was both portable and recognizable were of the greatest importance. And remember that portability is a circular, self-referential property based on value. So, in essence, I think the fact that it was recognizable anywhere you traveled was probably the singular physical property that led to its highest value use, a value that was imparted on all gold, even that which wasn't "on the road," simply because it potentially could be.
Now let's think about the way gold is used by Giants today, including CBs and governments. It is being used primarily in large bar form, buried and secured out of sight in underground vaults for decades on end. Gold's beauty doesn't factor in at all, since the vast majority is hidden and unseen. It's just lying still and not circulating, so the facts that it is portable, easily recognizable and fungible hardly matter at the moment. Divisibility doesn't matter much, although some of the larger bars are being divided into smaller kilo bars and coins, and malleability only really matters to those who are making gold jewelry for the Indian wedding season. Scarcity is not a big deal since we have literally doubled the above-ground supply in the last 45 years, so I'd say the most relevant physical property today is gold's durability.
Those are just the relevant physical properties though. In antiquity, it was that gold was universally recognizable. And for the Giants of the last few hundred years, it was that gold is durable, because what else matters when all you are going to do is bury it for the long haul?
It is probably true that in recent decades a massive portion of formerly-Western gold disappeared into Eastern "jewellery demand", but don't let that distract you from the point I am trying to make. That large "jewellery demand" is both an artifact of the $IMFS (from what I understand, the gold jewelry was, how shall I put it, smaller(?) 60 years ago), and evidence that "so many people worldwide [still] think of it as [store-of-value] money." My point is that gold's true value comes from its best and highest use, and jewelry is not it. Neither is currency, base money or monetary specie.
Indian gold earring
I have even speculated in the past that, in Freegold, other "lesser" uses for gold will disappear, falling victim to the substitution effect, like jewelry, dental and consumer electronics. It will probably still be used in some industrial electronic applications, but that's only because technology today makes it possible to use gold at the atomic level of thickness where, even at Freegold prices, the cost will be negligible.
Why We Hoard Gold
I was having a discussion with Edwardo a few years ago, maybe he'll remember, about why we hoard gold. It started with me suggesting that we buy and hoard gold due to a kind of recursive regression that's not too unlike a Ponzi scheme, except that this one has lasted for thousands of years and can continue indefinitely. In other words, we buy and hoard gold because of the expectation that other people in the future will buy and hoard gold because of the expectation that other people in their future will buy and hoard gold, and so on, ad infinitum.
Edwardo came back with a clever reply, in perfect Edwardouan style:
"I suspect this line of thought was precisely what informed Bernanke's now (in)famous "tradition" response to the query, "Why do CBs hold gold?" It may be correct for some, but I actually think that, in the main, it is an errant notion.
Let's start with what stands behind the impulse to hoard. There are, by my runes, three reasons for hoarding, mental illness, speculation, and saving for retirement and/or a rainy day. The three reasons are by no means entirely exclusive of one another, but I believe that, generally, only one of the three motives, madness, speculative fervor, or the proverbial "saving for a rainy day" informs anyone's desire to hoard.
The mental illness thesis requires little to no explanation. Nor does the motive of the hoarder who does so with speculation in mind. Let's call him person A., Person A hoards with the devout hope that someone, let's call him person B., will pay more for the item than person A. originally paid for it. The prospective retiree hoards for that time when, for whatever reason, disability, old age, etc. they can no longer support themselves through work. At such times one must have something in the cupboard with which to sustain oneself.
Only the last of the three types of hoarders actually needs to hoard. The compulsive hoarder and the hoarder who does so for profit, don't need to hoard, however passionately they may feel about it.
And while one can certainly quibble about the level of hoarding required by, for example, a retiree, I don't think one can dispute the imperative to hoard. It is a fact of life for many creatures, not just man, that the drive to store key items, food being the most common one, is probably as close to coded into the DNA of animals as something can be. We humans certainly have enough self-awareness to understand that we all diminish past a certain age and that necessitates hoarding.
So, now that we have established that evolutionary forces have likely programmed into us the drive to hoard, one is then tasked with finding those items, or that item, which hoards best. To make a long story less long, gold has its fantastic six thousand year track record because it hoards better than anything else, at least in what passes for the monetary plane broadly defined. Humanity would have stopped hoarding gold a long, long time ago if it wasn't fungible, divisible, portable, malleable, with the right stock to flow profile, etc. etc. If, somehow, mankind had discovered something else (I can't even imagine what that other thing would look like) that exceeded gold's unique profile, well it would now have all the allure of wampum or tally sticks. The only thing that is likely to stop gold from carrying on as it has is if mankind itself doesn't need to save. And that will only happen if mankind ceases to be a going concern, or if the fabled horn of plenty somehow shows up making saving obsolete."
My immediate response was, what about Giants? Where do they fit into those three categories? They buy and hoard gold not because they need to save for retirement or a rainy day (they have enough wealth to last for generations), nor for speculative purposes, and hopefully not due to mental illness. I don't think any of Edwardo's three motives apply to the Giants, from whom, as I have said in the past, I think gold gets its true value today.
Let me repeat, to be perfectly clear. I think that gold gets its value today, its real value, which will be apparent come Freegold, from the way the Giants use it. Not from the way we shrimps use it, or jewelers, or dentists, or the solar cell industry, or the bullion banks, or the financial industry, or India or China, or even the central banks, but the Giants. I'll try to explain what I mean.
Since Another first said, and I quote, caps, punctuation and all, "The PHYSICAL GOLD MARKET HAS BEEN CORNERED!", since he first wrote that in April of 1997, roughly 52,000 tonnes have been dug out of the ground and added to the above-ground supply, and have disappeared into a black hole of demand. Where to? We don't really know.
To put a little perspective on this, the total of all gold bullion coins in existence may be roughly on the order of only 5,000 tonnes or so. With an estimated 189,000 tonnes in existence, that should give you an idea of how much of it is held by shrimps like us, who tend to hold bullion coins. Roughly another 2,200 tonnes is in ETFs, and roughly 33,000 tonnes is held by central banks. That's about the same amount in central banks as when Another started writing, so we can ignore CB demand when wondering where the 52,000 tonnes went.
That 52,000 tonnes of new gold, by the way, doesn't include supply from recycling, which is roughly 35% as much as new mine production on average, and which is therefore enough to account for a good portion of what we see flowing into Asia. So, subtracting what we know is in the central banks (33,000t) from the estimate of all existing gold (189,000t) leaves us with about 156,000 tonnes in private ownership, a full third of which (52,000t) was mined in the last 20 years. That gold went somewhere, and as I said, recycling (which is in addition to the 52,000) is enough to account for most of the eastward flow. We know where 2,200 tonnes went… into the ETFs, which means there's still almost 50,000 tonnes basically unaccounted for since Another first said the physical gold market was cornered. That's roughly 2,500 tonnes per year that someone bought.
Of course, gold demand is different from other commodities in that it's currency-denominated demand. Industrial commodities have weight-denominated demand, because they are used in specific quantities for whatever industry they serve. Understand this point! The demand for industrial commodities like copper is pretty stable in terms of weight. The amount of copper needed by industry is roughly the same by weight, regardless of price. Gold, on the other hand, is simply locked up in underground vaults, so its demand should be pretty stable in currency terms, and in fact, in some senses it is. We see this effect to some degree in the eastward flow of gold. As the price declines, we see more gold by weight flowing east, and vice versa. That's partly because, with a lower price, the same amount of currency buys more gold by weight.
This, however, leaves us with the question of those 2,500 tonnes of new gold per year for the last 20 years that someone bought. For the most part, that was steady by weight, so all things being equal, we should have seen the price of gold decline over the last 20 years as a massive amount of new supply was added. But instead we saw the opposite.
Year
World Production (in metric tons)
Avg. POG/oz. that year
Avg. Cost of all newly-mined Gold that year
1997
2,450
$330.98
$26.0B
1998
2,500
$294.24
$23.6B
1999
2,570
$278.88
$23.0B
2000
2,590
$279.11
$23.2B
2001
2,600
$271.04
$22.6B
2002
2,550
$309.73
$25.4B
2003
2,540
$363.38
$29.6B
2004
2,420
$409.72
$31.8B
2005
2,470
$444.74
$35.3B
2006
2,370
$603.46
$45.9B
2007
2,360
$695.39
$52.7B
2008
2,290
$871.96
$64.1B
2009
2,450
$972.35
$76.5B
2010
2,500
$1,224.53
$98.3B
2011
2,700
$1,571.52
$136.2B
2012
2,864
$1,668.98
$153.5B
2013
3,018
$1,411.23
$137.7B
2014
3,153
$1,266.40
$128.2B
2015
3,226
$1,160.06
$120.2B
2016
3,191
$1,250.74
$128.1B
Here's what the above means to me. There is a hidden level of demand for physical gold which is virtually infinite. This is counterintuitive, because gold demand should be relatively steady in dollar/currency terms. And we can see this expected effect on one level, our level, which is the level of shrimp demand and physical gold market flows. But on another level, as seen above, new physical gold added to the global above-ground supply disappears into a black hole of demand that appears infinite in dollar terms, and steady in weight terms only to the extent that new gold being added to the supply is steady in weight terms.
Please take a moment to let the implications of this sink in.
Again, the table above represents new supply added to the global above-ground total, which doesn’t get used up. It just circulates like poker chips on a poker table, or lies very still in an underground vault. The second column is the new supply each year by weight. So the fourth column represents the seemingly-infinite demand in currency terms, but because supply and demand must meet, consider that fourth column as new supply each year in currency terms.
With this slightly different view, the new supply being added each year, in currency terms, grew 667% (6 2/3rds times larger) from 1999 to its peak in 2012. That's an average new supply increase of 16% per year, compounded for 13 straight years, and with no negative effect on demand. In total, adding up all twenty years in the table above, that's $1.38 trillion that bought up the new supply coming out of the mines, and I'm suggesting that money (actually around 95% of it) did not come from one of the known sources, like industrial demand, jewelers, dentists, the bullion banks, the financial industry, ETFs, India, China, or even the central banks. And that's what I mean when I say that gold gets its value today, its real value, from the way the Giants use it.
It's not out in the open. It's not something you can point to and say there, that's where the 50,000 tonnes went. It's opaque. It's secret. It's hidden from public view and from the Forbes bean counters. I know that some of you will be tempted to dismiss this notion out of hand, but just give it some thought. Look at the WGC annual demand trend reports, and then think about the 52,000 tonnes that have been mined since Another first wrote, "The PHYSICAL GOLD MARKET HAS BEEN CORNERED!", and quietly ask yourself if those reports sufficiently explain where it went. I have given it some thought, and I say they don't.
So, to recap, gold derives its value from its utility, which is the same today as it was in antiquity: tradeable wealth. But because of a few differences between today and antiquity, like longer life spans and an international monetary system to name just two, we do use it a little differently. Back then, we took it on the road, and today we just bury it. And this next part is of course merely academic, but I think gold's key or most important property is different today than it was in antiquity. I think, back then the key property was its recognizability and easy authentication, while today it's simply its near-infinite durability. Other than secure storage, unlike paintings, castles and yachts, gold requires no upkeep or maintenance.
"So, with the Athens, Macedon, Tarentum and Antiochus to name a few, began the worlds first coins. Gold coins? Yes they were, but money as we know it? Our view of how these people viewed and used this gold money is, we believe, far different from what gold scholars teach. And its impact on estimates of existing modern gold supply and use is enormous.
[…]
Walk up to any citizen living during 335BC, in the latest town where Troy once was, show them a “Head of Zeus” (Saracuse 3 stater) coin. Then show him a vessel of oil and ask which he would take in equal trade for anything? Odds are, even though your two items were of equal value, he would take the vessel. Why?
All throughout these early times, prior to BC and into some AD, people didn’t see these gold coins as we think of money today. These various gold coins had tremendous value, but they were just gold pieces. They were wealth for trade like everything else was. That’s simple logic, I know, but the vessel of oil, for instance was just as tradable as a gold coin. In fact, within most of the medium sizes city states of that era, barter of like goods was just as good or better than gold coin. One’s life was better if he owned wealth he used.” – FOA
Money
That picture at the top of this post is 90-year-old Stephen Ivičinec, posing with a good portion of his life's savings of one million, two hundred thousand Yugoslavian dinars. He and his wife, Kate, hoarded them for a rainy day, hidden away for years in cushions and pillows, right there in their home. And then, in 2014, that rainy day finally arrived.
As they sat listening to their son and his wife explain the dire situation they were in, desperate for even enough money for seeds to plant their fields, Stephen looked over at his wife with a smile, and said, "Come now, Kate, bring a cushion and the scissors. See? They have come to the dark days we always feared, but were spared. Now you can finally see that it was good to listen to me and to save, and not spend the money like you wanted."
Stunned and in disbelief, his son and daughter-in-law held their breath as they watched him rip open his favorite cushion and pull out a bunch of the old Yugoslavian dinars. "What's wrong?" Stephen asked. "Not enough? If you need more, we'll just open another cushion! Don't worry, we'll never go hungry. We'll have enough seeds for the rest of our lives!"
Stephen and Kate had no idea that the dinars were now worthless, which was why they didn't understand the stunned look their generous offering brought. Their cash stash had once been worth about $50K (DM 93,000). Of course, Yugoslavia broke up in 1991, and, in ‘92 and ‘93 went through one of the worst bouts of hyperinflation in history, with a peak inflation rate of 313 million percent. Here is the original Croatian article.
Money is essentially the antithesis of wealth. A balance in the monetary plane represents an unsettled imbalance in the physical plane. You've probably seen me write that before.
“I have seen one sure sign that Westerners don’t really know what has happened to their wealth. This is demonstrated when one “bemoans the loss of good times” if gold goes very high. It comes across the same every time; ””“if gold goes to $30,000, we won’t have a dime and everything will fall apart””“. Well, Another made his point that the dollar said your wealth was worth more than it really was. Let me demonstrate.
Like this:
Ever been to a high priced auction. They bring out the “Strad” violin and start bidding at $500,000. After a while it goes for $1 million flat and it’s over. After that we listen to the perceptions around the room.
One guy in the back, who has 10 million cash, thinks the Strad was cheap at one mill and will pick one up next year. In fact he may get ten if they are offered. Some rich woman has 3 million and she figures her wealth is equal to three “violins” if she ever wanted them.
All around the room the feelings are the same, as perhaps 100 million in assets are represented. They all equate their buying power to this one auction. Even though only one walked away with physical, everyone knows they are “strad rich” in wealth. Each goes home for the evening cognac and relishes in this knowledge. Their lifelong effort of hard work and shrewd investing has positioned them to own the wealth of many rare violins. Life is good, very good.
The one problem with all of this is that they based their “wealth holdings” on the outcome of just one auction. Truly, had they all bid, the violin would have gone for much more and their wealth would seem “not so much”.
In much the same way, our world of dollar assets carries the same risk. All of us stand in the same world auction room and watch the daily bidding for goods and services. We watch the prices of cars, gas, houses, clothes, etc. and conclude our wealth balances based on what we could acquire at this auction should we choose to bid. We see our economy in a light of infinite goods and services but fail to balance this with the potential of others to bid, “in mass”. In this light, few have a valid perception of just how many dollar assets are out there. Indeed, without this grasp of “dollar inflation”, we blindly consider our wealth and position in life using the present price structure of “things”. A system in which we trade paper IOUs of infinite number for real things of finite number.
So, our belief that life is good, largely rests not on the confidence in the dollar. Nor is it in the confidence that others will value and accept our dollars. Life is good, because all of us do not “bid” at the same time! If we did, our life would not be as good as our dollar wealth says it is!
This is the deception in our Western grasp of what wealth is. Our life savings are valued at what they can buy today, even though, in reality it is based on an unknown purchase price in the future. Just as all of the wealth at the violin auction was a phantom in self delusion, so too is our present good life and bank account numbers. The evolution of a people that once gripped gold for the real wealth money it was, has proceeded to the hoarding of bookkeeping entries of account credits. History has proven that once humans begin to question the value of this dollar “wealth owed them at a future unknown price”, they run a race to outspend their loved brothers. Buying goods now at the “known” price quickly balances the books so no one is any longer fooled. The currency equivalents remain as a trading medium, even as real things are held in the background for value proof.
No, a high price of gold will not rob us of our wealth. It will rob us of this perception of money value that was but an illusion in the clouds. Wealth for tomorrow is found in this context for today; one cannot lose something they never owned. Buying physical gold at today’s prices will not help you maintain this modern illusion of wealth we never had. But will allow us to later spend the true value of gold that presently exists today. A value few will accept or believe.” – FOA
It's starting to fit together like a puzzle, isn't it?
Money and the monetary plane have their place in our lives, as does wealth. They're just different places. Having wealth means you settled those unsettled imbalances in the monetary plane. But I need to make it clear that such settlement is only necessary at the individual or family level. At the national and international level, it is perfectly appropriate to remain “unsettled” in the monetary plane, as long as it is constantly and gradually making adjustments in the background, passively and subconsciously (i.e., the clean float). The old Bretton Woods gold exchange standard, on the other hand, was active and conscious adjustments, that often went against the natural inclination of a currency and actually made economic imbalances worse.
Free Trade?
"We have got to stop sending jobs overseas.
It's pretty simple: If you're paying $12, $13, $14 an hour
for factory workers and you can move your factory
south of the border, pay a dollar an hour
for labor,… have no health care
—that's the most expensive single element in making a car—
have no environmental controls, no pollution controls
and no retirement, and you don't care
about anything but making money,
there will be a giant sucking sound going south.
...when [Mexico's] jobs come up from a dollar an hour
to six dollars an hour, and ours go down to six dollars an hour,
then it's leveled again. But in the meantime,
you've wrecked the country with these kinds of deals."
-Ross Perot talking about NAFTA in 1992
There has been some discussion lately about what effect possible import tariffs might have on the $IMFS. On the surface, it's pretty simple. Import tariffs make imports less competitive. There is indeed a problematic differential between the competitiveness of local versus foreign production, but overpricing cheap imports will not directly fix the problem. It could, however, fix it indirectly by collapsing the dollar system.
You see, while there are adjustments needed on both sides, the problem is more about us being uncompetitive than about foreign products being too competitive. Imagine that the low price of cheap imports is actually the correct price of those goods in real terms, and that locally produced goods today are incorrectly overpriced due to bloated wage and entitlement expectations, along with excessive bureaucratic meddling.
With this slightly different perspective, you can see that what actually needs to be fixed is that we need to become more competitive, not make them less competitive like us. But there's an underlying level to this problem, and that's the overvalued dollar that brought us here to this place of bloated expectations and excessive bureaucracy. It's because of this underlying level that import tariffs, or maybe even just protectionist rhetoric, may indirectly cause us to become competitive once again.
The basic idea behind the import tariffs is, if we'd only produce more at home of what we consume anyway, well then there'd be higher employment and more people would have money to afford the stuff we're now making domestically, and all these great positive feedback loops would jumpstart themselves, and the economy would roar back to life. Said another way, a lower trade deficit, or even balanced trade, theoretically correlates with higher employment and a stronger economy. The objective is respectable; the problem is the dollar.
We can theoretically have balanced trade without being an island of self-sufficiency. It feels odd including the word "theoretically", but we haven't had balance in so long, it almost seems necessary. Again, this is the basic idea, to head toward balanced trade. The problem is that the 40 straight years of trade deficit need to be settled before we can have balanced trade.
Trump isn't the only one who has called the Chinese currency manipulators. Remember back in 2014? Obama's Treasury told the Chinese to stop buying dollars, stop strengthening the dollar, and let their currency float. That was around the same time that the PBOC Treasury holdings peaked. It was basically the same misguided strategy as today. Obama wanted a weaker dollar to boost exports, and today we're talking about cutting imports through tariffs. Increasing exports and decreasing imports are two sides of the same coin that is trying to decrease the trade deficit in order to cause economic growth. Correlation is all too often mistaken for causation. Anyone remember the caption contest? ;D
Lew: "Did you know it took them hundreds and hundreds
of years to build this wall and they almost bankrupted
the whole country? But by manipulating the exchange rate
it only took a few decades to rebuild the whole country
from its previously medieval infrastructure."
Kerry: "Oooooo0O ! That's it, we gotta make sure we make
them stop that Jack."
(Caption submitted by Aquilus)
We have run a trade deficit every year since 1975, and just like coins have two sides, there's a flipside to a trade deficit too. That flipside is that we've been exporting dollars every year since 1975, net-exporting that is. And as I mentioned above, money is essentially the antithesis of wealth, a balance in the monetary plane represents an unsettled imbalance in the physical plane, and for 40+ years, the rest of the world has accumulated a huge balance of dollars which represents an unsettled imbalance between us and them.
Of course, we can never pay it back. We'd actually have to run a trade surplus for the next 40 years or so to pay it back, and that ain't happening. But there's another way it can (and will) be settled, and that way is dollar hyperinflation.
Remember these quotes from FOA?
"Why promote a digital currency such as the dollar or the Euro? The answer lies with the modern world, it's the only way we can trade globally in an efficient manner. Then we further ask, why promote the Euro over the dollar. 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.
[…]
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! Now, Europe is going to finish the job using a new currency to supplant "dollar settlement".
[…]
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"!
[…]
The strategy to counter this outcome started with the formation of the ECU (European Economic Unit). It was started in the early eighties as a precursor to the now existing EURO. As Another said before, it took at least ten years longer than anyone thought, but it's here. In no small way has this been responsible for the 18 year (gold bear market, as some would call it) upward revaluation of the dollar by the BIS. 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… As it is, this is created through BIS manipulations of foreign exchange (dirty float)… this is not a "New York day trade", but rather a world money transformation… history usually documents that the most earth moving events were obvious, all along, but no one believed them!"
-FOA (3/14/99-3/20/99)
He was basically talking about the same thing I'm talking about here. If the term "free trade" is tripping you up, just replace it with "free float", because exchange rate manipulation (the dirty float) can have the same effect as a tariff. Just like import tariffs make imports less competitive, so does raising your trading partner's currency exchange rate by buying it up.
This is what the rest of the world has done with the dollar for the past 40 years, bought it up, which made US exports uncompetitive, which caused us to run a perpetual trade deficit that whole time. It's what FOA called the longest "stop gap measure" ever, and "a tremendous success by any standard, to keep the dollar stable" for such a long time, thanks to the "upward revaluation of the dollar by the BIS."
As I have said many times, you can substitute "the ECB" for "the BIS" as it was written by A/FOA, because they were referring to the core European central banks whenever they talked about "the BIS." FOA wrote that in 1999, and up to that time, it had been the European central banks (the BIS) who had supported the dollar by buying it up. Then it was China, the PBOC, up through 2013.
This is what my aforementioned 2014 series, Fiat 33, Dirty Float and Global Stagnation, was all about. Fiat 33 was about the exchange rate procedure pre-71. Dirty Float was about 1971 through 2013, and Global Stagnation picked up in 2014. And that's where we are still today, living in the global economic stagnation caused by using the dollar as the global reserve currency (FOA's "dollar settlement"), even as we are entering the "free trade (free float) conversion" that FOA described, "a most earth moving event… a world money transformation" that history will, in the end, document as being "obvious all along."
We could theoretically do as Ross Perot suggested, bring up foreign (Chinese, Mexican, etc.) wages and crash our own lifestyle and expectations down so they match—so that we were suddenly and miraculously competitive once again—but it wouldn't work. It wouldn't work within the $IMFS as it currently stands. And by that, I mean with the dollar exchange rate and dollar financial asset values as they currently stand.
Here's a diagram I made for Global Stagnation to illustrate how our perpetual trade deficit feeds and supports dollar financial asset prices:
Now imagine that we suddenly had Ross Perot's theoretical and miraculous balanced trade. And again, this is what both Obama and Trump want, Obama through a weaker dollar to boost exports, and Trump through import tariffs to cut imports, both in order to decrease the trade deficit based on the belief that it will cause economic growth. To decrease our trade deficit means to decrease our net financial inflow, circled below in red, which is really juicing the stock market right now:
That's your trade deficit that tariffs would cut. Now imagine it just disappeared… POOF:
What do you think that would do to this?
Now, to be fair, I'm not really waiting for import tariffs to hobble the rally. The stock market is looking rather toppy on its own. What I actually expect is a chain reaction, beginning with a dramatic "correction" in the markets, and ending with balanced trade. Would you like a playbook for how it plays out? Here are a few more quotes from FOA that could have been written today:
"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."
- "Other investors, outside the Central Banks" = foreign private sector
- Foreign CBs = foreign public sector = "For. Official" (on the TIC)
From my post, Global Stagnation: "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."
Back to FOA:
"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… we can see where equity markets are telegraphing a transition into dollar expansion "without world support". … Many stock markets have headed straight up in reflection of this."
Why do you think he would say that a rising stock market "telegraphs" a lack of "world support"? Look at the $500B financial inflow in my diagram above. It shows that it comes from "Investors & CBs". CBs are the foreign public sector (what I think FOA meant by "world support"), and investors are the profit-driven foreign private sector. When the dollar is being supported by the CBs, it is because it is in need of support. And foreign CBs generally don't plow the dollars they buy into the stock market. They tend to buy US debt.
If, however, the dollar exchange rate is rising, then it is probably the foreign private sector that is driving it up, and that's who plows dollars into the stock market. So while a strong dollar simultaneous with a strong stock market obviously doesn't mean official support won't return when needed in the future (obviously, because support did return, in 2001 and again in 2008), it does indicate what FOA said, which is $IMFS expansion "without world (CB) support."
Of course, I argue (in Global Stagnation among other places) that the "dirty float" is now dead, meaning unlike on previous occasions, foreign official support won't step in next time, or if it does, it'll do so too late. For that, we'll have to wait and see.
Back to FOA:
"Prior to EMU the dollar was expanded (thru debt creation) at levels never before thought allowable or possible. But all of that debt creation in conjunction with its demands for that future debt service is spiking the dollar "exchange rate" as Euro financing competes with Dollar financing. In other words, on the world stage converting dollar debt into more favorable Euro debt shrinks the dollar liquidity pie…
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…
This very dynamic creates a massive demand for Euro priced goods from outside their borders. 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."
What he's talking about here is a vicious circle or feedback loop in which the dollar is stuck. In the first line, he's talking about Eurodollars, the lending into existence of credit dollars outside of the US, and the demand that creates for more dollars for future debt service. I'm sure you've all read about the "dollar shortage" which I mentioned at the top of this post. That's what he's talking about.
So, there is this financial (monetary plane) demand for our dollars which is driving up the dollar exchange rate. In a true clean float, a rising exchange rate would translate to an increase in purchasing power, but as FOA notes, our "buying power" is not rising with the exchange rate. That's because the giant sucking sound you hear coming from the rest of the world is demand for our dollars, not our goods.
US goods are uncompetitive, which, in conjunction with the financial demand for dollars, keeps the US trade deficit going. In a true clean float, your exchange rate might rise if your goods were too competitive. The foreign sector would go nuts for your underpriced goods which would bid up your currency until your goods were no longer considered underpriced when the prices were converted to other currencies. The monetary/financial plane should not drive exchange rates in this same way, but for the dollar it does. Think about it.
Imagine you were an island whose only industry was the financial industry, and whose only output was financial products. If that were the case, you would not have your own currency. You would need to import everything in the physical plane, like food, shelter, clothing, energy, transportation, etc., etc., so you would create financial products in someone else's currency who had those necessary goods to trade. If there were a large neighboring currency, or a global reserve currency, you would use that. It would actually be absurd for you to have your own currency.
This hypothetical financial industry island which absurdly uses its own currency is a good analogy for the US today. Not because the US only produces financial products, obviously it doesn't. But because its goods production is uncompetitive while its currency is driven even higher due to financial demand alone, it might as well be a financial products island.
We got here, of course, because the dollar was used globally for many decades, so it wasn't exactly like using our own currency. It was the world's currency, so it was okay in a way that we became "Financial Island" for the dollar. The problem is the vicious circle that created, leaving us with no escape other than currency collapse.
How do you transition from global currency to national currency in this situation, without currency collapse? As a global currency, this debt denominated in your currency but outside of your borders grew out of control, and today its very existence drives up your exchange rate, even as your aggregate goods production is already uncompetitive. You need to get competitive again (both Obama and Trump get this), but you can't until all this debt is either settled or wiped out through currency collapse (this is the part they don't get), and there's no chance it will ever be settled in real terms at today's prices. So you're stuck, or as FOA put it, "it's the dollar that's caught in a vice."
Meanwhile, this flow of dollars circulates round and round, even as it expands, because of course no one holds actual dollars, they hold dollar assets. So this never-ending, ever-expanding, circular flow of dollars keeps coming back into (or passing through) dollar assets, driving interest rates to zero, Wall Street bonuses to the moon, and stock prices up, up and away. Starting to see the problem yet?
Now imagine you suddenly choke that flow of dollars with import tariffs. The reason for import tariffs is to make foreign goods uncompetitive inside the US, so that companies will choose to produce goods here. But even if they do produce the goods here, they will still be uncompetitive out in the rest of the world. So we'll only be producing goods for ourselves, we'll further island-ify ourselves, and the foreign private sector financial demand for dollars will only get worse, because there'll be fewer flowing out to buy imports, and therefore fewer flowing back into dollar assets like the stock market. We'll probably see the dollar exchange rate spike really high at first, even while the stock market bubble is collapsing.
"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!
[…]
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.
[…]
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.
[…]
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 huge devaluation of the dollar to cover this debt.
[…]
The debts and the dollars would remain; only 90% of their current illusion of value would vanish."
-FOA (3/17/00-7/27/01)
You see, right now, almost literally everyone wants and needs a lower dollar. I already mentioned Obama's call to the Chinese to let the dollar weaken, and just yesterday, the head of President Trump's new National Trade Council called the euro "grossly undervalued", the obvious implication being that we want a weaker dollar. Everyone wants a weaker dollar. It's not just the US economy that’s suffering under the strong dollar right now, it's the whole world. And that's why, when it does start falling, foreign official support will just let it go. Or as FOA put it, "Once the ball starts rolling, it’s good bye dollar overvaluation,,,,, and hello US hyper inflation."
By the way, the National Trade Council is a brand new office created by Donald Trump, which only opened on January 20 when he took office. Its Director is economics professor and Trump's campaign advisor on US trade policy Peter Navarro, who is the one who called the euro "grossly undervalued" yesterday. Navarro also wrote a book called Death by China, which was then made into a documentary, also titled "Death by China", and here it is:
I cannot overstate how remarkable this is. It is a documentary that perfectly encapsulates the current US administration's view on international trade policy, and what they plan to do about it. If you disagree with the views in the film, as many do, or even if you think he uses "dodgy economics," as The Economist does, that's simply beside the point. This is what the Trump administration thinks, it's a good part of what he was elected to "fix", and it is therefore a must-see documentary.
There's a great analogy at the end of the film, by Patrick Mulloy of the US-China Economic and Security Review Commission. He says: "I think the number one thing that the United States has to do is to say, 'we're gonna balance our trade.' Now, people say, 'how do you do that?' Well, when President Kennedy said, 'we're going to the moon,' he didn't have a clue how to get to the moon. But we set it as a national goal, and we figured out how to do it."
That's it right there in a nutshell! When we elected Trump, we elected this policy, these goals, and Trump is to jobs and renegotiating our trade deals as Kennedy was to the moon. Oh we'll get there alright, the only part that might surprise a lot of people, President Trump included, is that 40+ years of debt will be wiped out through currency collapse along the way. But get there we will! ;D
Money and Gold
Up at the top, I said this post was about both money and gold. And I think I kept that promise; I have written about both money and gold in this post so far. Also at the top, I think I made it clear that gold has no place in the monetary system, that gold has little to do with the future monetary system I call "Freegold", and that whenever gold ended up in the monetary systems of the past, that was not the best use of gold. And, I started the post with a quote from Another saying that "gold is not money."
For the most part, I think I have kept the two separated in this post, while including them both, at least that's what I tried to do. I tried to do that as kind of a practical demonstration of something I said around the middle of the post, that both money and wealth have a place in our lives, they're just different places.
To get that, I think you need to understand what I mean when I say that money is the antithesis of wealth. You can convert one into the other, and vice versa, but they aren't the same thing. They are opposites. They're like matter and antimatter.
You might think it makes more sense to say that debt is the antithesis of wealth, but debt is just a negative monetary balance. It exists only in the monetary plane, and can be extinguished or wiped out all within that single plane. The difference, as I said, is that a balance in the monetary plane is an imbalance in the physical plane. You could theoretically obtain the same physical plane items through debt that constitute wealth, so in that way, perhaps you can see how it doesn't make more sense.
The story of Stephen Ivičinec above is a lesson about mistaking money for wealth. Imagine Stephen had a neighbor named Kanye who, rather than stuffing cushions full of money in 1991, ran up a bunch of dinar-denominated debt that same year. Which story is sadder? Both Stephen and Kanye would have had monetary balances, one negative, one positive, both of which would be wiped out by the subsequent hyperinflation. We can certainly look down on Kanye more than Stephen if we want to, but who in this hypothetical scenario was the bigger fool?
I think it was all the talk recently about open letters to Trump, WSJ editorials, Trump advisors, etc., all pitching this idea that a return to some kind of a gold standard should be put on the table, that got me thinking about writing a post to really drive home the error in that kind of thinking… that bringing gold back into the money is not the solution to anything, nor is it even a good idea. I don't view those kinds of pitches as "not quite Freegold, but better than the mainstream financial view." No, they are worse.
If something needs repair, it's the modern concept of wealth, not money. While almost everyone seems to misunderstand the concept of wealth today, it's really only the gold bugs who don't understand money. Modern money is fine. Repair the concept of wealth at the personal level, and everything will be fine.
You know, this reminds me of something from my Trump post:
"Someone on FNC a few days ago, who had worked with Richard Nixon on the Nixon Library during the early 90s, had asked him why he thought the liberals owned the media, and I thought Nixon’s answer was interesting. He said that smart conservatives come out of college and go into business to make money, while smart liberals come out of college and join the media to change the world. It’s that old (but true) stereotype that conservatives tend to better themselves to do well in the world as it is, whereas liberals tend to prefer to change the world rather than work on themselves."
I think the fact that I'm a conservative and that I'm not an activist are more than related, they are one and the same. What does this have to do with money and wealth? Well, changing wealth is something personal, something you do to better yourself. Trying to change money, a concept as old as antiquity, is a fool's errand—the folly of the activist, trying to change the world to fit his own misconceptions of it, rather than looking inward.
This applies at the macro level too. The clean float (Freegold) is passive, subconscious, gradually making adjustments in the background, making active settlement between currency zones unnecessary. This is the key as to why gold is not needed at the macro level. Gold is active, activist, activism, which is needed at the personal (wealth) level.
Regardless of any impression my early posts may have given you about gold being important for settlement at the national level, I want you to understand that anytime a CB/country buys gold to increase its reserves, it manipulates its currency. And while having an initial CB gold reserve is needed, Freegold is the antithesis of countries settling imbalances through gold. Countries correct (not settle) imbalances though floating monetary exchange rates, private entities settle imbalances (monetary balances) by buying wealth (gold, or any other physical-plane item). Having wealth means you settled unsettled imbalances, i.e., monetary plane balances.
We all need money. Money is a good thing, and having an efficient international monetary system is a huge improvement over not having one. Money and the monetary plane have their place in our lives, as does wealth. They're just different places. So beware of anyone pitching a gold standard or trying to fix money.
For more on this subject, you can do what FoNoah did and "RRTFB Trilogy - Fiat 33, Dirty Float, and Global Stagnation" (which, combined, are 3.5 times as long as this post, FYI). If you have a similar result, especially after reading this post, please let me know. :D
And if you would like to join the discussion, you can click here to join the Speakeasy.
