Tuesday, May 28, 2019

Freegold in the IGWT Report


I did an interview for the new 2019 In Gold We Trust Report, just out today. Here's the 7-page teaser:

Highlights: 20 Years
Later – a Freegold
Project: Interview with
“FOFOA”


Key Takeaways

• There is a group of “physical gold advocates” that have
a completely unique view on money, the energy markets
and gold. They believe, we are entering a new monetary
and financial system in which gold will displace the
most conservative types of investments, those used by
passive savers.

• The term they use for this system is “Freegold”. The
theory dates back to the late 1990ies when a mysterious
writer showed up in online gold forums. He called
himself “Another“ and wrote about the gold market in a
way no one before or after could. Many still consider
him a genuine insider.

• We have conducted an extensive Interview with the most
high profile writer who is still actively exploring
“Freegold”. He uses the pseudonym “FOFOA”. In this
extensive interview he explains “Freegold” like never
before and calls for a much, much higher price of gold.


FOFOA on how the Freegold view on gold is different from the "classic goldbug" view:

For A/FOA, gold is the master proxy for real wealth, meaning not money, but the actual wants and needs that contribute to our standard of living. That's real wealth, useful things, and gold is the useless proxy we can save and exchange for those things in the future.

To goldbugs, on the other hand, gold is the rhetorical proxy for a whole menu of other metals, commodities, hard assets, and shares in the companies that produce them. When goldbugs talk about gold, they're really talking about gold and silver… and platinum and palladium and rhodium and mining shares and so on. You'll often hear goldbugs say things like "silver is like gold on steroids," but you'll never see A/FOA say anything like that.


On the Freegold view of fiat money, and how it's different from the “classic” view we all know:

Freegold really is an easy money system, if we're talking about the monetary system and not the wealth asset used for saving. Freegold money is just like today's money. And that's, I think, the big difference in A/FOA's view of the fiat monetary system.

Yes, there are many problems today, but they stem from the $IMFS, not from modern fiat money. And by that, I mean they stem from savers all over the world saving in today's fiat money. That is truly the root cause of most of the problems people blame on easy money. We don’t need to fix modern fiat easy central bank money, we just need to stop saving in it.


On how A/FOA's view on oil is it different from the “classic” view we all know:

So here's the other big difference between A/FOA's view and the "classic" view. The "classic" view is that if we ever see $30,000 gold, then oil would have to be at least $1,000 a barrel. But Another foresaw a post-revaluation gold/oil ratio of as high as 1,000:1, meaning, in real terms, not nominal terms, gold could be revalued to $30,000 an ounce with oil still at $30 a barrel!

This is possible, because A) the price of gold has no impact on the price of other things—it's basically an arbitrary price—whereas the price of oil is closely related to the general price level, i.e., inflation, and B) because the gold/oil ratio of the last 73 has never been allowed to find its physical equilibrium price. As I said, it all comes down to "the battle to keep gold from devaluing oil ( in direct gold for oil terms )."

The "battle" has already ended. Europe stopped when the euro was launched, and the rest of the foreign public sector stopped supporting the $IMFS five years ago. The gold/oil ratio which persists today is merely an artifact of the $IMFS, the result of regression and the expectation of traders that tomorrow will be just like yesterday, just like the gold/silver ratio is an artifact of the same. It won't break until the $IMFS ends. But when it does, the outcome A/FOA foretold is about 50 times greater than "the classic view we all know."


On the future value of gold:

$55K is my number. I first used it in 2009. A/FOA used $30K, but that was back when gold was under $300 an ounce and oil was around $12 per barrel.

What is the thinking behind those numbers?

Well, first let me address A/FOA’s number and where it came from. FOA was asked that question back in 1999, and he said it was a projection taken from a study done way back in 1988 in response to the stock market crash of 1987. It was based on the dollar losing “reserve use”. Here’s what he wrote:


“This work started back in 1988, not long after the 87 crash. Important people were asking some very serious questions about the timeline of the world monetary system. They expected a long term evolving report that would expand ongoing events into a format of true life context. A context to be understood at all levels of economic exposure. In other words, it had to do a better job of explaining the (then) recent illogical swings of world economic affairs and the effects of those swings on various national economic groups. Were we progressing into a new, better age, or was our system responding in a death-like downtrend?

Because the questions grew from a fear that the world economy would indeed contract in the future, leaders wanted to know how one could retain the most wealth during such an event. It was thought that if the basic extended family blocks of a nation could survive such a collapse, savings intact, those nations and their children would be a benefit to economic affairs of the future. In effect, negate a possible return to the Dark Ages of European history. Our time frame was outward some 20+ years. I cannot offer the full report or its complete ongoing analysis. But, the effort you have seen to date is one of sharing somewhat for the common good of all.”


That gives us a good framework for understanding Another, as well as an idea of where the $30K number originated. We don’t have all the details or calculations that went into it, but at least we know it was the result of a study.


On the potential for a dollar collapse:

What’s important today is not what’s priced in dollars or the dollars used for transactions, but the dollars held as reserves, savings and wealth. If you buy oil in dollars, what matters is if the seller then holds those dollars as reserves, savings or wealth. If he exchanges them for another currency he needs to pay his expenses or employees or whatever, then the transaction is basically irrelevant to the dollar.

The ball that I watch is capital inflow, that is, foreigners buying US assets. That’s all it takes to support the current system. When that stops, we will get dollar hyperinflation. Since 2013, the foreign public sector has been flat, which means foreign central banks stopped more than five years ago. It’s been the foreign private sector buying our bubbles since then.

That will stop when the markets crash, and an important part of my theory is that I don’t think the foreign central banks will pick up the slack this time like they have in the past. That idea is based on a number of things, from trends to statements to actions. And I view developments like the European uneasiness over Iran sanctions you mentioned as supportive of my theory.

You interviewed Ewald Nowotny last year, the governor of Austria’s central bank and a member of the ECB governing council, and he talked about Europe’s efforts to counter the USG’s use of the dollar as a weapon. When the markets crash, and the foreign private sector stops buying US assets, the dollar will devalue. This devaluation will force the USG to print money hand over fist, but all that will do is cause the dollar collapse to accelerate.

The question is whether Europe and China will prop up the dollar at that critical juncture between when the stock market crashes and the dollar devaluation begins. In the past, they couldn’t let the dollar collapse without it taking them down with it. But today they are prepared, and because they are now taking active measures to counter the USG’s aggressive use of its exorbitant privilege, I don’t think they will be very quick on the draw trying to prop it back up. And that hesitation is important, because once the dollar collapse gets underway, there will be no putting that cat back in the bag.


On bubbles and the stock market:

In January of 2016, I wrote a post called The Unicorn Economy focused on the tech bubble, and ever since then I’ve been looking for bubbles. In January of 2017, I wrote about the “bubble of bubbles,” and in November of that year I had a section in a post titled, “Bubbles Built on Bubbles Built on Bubbles”. By that time, a few people were calling it the “everything bubble,” and in January of 2018, I called it the “Bubble of Bubble Bubbles,” dubbing 2018 the year of the POP.

I heard something on a recent interview I watched, I think it was Jeffrey Gundlach. He said, basically, that the first sign of a bubble market turning is usually some single crazy mania thing that happens. Like in the dot-com bubble, it was Pets.com, and in this one it was Bitcoin. It’s a sign that something has changed.

That whole run-up in Bitcoin from $2,000 to $20,000 during the second half of 2017 was pretty insane, and I had several posts during that time on related topics. That manic phase ended on 12/15/17, and a little over a month later, on 1/29/18, the stock market bubble popped. That was when it dropped 10% in 10 days. The turn in the market was confirmed with the October 3rd retest, and again on Christmas Eve with a 6% drop from the previous day’s high.

As I write, we are testing the highs for a triple top, but I’m pretty convinced that the nine-year bull market turned into a bear last year, and this year I’m looking for a big drop, not just in stocks, but in the “everything bubble”, which includes virtually all US wealth assets except gold, things like real estate and art, too.

That’s what I’m looking out for, because I think that’s the next (final?) step on the trail to Freegold.


On floating exchange rates, the US trade deficit, and hyperinflation:

You see, the whole world is in a floating exchange rate regime today, ever since the Jamaica Accord in 1976. It’s been a dirty float for most of that time, but since 2013 it’s been pretty clean. That means the dollar is floating too. But its position in the float is the result of a constant inflow of capital, meaning a constant buying of dollars by foreigners which has been ongoing, non-stop, since 1975.

It’s reflected in the US trade deficit. That’s how you can see it. That’s how you can know it’s flowing in. A 44-year non-stop trade deficit doesn’t just happen organically. It is caused. It is caused by a capital inflow. A capital inflow causes a trade deficit. And over 44 years of living with it day in and day out, the USG has grown addicted to it.

It’s like the water in a fishbowl. The USG is a fish, and the perpetual trade deficit is the water. Only there are holes in the bottom of the fishbowl, so water is constantly leaking out. But there’s also an equal inflow coming from a hose propped on top of the bowl. When the markets crash, that hose will be turned off, and the USG will find itself short on water.

When the markets pop and the inflow stops, the dollar will drop, and the USG will find its current nominal budget insufficient for even its most basic operations. It won’t be able to borrow or tax more, so it will print. At that point, the dollar will have only undergone a devaluation, a sudden drop to a lower level. But when the USG starts printing just to maintain the status quo it has grown addicted to, the dollar will start slipping again.

The slip will become a slide, and the more they print, the faster it will drop. That’s how hyperinflation works. You can never print enough, because printing begets more printing, and you can never outrun the bear.

So that’s where I think we are in the dollar timeline today—right on the cusp of a big change. I can’t say when it will happen, only that it’s way overdue.


On how the “next financial system” will look:

It’s important to draw the distinction between Savers and professional investors, traders and speculators. True professionals were in Wall Street long before all the easy money came in, and they’ll be there when it’s gone. But there are also a lot of Savers today who think they are professional investors, traders and speculators, but wouldn’t be very good at it without the ocean of easy money.

Just like in online poker. While it was big, there were lots of mediocre players who thought they were really good, just because there were so many bad players playing. But that all ended on April 15, 2011, when they shut down online poker in the US. They call it Black Friday, and poker hasn’t been the same since. You can still play online outside of the US, but it’s not the same, because the easy, passive, dumb money is gone. The floodgates that opened in 2003 were closed on April 15, 2011. And that, in a metaphorical nutshell, is how the “next financial system” will differ from today.

The floodgates that let an ocean of passive Savers’ money into the shark infested waters of Wall Street will close. Much savings will be lost, but new savings will go elsewhere. Investors, traders and speculators will still invest, trade and speculate, but it will be a smaller pool in which they play, and their skills, which have likely atrophied over the past 44 years, will once again be tested.

This is a big topic, and there are many implications worth exploring. It’s something I do at the Speakeasy once in a while, gaze into my crystal ball, and write about how I think the future will look. But the bottom line is that when this sucker blows, all those savers still invested in Wall Street are going to be so badly burned that they’ll never go back. At least not for several generations. And in my assessment, savings or Savers’ money makes up the majority of the financial system today, so you can imagine how it’s going to have to shrink.

Passive investments such as ETFs will probably shrivel and all but disappear. Real estate investing will be boring and difficult like it used to be, so REITs will probably follow ETFs. Far fewer kids will study finance at college. You get the picture.


On the Euro and the future role of gold:

Money will be just like it is today, mostly credit, denominated in a purely symbolic unit like the dollar or the euro. The dollar will have fallen far, and the euro will help bridge the gap. Most of the problems with the euro today, and criticisms of it, are actually effects of the current system, the dollar international monetary and financial system ($IMFS), the fishbowl in which even the euro swims today. Once it is free from the $IMFS, the euro will be money par excellence. The reason is mostly because of its management structure.

The reason I have positive things to say about the euro is because, no matter how it’s being used today, it was conceived and constructed to bridge the end of the dollar reserve system to the next one. Its design, its architecture, will not only allow it to survive the transition, but also to flourish within the next system.

In his famous acceptance speech for the International Charlemagne Prize of Aachen for the euro in 2002, Wim Duisenberg said, “It is the first currency that has not only severed its link to gold, but also its link to the nation-state.” You see, the euro solved two problems. 1. It severed its link to the wealth reserve function of money. And 2. it severed its link to the Triffin Paradox of an international currency being managed by a single nation. These are the dollar’s two greatest problems, and the design of the euro resolved them.

Is it susceptible to politics and political influence? Of course it is. But it’s the currency of many very different countries, and that’s why its susceptibility to political influence is actually a strength, not a weakness. FOA wrote:


“The dollar is ruled by one country and one country only. This implies that only one Economy is taken into consideration when policy is discussed, the USA. The management of interest rates, inflation, dollar value and crisis intervention, are therefore politically motivated to benefit one world group, again, Americans. We have seen the news events of how this tramples upon the needs of other geopolitical groups (countries).

On the other hand, the Euro will utilize a totally different structure of consensus management. It will be governed by many nations of obvious conflicting needs. This very weakness, that is so well documented by analysts, is the “major” strength that will contribute to the popularity of the Euro. In time, it will be governed by many cultures, including an “open market” valuation of gold.”


So money will be just like it is today: easy. Easy money, not hard money. We don’t need hard money. Hard money is bad. It’s bad for the economy, and it’s bad for the debtors. Savers (and gold bugs) seem to want hard money, but after a while, those hard money systems end in either tears or bloodshed for the savers, as we abandon hard money once again. It happens over and over in history.

Freegold solves this problem, and ends the Groundhog Day repetition of easy and hard money systems forever. The role that gold will play is that of wealth reserve par excellence.

That doesn’t mean that gold will be the very definition of wealth, but it will be the master proxy for wealth. And at a high enough price, there will be plenty of it to fulfill that role.


And on timing:

I think we’re close. I think we’re almost there. Like I said, I think a good stock market crash like 2008 will do it…

I think it will be a chain of uncontrollable events that will start with a stock market crash that could happen at any time. It could be something else, but whatever it is, I think the endpoint is still the same. And whatever it is, you can bet we’ll be talking about it at the Speakeasy!


You can download the full 46-page interview for free at the following link:

IGWT_2019_SPECIAL_Freegold_EN.pdf


And if you found your way here because of my interview, welcome! You can peruse more than a decade's worth of archives here, and you are also invited to join my private blog, the Freegold Speakeasy. The price is $110 for 6 months, or about 60 cents a day, and you can subscribe by clicking HERE. My email address, should you need it, can be found by clicking my profile link in the sidebar.

Sincerely,
FOFOA


Tuesday, January 1, 2019

Happy New Year!

2019
Year of the Head Fake



After ten years, I think I finally got one right. You might disagree, but I think the everything bubble has finally popped. It's so big, however, that it may take some time to fully deflate. I thought about calling this the year of the great deflation, but I knew that would send the wrong message. I'm certainly no deflationist, but as I've said in the past, hyperinflation has a lot more in common with deflation than with the common understanding of inflation.

So if you'd like to read "Year of the Head Fake", it's up right now at the Speakeasy!

As I've done for the past few years, I share a sample post from the Speakeasy here on the public blog about three times a year, New Year's Day being one of them. For this one, in celebration of promising recent developments, I decided to share three posts from the past few months, 'Freegold is Much Simpler than the $IMFS', 'Money Is Credit Is The Answer', and 'Apples to Oranges'...

Apples to Oranges


The LBMA yesterday began a new program of regularly releasing trading volume data related to the London gold market. There was a short Reuters article about it back on Oct. 29th:

LBMA to reveal size of London's gold market on Nov. 20

BOSTON, Oct 29 (Reuters) - The London Bullion Market Association (LBMA) will begin publishing data on November 20 that will provide the most accurate picture yet of the size of London’s gold trade, its chief executive said on Monday.

London is the world’s largest gold market but because most transactions are done bilaterally between banks, brokers and traders reluctant to reveal their activity, its true size remains a mystery.

The closest approximation is clearing data which suggest gold worth around $25 billion changes hands each day, but this data contains only transactions which reach settlement in London.

The new LBMA figures will show the total trading activity of LBMA members which make up the bulk of the London market and are expected to be much larger than the clearing statistics.

For the first three months after the launch, the LBMA will publish weekly reports showing total trading activity that week. After that, it will begin publishing daily reports, it said.

The initiative is part of a push to make the gold market more transparent after accusations of price manipulation by banks and traders and pressure from regulators.

Last year, the LBMA began publishing monthly data showing how much gold and silver is stored in London’s precious metals vaults.

At the end of June, they held 7,684 tonnes of gold worth $309 billion and 34,901 tonnes of silver worth $18 billion, according to the data.

The five banks that settle transactions in London have also changed the rules of their clearing house to make it easier for newcomers to join. (Reporting by Peter Hobson; Editing by Jan Harvey)

I included the article because Aaron asked me about it that day, and I wanted to share my response so that I can add to it now that I've seen what they released:

Aaron: Subject: How big is the LBMA

Do you think you'll get any new insights from the LBMA data that you don't already know? This is the one quote that caught my eye making me think there won't be much if any new information:

"but this data contains only transactions which reach settlement in London."


Me: I don’t expect to learn anything new. I’ll have to see how the LBMA itself describes the data once it is released. Until then, whatever anyone says is really meaningless. The “clearing volume” only containing London settlement which you quoted is meaningless. It’s written by someone with very little understanding, who thinks this is physical gold and not gold credits they’re talking about. The description in the 2011 survey is what gives the data meaning. It told how many of the banks reported, what they reported, and what they did with the data (divide by 2 to avoid double counting). We’ll have to see if they say something similar when they release the first data. My guess is they’re doing something different this time, and the data will be less meaningful than the 2011 survey.


Ronan Manly has a good article about it which DI posted in the last thread, which you can read here. He noted the main thing I noted too, which was an obvious discrepancy between this new data and the 2011 survey. It's almost like comparing apples to oranges.

I'll try to explain it as simply as possible. The basic concept is that whatever data they report is only really going to have meaning when compared to other data they report using the same method. It's impossible to draw any real meaning from isolated LBMA data, simply because of what the LBMA is, which is a bullion banking organization pretending to be a commodity market.

For example, in the 2011 survey, they gave us total sales and purchases (called "turnover" for short) in both weight and value terms, and they also gave us the number of trades which made up those numbers. Simple math gave us the size of the average trade that made up the survey. The survey covered 385,852 different trades, with a total value of $15.2 TRILLION representing 10.9 BILLION ounces of gold, or 340,402 tonnes, about twice the amount mined in all of history.


This was over the course of one quarter, which in Q1 2011 was 63 trading days. Breaking it down to the daily average, it was 6,125 trades per day with a total daily value of $240,813,277,059, representing 173,713,000 ounces, or 5,403 tonnes traded per day. No need to halve that, because they already did. From the survey:

"It should be noted that the figures
provided for trade between members were
divided by two
in order to avoid double
counting. This is rather conservative in that
many of the trades reported with members
would be with members that were not
themselves reporting. The figures for sales
and purchases should be added to get an idea
of the total trading turnover."


So with these numbers, we can divide $240,813,277,059 by 6,125 trades, and 5,403 tonnes by 6,125 trades, and we come up with the average trade used in this survey. The average trade was $39M+, or 9/10ths of a tonne. That's 28,361 ounces per trade, and there were 385,852 of those trades reported by 36 LBMA members covering 63 trading days. With that, we can divide the daily total by the number of members and get the average number of 39-million-dollar-trades that each member reported for each day, on average. It comes out to 170 trades per day, per LBMA member, on average, and each of those trades averaged almost a tonne. So each reporting member traded almost a tonne, 170 times a day, on average.

Think about it. What does that mean? Were these wholesale trades? Were they mainly between banks, or between banks and customers? What I think they might be is the netting out of the bank customer's daily volume. Imagine that a customer of a bullion bank runs a gold trading platform where he makes a nice profit from trading fees, but doesn't want to be exposed to losing money if the price of gold goes the wrong way. He makes money whichever way it goes, because he gets a small piece of every trade on his platform. So the way he hedges his price risk is by keeping a gold-denominated account at the LBMA, and he buys or sells each day to offset his price exposure on his trading platform.

I don't know if this is what most of those $39M trades are. It's just a guess. But the point is that each $39M "trade" actually represents a netted out value from the customer. If he needed to buy or sell $39M at the end of a day, then his own trading volume was probably ten times that amount. Now, the point that I'm really trying to get to is that these numbers are meaningless in isolation, because we don't know enough about where they came from. Are we just supposed to assume the LBMA is made up of a bunch of Giants trading a tonne at a time, 6,125 times a day, every day? Or is it really the de facto central clearing system for global paper gold trading?

Where these numbers do have meaning is by comparing them to other data they reported using the same method. And thanks to the clearing volume numbers in the report, we have a consistent stream of data from 1996 – 2018 to use for comparison. They began reporting average daily clearing volume in 1997, going back to October of 1996, and they continue that today. The numbers change over time, but they are consistent, and because of that, they make some sense.

The 2011 survey included the clearing numbers from this same series, so we could compare the "turnover" of 36 LBMA members with the "clearing volume" of the clearing members. The comparison yielded a ratio of 9.25 to 1. This means that the trading volume or turnover of the reporting banks was 9.25 times larger than the clearing volume. And since only 36 of the 56 LBMA members reported their volume in that survey, most people just round the multiple up to 10. It could be higher, but 10:1 is probably a good conservative ratio for estimation purposes.

Even the LBMA itself acknowledged the multiple of 10 in that very survey:

"It can also be seen that there is an approximately ten to one ratio between the turnover figures and the clearing statistics. It can be seen that spot transactions form the large majority of the total (around 90%), with forwards and other transactions each representing around 5%."

Note also the breakdown in that survey. Of all the trades reported, 90% were "spot" transactions, 5% were "forwards" (basically the LBMA OTC equivalent of COMEX futures), and the last 5% were other derivatives, including "options and bullion-related commodity swaps."

Now, moving on to the new data, the discrepancy is in the ratio. The clearing volume series they're using is the same one they've been using since 1996. That's consistent, and the latest numbers are from Sept. 2018. They are 18.9 million ounces or 588 tonnes valued at $22.6B cleared each day, on average. The new data, however, is supposed to be "Daily Average Turnover", the same as the 2011 survey. But currently, they're reporting $36.9B in daily turnover. Compared to $22.6B in daily clearing volume, that's a ratio of 1.6 to 1, not the expected ratio of somewhere around 10 to 1.

Ronan Manly noted this discrepancy, and so did the LBMA itself! Here's the supporting document released by the LBMA along with the initial data, and here's what it says about the 1.6 ratio:

"There are two regularly published statistics – monthly net clearing and vaulting data. With respect to clearing, in October, the latest available print, 18.7 Moz/day was ‘cleared’. If last week was similar it would mean volume traded on the London market is around 1.6x that which is cleared. This ratio will raise some eyebrows given market lore has suggested the ratio is 3x, or 5x, or even 10x."

Market lore? Market lore??? Again, here's what the LBMA itself wrote on its own 2011 survey:

"It can also be seen that there is an approximately ten to one ratio between the turnover figures and the clearing statistics. It can be seen that spot transactions form the large majority of the total (around 90%), with forwards and other transactions each representing around 5%."

Market lore my ass. The LBMA itself said 10 to 1, and now they're releasing a document that calls that number market lore? The document goes on to make various excuses for the discrepancy. I will debunk each one here:

"Of course LBMA-i covers only the trade of LBMA Members (and not quite all Members), whereas clearing is used by Members and non-members alike..."

The 2011 survey also surveyed only members. In fact, the 2011 survey only included 36 members, while this new data comes from 42 members, so if anything, we should expect a slightly higher ratio than 9.2. So this doesn't explain it.

"And once again having only one week’s data means we cannot assume this is the normal ratio– next week could be much higher or lower… It is also possible that the clearing numbers in November, the week for which we have volume traded data, were much lower than in October, though they tend to be quite stable."

Applying the expected ratio of 10 would mean the trading and clearing volume dropped by 84% from September to November. Nothing even remotely close to this has ever happened before, which is what he means by "they tend to be quite stable." So this doesn't explain it. Try again?

"But the LBMA-i exercise has also shown that a reasonable proportion of clearing does not see a trade – transfers within metal accounts, across customers, novations and so on."

Here we're getting into the meaninglessness of this data. Some things, he says, are not counted as a trade in this data. Were those things counted in the 2011 survey? Could they account for an 84% difference? I don't think so, but something is clearly missing from this data. It's 6 more members reporting than last time, yet they're reporting only $36.9B per day versus $240.8B per day in the 2011 survey.

So what's missing? And where is it missing from? Did it come out of forwards, swaps or derivatives? Apparently not, because in this new data, forwards, swaps/loans and options are up to 37% of the total, up from 10% in 2011, and "spot transactions" are down from 90% to 63%. So, best guess, whatever is missing came out of spot.

Ronan Manly takes a stab at what might be missing:

"It was in a January 2015 letter to the Fair and Efficient Market Review (FEMR) at the Bank of England, where the LBMA stated that: “it is worth noting, that the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level…”

Have these or other types of trades, such as sovereign trades been masked or filtered out of the trade volume data?"

If that were what was missing, it would mean that such CB/sovereign trades were not only included in the 2011 survey and masked or filtered out of the new data, but that they made up 84% of the 2011 data. I suspect there might be a simpler explanation.

I will give you a hypothesis, the reasoning behind it, and the hypothetical conclusion that can be drawn from it. Don't consider this my theory as to what's going on here. I don't know what they did to the data, and I don't really care that much. It doesn't affect my view one bit, one way or the other. But I can tell you what makes the most sense and why, and show you what it would mean, hypothetically, which is pretty stunning in my view.

Let's say, hypothetically, that what's missing is the "gold as a FOREX currency" portion of the volume. If that were the case, why would they want to exclude it? And how would they exclude it? And if that were the case, can we deduce how much of the LBMA is actually currency trading? I will answer these questions now!

If you recall, I published Gold as a FOREX Currency in October of 2013. The 2011 survey had come out in August of 2011, right around the time that the price of gold peaked. There was much discussion and debate over the volume in that survey for the next two years, and Gold as a FOREX Currency was offered as an explanation for such stunning volume.

That post prompted another gold writer, who was writing for The Daily Reckoning at the time, to write to the LBMA and ask them if gold as a FOREX currency was included in the survey. Here was that email, dated the same date as my post:

Sent: Friday, 18 October 2013
To: mail@lbma.org.uk
Subject: Some information please

Hi there,
I am conducting some research into the gold market.

I am trying to gain a little more understanding about LMBA turnover.

According to your 2011 survey, average daily trading volume in the London market in this period was 5,400 tonnes, equivalent to US$240.8 billion at the time.

Given that most of this is ‘spot’ gold trading (and its understated given the lack of full responses from members) and it’s clearly not that much physical changing hands/ownership (more than annual scrap and mine supply trading per day would be impossible, despite the large outstanding stock of gold) can you provide some information as to what accounts for this huge level of trade?

The only thing I can come up with is that it’s related to currency trading. As you probably know, you can trade gold on a computer screen in the same way you can trade global currencies. Its currency code is XAU. I’d imagine XAU/USD long or short is a pretty popular pair trade. Is it this ‘gold as a FX currency' trade that accounts for the huge amount of daily spot volume?

Would gold as FX trade be reported to you as part of the survey?

Any info you could provide to clear this up would be much appreciated.

Cheers,

It took more than five months of him pestering the LBMA to get an answer. The email was passed around the office, and ended up with the LBMA Public Relations Officer at that time, Aelred Connelly, who wrote in January of 2014 that he'd have to do some research in order to answer the question:

From: Aelred Connelly
Sent: Thursday, 30 January 2014 1:32 AM
To: XXXX
Cc: LBMA Mail
Subject: RE: Some information please

Dear XXXX,

I refer to your questions below which have been passed to me. First of all, I would like to take the opportunity to apologise for the delay in our response.

This was a one-off survey which was conducted before I joined the LBMA with 36 of the 56 full members involved in gold trading. As I was not directly involved in the survey I will need to do some research to find answers to your questions. I will come back to you as soon as I can with a response.

Kind regards,
Aelred

A bit more pestering and he finally came back with an answer, in March:

From: Aelred Connelly
Sent: Monday, 24 March 2014
To: XXXX
Cc: LBMA Mail
Subject: RE: Some information please

Hi XXXX

Apologies for the delay, but I thought that my colleague had already responded to your questions. The Survey included all forms of gold trading so certainly included gold currency trading which would have contributed to the significant numbers that came out of the Survey. We are in the process of discussing with market participants running more regular surveys. I will keep you posted on developments. I am not sure if you have seen the article that accompanied the results of the 2011 Survey, see below. Once again apologies for the delay in responding to your questions.

http://www.lbma.org.uk/assets/Loco_London_Liquidity_Surveyrv.pdf

Kind regards,
Aelred

Perhaps it never even crossed their minds before that email what an oversized portion of the volume would consist of FOREX-style "gold" trading, i.e., XAU/Whatever, which is so clearly not physical that it could be somewhat embarrassing to the LBMA that they inadvertently included it in the survey.

Of course it should be in the survey because it makes up the bulk of the worldwide "gold" trade, and therefore has the heaviest influence on the price, but I propose to you that these emails might be behind their decision to exclude it from the new data. There's a reasonable argument to be made that this was embarrassing at the very least. Or even worse, it exposed how the "gold" market is mostly just electronic FOREX trading.

So perhaps they figured out a way to separate LBMA member "trades" originating from FOREX trading from other trades. Maybe the members report all trades, with some kind of notation next to trades with customers who run FOREX platforms and such, and then the LBMA just excludes those from the published data. I don't know. I'm only hypothesizing. But it would make sense to get it all, and then separate FOREX out at the LBMA rather than asking each member to exclude FOREX-related trades itself. The members might not even know the LBMA is doing this to their data, since they're only publishing aggregated data.

So there's the why and the how. The last question is, if this is what they're doing, can we deduce how much of the LBMA is actually FOREX trading? And the answer is yes!

First off, the numbers they put out are stunning in their own right, even without whatever is missing. As Ronan put it, "roughly every three and a half trading days, trading of ‘gold’ by LBMA members for ‘settlement’ in London or Zurich exceeds the amount of gold physically mined globally in an entire year." That's what the numbers they put out say! So that's not what this is about. It's not that the volume they're showing isn't shocking enough, it's that it looks like they did something sneaky with the data. And that implies they have something to hide. I think they do have something to hide—that the "gold" market is 84% XAU trading.

Now, one thing that is consistent between the 2011 survey and the new data is that they break it down into three categories, spot, forwards, and swaps/loans/options. Here's what the breakdown looks like in the 2011 survey:


And here's what it looks like with the new data:


So, really quickly, here's what I did. Assuming current clearing numbers are roughly similar to September, and assuming a ratio of 10 to 1 as is reasonable to assume, then the real volume should have been 10 x $22.6B, or $226B rather than $36.9B. That leaves us with a missing $189.1B. $189.1B is 84% of $226B. In other words, XAU is 84% of the LBMA trading volume, hypothetically of course. So here's how the real apple looks:


Happy Thanksgiving! :D

Sincerely,
FOFOA
__________________


Freegold is Much Simpler than the $IMFS


Koba wrote in the comments:

"Hello fofoa

After reading the warning from Peter Navarro on CTH, I am reading some older posts of Sundance on CTH, and I wonder what you think of the so called “Globalist (Wall St.) -vs- Nationalist (Main Street) confrontation.“
It's explained in a lot of posts like these:

https://theconservativetreehouse.com/2018/11/10/peter-navarro-warns-wall-street-globalists-stand-down-or-else/

https://theconservativetreehouse.com/2017/07/24/how-maganomic-policy-is-interacting-with-wall-street-financial-systems-and-investment-winnerslosers/

https://theconservativetreehouse.com/2016/08/07/two-divergent-platforms-donald-trumps-main-street-vs-hillary-clintons-wall-street/

So my question is, do you think Sundance has a good view of economics and the way the Trump administration is trying to make things work and trying to change things?

I think he (and Trump) may be right in things that need to be done and all of them are good steps, but it's one thing to try to do the right things, but it's a whole other thing to make things work without the needed bust, hyperinflation and cleansing of all the malinvestment and without main street feeling pain...
do you think they underestimate the pain and the cleansing that will come first before things will be better?"

Hello Koba,

I think you said it pretty well there! :D

Sundance understands things well from a certain starting point, but what he's missing is the most fundamental underlying cause. For example, he is right that Wall Street and Main Street are disconnected. What's good for Wall Street is not good for Main Street, and that one is not a reflection of the other. Wall Street is rather a reflection of the $IMFS, which is the use of dollars and US assets as global savings and monetary reserves, which overvalues the dollar for imports, and therefore sends manufacturing abroad. That last part is the fundamental underlying cause that he's missing.

To end the bad stuff, you simply take away the cause. You take away the $IMFS. And you do that by ending the use of dollars and US assets as global savings and monetary reserves, which will collapse the dollar's overvaluation and naturally bring manufacturing back to the US.

Interestingly, if you really think about it, the things we're doing are likely to help that process along. So, even if you don't know the primary cause, if you purposely restrict or reverse the primary effects thinking they are themselves the cause, you may be unknowingly undermining the already-crumbling real foundation.

This may just seem like dumb luck, but is there really any other way, even if you knew exactly how foreign support for the dollar over the last 40 years built up Wall Street while eroding Main Street? Would people understand it better if you tried to explain the real primary cause rather than explaining primary effects as causes? Would people be more understanding if you went directly after the primary cause rather than attacking its effects? Would you be hailed as a genius, or locked up as a lunatic, for explicitly blocking a main form of your own government's financing, while explicitly destroying peoples pension funds and retirement nest eggs along with your own national currency?

Wouldn't it make more sense, even if you had perfect knowledge, to go about things more in the way Trump is doing it, than to try to attack the $IMFS head on?

And then for someone like Sundance, wouldn't it make more sense to explain it the way he is, even if he had perfect knowledge of the real underlying cause? He has a large audience, much larger than I ever had, well over a hundred thousand. Then again, economics and money aren't his main topic. But can you imagine if he tried to add a deeper layer on the money and economics part, a layer basically equivalent to what you've learned at my blog? Would that make his audience larger or smaller?

I'm not saying he knows Freegold. I'm just saying, if such an all-knowing perfect genius blogger even existed, wouldn't he need to separate things kind of the way the Speakeasy and CTH are separate?

The true big picture is really not that complicated. In fact, I believe all of this stuff that we at the Speakeasy know now, will be common knowledge in Freegold, and it'll be difficult to explain to anyone then, how impossible it was to explain to most people now, before it happened. It's because, due to inherent biases, we are basically wired to resist understanding the primary cause while it is still causing its effects.

We are wired to resist understanding that our financial domination and the perks that go with it are mostly the result of an exorbitant privilege that was given to us by foreigners, mainly beginning—for a specific purpose—in 1979, and not something we earned. We are wired to resist understanding that a lot of our privileged lifestyle is due to foreigners overvaluing our currency by saving in it and pegging their currencies to it. We are wired to resist understanding that the financial world as we know it today is not how it would naturally evolve. That it is not something real. That it is merely an outgrowth, like a tumor, of something very specific that happened over the last 40+ years. It is not what would have naturally evolved without that something we call the $IMFS.

And we are therefore wired to resist understanding that our savings in this system—the fishbowl in which we swim—are an illusion, which could disappear in a flash. If it was possible to get them all out, then we wouldn't be wired to resist that notion. But it is not possible. At this late point, it is only possible for a little bit at the margins to escape. And that's why Freegold could never be widely understood before it happened, even if a genius blogger or godlike president with perfect knowledge of everything could exist, we still couldn't get more than just a little bit of a few people's savings at the margins out.

You might wonder, then, how do we know our view is more fundamental than what's at CTH? How can we objectively judge this apparent difference of opinion by apparently smart people, when we ourselves are on one of the sides? I'll tell you the way I know, and then you can judge for yourself.

I can appreciate what Sundance writes, even the economics part, and I can see clearly what he's missing. You can too, Koba. I can tell you can because you basically nailed it in your comment. But I also know from experience that the opposite isn't true, that Sundance or someone from his blog would not be able to appreciate the economics that I explain. With the foundation of Freegold, the various other schools of thought out there are quite easily understood, in my experience, both personally and secondhand, yet the opposite is never true. In fact, the more committed one is to another school of thought, the more resistant he will be to the idea that a deeper, more fundamental explanation even exists. And then there's the whole gold part, which makes Freegold easy to dismiss at only a superficial glance. The name alone turns some people off, which is fine.

Like I said, however, it's not all that complicated. It's quite simple actually, because when you get down to any true foundation, it usually is simple. It's the additional levels that get built on top of one another that get increasingly complex. That's why solutions you see other people write about, even someone like Sundance, seem so complicated compared to Freegold. It's because they are trying to fix things at a more complicated level, not realizing there's a simpler foundation below.

A lot of the stuff that is problematic today is simply going to cease to exist when the $IMFS collapses, because it wouldn't exist in the first place without the $IMFS. Remember, this is not what would have naturally evolved without the $IMFS. It's kind of like the Matrix, only most of what you see around you is real. It's just the monetary and financial stuff, and the beliefs people hold due to the monetary and financial stuff, that's an illusion.

Now, with that in mind, here's a section from Sundance's post. He's explaining the disconnect between Wall Street and Main Street, as well as what he sees as Trump's solution. Notice how complicated it is. That's because it's constructed with the existing $IMFS as its foundation. (I'm only including this as an example to help you see the point I'm making. There's nothing of particular value in this excerpt):

"President Trump and Treasury Secretary Mnuchin have already begun assembling and delivering a new banking system.

Instead of attempting to put Glass-Stegal regulations back into massive banking systems, the Trump administration is creating a parallel financial system of less-regulated small commercial banks, credit unions and traditional lenders who can operate to the benefit of Main Street without the burdensome regulation of the mega-banks and multinationals. This really is one of the more brilliant solutions to work around a uniquely American economic problem.

♦ When U.S. banks were allowed to merge their investment divisions with their commercial banking operations (the removal of Glass Stegal) something changed on Wall Street.

Companies who are evaluated based on their financial results, profits and losses, remained in their traditional role as traded stocks on the U.S. Stock Market and were evaluated accordingly. However, over time investment instruments -which are secondary to actual company results- created a sub-set within Wall Street that detached from actual bottom line company results.

The resulting secondary financial market system was essentially ‘investment markets’. Both ordinary company stocks and the investment market stocks operate on the same stock exchanges. But the underlying valuation is tied to entirely different metrics.

Financial products were developed (as investment instruments) that are essentially wagers or bets on the outcomes of actual companies traded on Wall Street. Those bets/wagers form the hedge markets and are [essentially] people trading on expectations of performance. The “derivatives market” is the ‘betting system’.

♦Ford Motor Company (only chosen as a commonly known entity) has a stock valuation based on their actual company performance in the market of manufacturing and consumer purchasing of their product. However, there can be thousands of financial instruments wagering on the actual outcome of their performance.

There are two initial bets on these outcomes that form the basis for Hedge-fund activity. Bet ‘A’ that Ford hits a profit number, or bet ‘B’ that they don’t. There are financial instruments created to place each wager. [The wagers form the derivatives] But it doesn’t stop there.

Additionally, more financial products are created that bet on the outcomes of the A/B bets. A secondary financial product might find two sides betting on both A outcome and B outcome.

Party C bets the “A” bet is accurate, and party D bets against the A bet. Party E bets the “B” bet is accurate, and party F bets against the B. If it stopped there we would only have six total participants. But it doesn’t stop there, it goes on and on and on…

The outcome of the bets forms the basis for the tenuous investment markets. The important part to understand is that the investment funds are not necessarily attached to the original company stock, they are now attached to the outcome of bet(s). Hence an inherent disconnect is created.

Subsequently, if the actual stock doesn’t meet it’s expected P-n-L outcome (if the company actually doesn’t do well), and if the financial investment was betting against the outcome, the value of the investment actually goes up. The company performance and the investment bets on the outcome of that performance are two entirely different aspects of the stock market. [Hence two metrics.]

♦Understanding the disconnect between an actual company on the stock market, and the bets for and against that company stock, helps to understand what can happen when fiscal policy is geared toward the underlying company (Main Street MAGAnomics), and not toward the bets therein (Investment Class).

The U.S. stock markets’ overall value can increase with Main Street policy, and yet the investment class can simultaneously decrease in value even though the company(ies) in the stock market is/are doing better. This detachment is critical to understand because the ‘real economy’ is based on the company, the ‘paper economy’ is based on the financial investment instruments betting on the company.

Trillions can be lost in investment instruments, and yet the overall stock market -as valued by company operations/profits- can increase.

Conversely, there are now classes of companies on the U.S. stock exchange that never make a dime in profit, yet the value of the company increases. This dynamic is possible because the financial investment bets are not connected to the bottom line profit. (Examples include Tesla Motors, Amazon and a host of internet stocks like Facebook and Twitter.) It is this investment group of companies that stands to lose the most if/when the underlying system of betting on them stops or slows.

Specifically due to most recent U.S. fiscal policy, modern multinational banks, including all of the investment products therein, are more closely attached to this investment system on Wall Street. It stands to reason they are at greater risk of financial losses overall with a shift in fiscal policy.

That financial and economic risk is the basic reason behind Trump and Mnuchin putting a protective, secondary and parallel, banking system in place for Main Street.

Big multinational banks can suffer big losses from their investments, and yet the Main Street economy can continue growing, and have access to capital, uninterrupted."




Glimpsing the Hereafter

Realizing just how much of the financial sphere that we live inside of is a result of the $IMFS, and not how things would have evolved naturally without it, reveals some surprising predictions about the future. But when I dare to tread here, which isn't very often, at least not publicly, I encounter resistance even from Freegolders, usually based on their own biases.

For example, when I talk about trading in the hereafter, $IMFS traders are sometimes resistant to the obvious. Or when I talk about real estate investing in the hereafter, those with plans to jump back into real estate investing in Freegold are resistant to the obvious. If I talk about banks in the hereafter, those who really hate banks in the $IMFS are resistant to the obvious. And the same goes for central banks.

But these are just predictions based on the concept that things that are obvious outgrowths of the $IMFS will die off due to lack of support and incentive once it is gone. Yes, I do consider that inertia and old habits might keep certain things going even after they become obvious losers, so my predictions don't necessarily mean things will change immediately. They are really only observations that certain things we take for granted today we probably shouldn't, because they are effects of the $IMFS.

A big one that I think about often is the idea that most big companies today are owned mostly by stock market shareholders ("investors", but really savers). This idea is so pervasive and entrenched today that I'm sure a lot of you will be resistant to the obvious.

If you have a big company today, the goal is generally to IPO. When you IPO, you sell off a good portion of your company to the public, and that's when you become a billionaire and your employees become millionaires. IPOs have really taken over the financial landscape, and most big companies are now publicly traded.

The reason for this is that almost all of the savers' savings is in the financial markets just waiting to buy companies that savers don't understand, and make the people running them millionaires and billionaires while incentivizing them to do things they probably wouldn’t do if they didn't take their companies public.

In the olden days, companies were owned by families, by titans of industry, and banks were owned by the likes of JP Morgan and the Rothschilds. I don't think we'll go that far back, but I do think that company ownership, like real estate ownership, will consolidate and come off the exchanges in the hereafter, and IPOs will become the exception rather than the goal.

Another one that I like to think about but almost never write about (because almost everyone is resistant to it and I find arguing about it to be a waste of time) is how we will store, trade and transport gold in the hereafter. Now bear with me, because all of these points are thought out over many years of consideration. I could write 50 pages on this topic (although I won't because it would be a waste of time), it's that well thought out. But I'm only giving you the abstract here.

In Freegold, maybe not immediately, but this is how things will develop, we will store our gold at the bank, buy and sell it through the bank, and when we move or want to move our gold or send it to someone, it will be done via unallocated pools at the bank, not unlike the way central banks use the BIS (fully reserved) unallocated today. Now before you knee-jerk me on this, I'm telling you now that all the reasons you wouldn't trust a bank with your gold today will be gone, and with the globally centralized bullion banking credit system of the LBMA dissolved, there will be no systemic risk to Freegold.

Buying, selling, storing and transporting gold today is a complicated process, by necessity. And it's very different for different people, depending on where you live. As I have discussed many times, the moment of revaluation is the moment of "peak risk" to your gold, or at least to your gain. Some of us have gone to great and complicated lengths to secure that gain against that moment of "peak risk", but once that moment has passed, what then?

Many ideas have been discussed over the years, and companies have come and gone based on some of them. But after much contemplation, I'm here to tell you that the simplest solution is what will ultimately come to pass, and that's your local bank vault.

When a little gold suddenly becomes extremely valuable, I don't want to have to store it, transport it or trade it by mail or over the internet the way I have in the past. I want to stick it in my local bank, in the main vault, knowing it's secure and fully insured, which it will be very cheaply, at virtually no cost to me. And that's how it will be. Maybe not immediately, but give it some time for things to settle.

Banks are the obvious solution. The infrastructure, vaults and networks are already in place. And at $55K per ounce, your local bank could hold $100M in local customer savings in a small corner of the vault. $100M would be about 90 of these mint tubes of gold Eagles:


Four of these mint "monster boxes" would be $110M in savings, and it would be fully insured against bank robbers:



The actual gold pieces that you have today will be stored for you, unless you choose to have them standardized in which case they will be assayed (tested), and exchanged for something standardized. If you want to sell them, you will sell them to the bank and they will be tested. If you want to buy some, you will likely buy pre-tested standardized gold from the bank. If you want to move your gold because you're moving, or you want to send it to someone, or just to another locale, you'll probably choose to exchange it with the bank for standardized gold in the new location, because that will be the cheapest option. If you want the bank to transport your actual pieces, it will do that for a fee, and your gold will be insured by the bank during transport.

This will all seem quite mundane in the future, as hard as it is to imagine right now. But if you want to argue against it, be sure to explain how the way things are today is not just an effect of the $IMFS. And keep in mind that fractional reserve bullion banking, which is simply a carryover from regular London commercial banking during the gold standard, will be no more. It only exists as a carryover from Bretton Woods. It cannot spontaneously reappear again simply because the banks will be securely holding people's Freegold. And if fully insured physical bank storage was an option, where else would you store it? Nowhere else would make sense.

Most of the industrial gold trade will no longer exist. It won't be profitable. And gold will be too dear for most of today's uses. Your local coin dealers, and dealers like APMEX and Kitco, will no longer exist. It will no longer be profitable. And you'll keep your gold where everyone else does, where it's most secure and fully insured at almost no cost.

As far as fraud goes, of course there will be fraud. There's always someone committing some fraud somewhere. But that's all it will be, an isolated crime. It won't be systemic.

So there you have it. Someone brand new who just joined the Speakeasy a week ago, his first search after getting in was "what do we do with our gold after Freegold?" He probably doesn't even know I saw that. Ha! I see everything. ;D

Sincerely,
FOFOA
__________________


Money Is Credit Is The Answer


I found this instructive and stimulating, so I thought I'd put it up as a post since only a few of you watched it in the comments. In the comments I wrote:

This was good. Who here knows what he’s missing. ;D




I got some good answers!

MdV pointed to the Debtors and Savers dichotomy. He wrote, "Obviously his comments on Marx are not what you wrote about in Debtors and Savers. Marx’s error was an incorrect assessment of the groups in conflict." In the video, George Gilder said, "Marx's great error, his real mistake," was thinking that the 19th century industrial revolution was the pinnacle of human productivity, so all that was left to do was not the creation of more productivity, but just the redistribution of what we already had.

That's basically what he said. And then the continuation of Marxism is each generation constantly thinking the same thing; that we've finally reached the pinnacle of human productivity, and now we redistribute rather than create. Creativity, he says, is the foundation of Capitalism, and Marxism stifles creativity by trying to plan the future. Creativity cannot be planned. Creativity requires unplanned surprise. He says this is really what Socialism is all about; saying that, what we have now is all we're ever gonna get, and that we know as much as we need to know to plan the entire future. That, he says, is fundamentally hostile to human creativity, and antithetical to Capitalism.

I can't really disagree with that, so maybe Marx got more than one thing wrong! ;D

Jand79 pointed out that, in discussing his new blockchain-based financial system, the thought doesn't seem to have crossed his mind that money and savings have different primary functions. Money's primary function is transactional, while savings' is storing value. Jand79 wrote, "Even if blockchain will be a new global, distributed financial database, we still need something to store our excess in, to be used later when needed." Bravo, Jand79! :D

In the video, George Gilder explains something he calls the cryptocosm. As he describes it, it's going to be an entirely new internet architecture, unseating Google et. al., an entirely new financial system, displacing the $IMFS which is dying, and an entirely new basis for money, displacing fiat currency itself. It's important to understand the sweeping nature of what he's imagining, because it's like a pyramid of layers, one built on top of another, and all built upon the original foundation, which in this case is Bitcoin, circa 2008.

The new blockchain-economy cryptocosm internet will be made possible by the new cryptocurrency financial system, and the new cryptocurrency financial system will be made possible by cryptocurrency unseating fiat currency. Not Bitcoin, however, which he explains has various flaws that mean it will not be the foundation for the new currency. He likes Ethereum, which he says has produced $20 billion in new ICO's, initial coin offerings of various Ethereum-based coins, over the past year.

The financial system, he says, has come to the end of the line. Its sole function today, he says, is to endow central banks with the capability of generating money and imposing a "doomsday pod" of $250T of debt on the world economy. Right here he appears to be missing something big.

Central banks don't impose debt. They create base money, and the presence of passive savers saving in the central bank's base money-based financial system gives that money the stored value that enables governments and the rest of the debtor class to impose the "doomsday pod" on the world. So his causation is off. You can't have $250T in debt without a currency collapse unless someone is supporting the currency by saving in it. So it's the system that encourages saving in bonds and other assets denominated in fiat currency that "imposes the doomsday pod," not the currency itself or the central banks.

He also points to the prevalence of currency trading in the current financial system, and how it doesn't even produce stable currency values. But its prevalence is due to perpetual imbalances in the system, that produce the instability necessary for currency trading. Take the imbalances away and the exchange rates will stabilize and the currency traders will have to find some other way to game the system.

But what it all boils down to is savers saving in fiat currency. The PBoC hoard of $1.165T in US Treasuries, and all CB foreign currency reserves for that matter, do act as a proxy for savers saving in fiat currency. But it’s really the private sector that carries the lion's share globally. This is the imbalance that enables massive currency trading and the massive debt burden.

What it really comes down to is FOFOA's dilemma: "When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma."

The point is, you can't fix the financial system without addressing the most fundamental flaw in it, and you can't address that flaw if you haven't even identified it. And he hasn't.

He apparently comes from the Lewis Lehrman hard money camp, so we can guess what he's thinking. He's probably thinking that a financial system based on a more gold-like currency, arbitrarily limited in supply, will somehow be better than what we have now. It's shallow thinking really, because it doesn't address anything financial. Either you're going to have savers hoard the currency unit itself, which is deflationary and causes economic depressions, or you're going to have savers lending hard currency to debtors, and saving in their promissory notes.

The point of FOFOA's dilemma is to identify the most fundamental flaw that has plagued all monetary systems in the past, both hard and easy money systems. When you use the same medium as a transactional currency and for storing value for savers, it ultimately leads to a conflict between the two real classes of people, the debtors and the savers. In essence, the debtors require an easy money currency that depreciates over time, and the savers want a hard money currency that appreciates over time. So when you have a hard money, the debtors get screwed, and when you have an easy money, the savers get screwed. It doesn't matter whether it's gold, fiat or cryptocurrency.

So Jand79 is right! "Even if blockchain will be a new global, distributed financial database, we still need something to store our excess in, to be used later when needed."

All of the things Gilder says sound good. A lot of it actually sounds great. But the question is: Is he right? If he's wrong, that doesn't mean good things aren't coming, positive changes, a new monetary and financial system, the decline of Google, etc. It just means that they aren't coming in the way he says they're coming.

I think the same things are coming, but I don't think they're coming the way he says they're coming.

Joevanderbilt hit the nail on the head when he wrote: "My take is that the main thing Gilder is missing is the nature of money. Money is credit."

In the video, Gilder says, "The great miracle of Capitalism was founded on money which was identified as gold." He also says that money should be a measuring stick rather than a magic wand. I think that both of these statements reveal how wrong he is about the very nature of money. And remember, that is the foundation upon which he is building his cryptocosm pyramid.

Money is not a measuring stick. The master proxy for wealth and savings could be a measuring stick of sorts, but money actually should be a kind of magic wand. In terms of money being credit, it shouldn't be something that needs to be earned first and saved by someone else before it can be lent. It should instead be something that enables true credibility whenever it comes along, makes it fungible and spendable such that it can fulfill its promise, it's potential. True credibility should not be at the mercy of a past producer's savings. That's why we have banks. Banks don't need your savings in order to lend money.

Don't think about what banks have become in the $IMFS. That's not what this is about. It's about what banks are supposed to be. It's the bank's job to judge the credibility of potential borrowers. Banks are not always going to make the perfect judgment, but a prudent bank will make enough good judgments to turn a profit and stay in business.

After that, the bank has a special license which allows it to make loans that become real money when lent. In essence, it allows the bank to issue liabilities that become real money in the system. No other kind of business can do this. It's what makes banks special, and it's what makes modern money so great.

Money always was credit, even before banks existed. But banks make this modern world possible. Fiat currency is so much better than gold currency, and there's only one step left in the long evolution of money… Freegold, in which we'll finally solve the conflict between debtors and savers by using separate media for the transactional currency and savings. Easy money for the debtors, hard "money" for the savers.

This is not a new concept. In The Return to Honest Money, I quoted hard money campers Menger (1840-1921) and Mises (1881-1973):

Menger: "It appears to me to be just as certain that the functions of being a "measure of value" and a "store of value" must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.

[…]

Money is the most appropriate medium for accumulating that portion of a person’s wealth by means of which he intends to acquire other goods (consumption goods or means of production).

[…]

But the notion that attributes to money as such the function of also transferring “values” from the present into the future must be designated as erroneous. Although metallic money, because of its durability and low cost of preservation, is doubtless suitable for this purpose also, it is nevertheless clear that other commodities are still better suited for it."

Mises: "Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.

[…]

One no longer compares the marketability of the various vendible goods with the perfect marketability of money. One merely compares the degree of marketability of the various commodities. One may speak of the secondary marketability of the vendible goods.

He who owns a stock of goods of a high degree of secondary marketability is in a position to restrict his cash holding. He can expect that when one day it is necessary for him to increase his cash holding, he will be in a position to sell these goods of a high degree of secondary marketability without delay at the highest price attainable at the market.

[…]

Consequently there emerges a specific demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specific demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the result of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render.

[…]

One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them--in a roundabout way--for paying…

Government bonds and treasury bills which can be used as secondary media of exchange can be floated on conditions more favorable to the debtor than loans not suitable for this purpose. The debtors concerned are therefore eager to organize the market for their certificates of indebtedness in such a way as to make them attractive for those in search of secondary media of exchange."


And easy money camper Silvio Gesell (1862-1930), in The Value of Gold:

Silvio Gesell: "And it is clear that money cannot be simultaneously the medium of exchange and the medium of saving - simultaneously spur and brake.

[…]

I therefore propose a complete separation of the medium of exchange from the medium of saving. All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!"


It's not a new idea, but it's an idea whose time has finally come!

Joevanderbilt continues: "Money is credit, cryptocurrencies can never be credit, they are more akin to a commodity, they can be used in a money-lending kind of way, but that’s no viable solution for a modern economy." We should discuss this, because it might not be obvious to everyone why it's true.

Hypothetically, I can imagine a cryptocurrency being used as base money and the unit of account for a credit money system. What I can't imagine is a plausible path from here to there.

Right now, cryptocurrency is a secondary medium of exchange as Mises explained it, i.e., a store of value. Secondary media of exchange, as he explained, must first be exchanged for real money if one wants to use them for something like paying, or spending. Even in situations where someone is "accepting" bitcoin, fiat currency is still the unit of account. In other words, the prices in bitcoin are still calculated using bitcoin's exchange rate with fiat currency at the time of purchase. This is no small deal.

For Bitcoin, or any cryptocurrency for that matter, to become the primary medium of exchange and unit of account, you'd need to have a shift in the way all people think about relative values, from fiat currency to whatever cryptocurrency everyone agrees on. It would have to be on the order of the shift from national currencies to euros in Europe. Think about what that entailed. Decades of preparation, massive exchange rate manipulation and central planning, and a gradual rollout over many years. It's simply not going to happen for a decentralized cryptocurrency.

You may think you can imagine it happening, when the system finally collapses and the dollar hyperinflates, but that's simply not the way these things happen. As FOA said, the US dollar will not be the same as it is today, but it will still be in use, "just like all those Pesos around the world! […] My point is that we will all be doing just as in Mexico; spending pesos while holding dollars and gold. Only in America we will be saving gold… and spending inflating dollars."

There's something called Mises' Regression Theorem which explains the evolution of money as a process of human nature. We can have monetary changes forced on us by edict, but if we're talking about a spontaneous and natural change, then the Regression Theorem comes into play. Here is Robert P. Murphy explaining it, again from The Return to Honest Money:

Robert P. Murphy: "People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.

But haven't we just run into the same problem of an alleged circularity? Aren't we merely explaining the purchasing power of money by reference to the purchasing power of money?

No, Mises pointed out, because of the time element. People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday. We then push the problem back one step. People yesterday anticipated today's purchasing power, because they remembered that money could be exchanged for other goods and services two days ago. And so on.

So far, Mises's explanation still seems dubious; it appears to involve an infinite regress. But this is not the case, because of Menger's explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter."


Understand that this holds true even when the purchasing power of money is changing rapidly. Just look at Zimbabwe or Venezuela for a current example. People will hold something else as a store of value if it's available, but they'll keep using the same currency for paying and spending. The monetary unit can change by edict, as I said, but it doesn't change spontaneously just because its purchasing power changes rapidly.

Sometimes people will gradually adopt a different currency that's already in use somewhere else if it becomes available, but never has a commodity, let alone a hard or deflationary one, been spontaneously adopted as money, without or even against the wishes of the government. It just doesn't happen, and there's no plausible reason to believe it ever could happen.

And that's why Joevanderbilt's statement is true: "Money is credit, cryptocurrencies can never be credit, they are more akin to a commodity, they can be used in a money-lending kind of way, but that’s no viable solution for a modern economy."

I have said this many times since I first learned about Bitcoin back in 2010, but Bitcoin and cryptocurrencies in general are all fundamentally based on a common misunderstanding of money, what money is, and of the properties that make a good base money. We need easy money. We need banks. We need bank money, credit money, easy money. Today's monetary and financial problems stem from savers saving money, not from the properties of modern money. We don't need to fix modern fiat easy central bank money, we just need to stop saving in it.

I don't really want to try to tackle blockchain technology or AI in this post, but I will give you what a few of you said, and tell you what I thought of the comments. Then you can all battle it out in the comments:

On a new blockchain-based internet, Joevanderbilt said: "The idea of securing the internet with blockchain technology sounds sexy, but I see that as a sure way to end online anonymity (even more than now) and having logged in the chain every single thing you do online. Perfect setup for the PC police to crack down on your “hate speech” and thought crimes."

I agree, and not just the PC police, how about any police. There are so many laws and regulations on the books that it's practically impossible not to break some of them, no matter how honest or good you are. And that's the way the state likes it. If they want to get someone, all they have to do is find the crime.

I'm not a criminal. I go out of my way to not break even the smallest of laws, because I sleep better that way. But I do enjoy being able to be anonymous online. In fact, I have more than one anonymous identity online. Different ones for different purposes. Anonymity is not just for criminals. And I'll gladly forego the convenience of a single password or even no password to keep the ability to have multiple accounts. But that's just me. :D

On AI, he said: "I like his views on AI though, the ongoing hysteria that the machines will outsmart us, become self-aware, take over and create mass unemployment, is beyond ridiculous. We can’t even explain consciousness in humans, let alone reproduce it in a machine."

Again, I agree!

One Traveler wrote: "When we hear blockchain we should avoid the inclination to immediately associate it with crypto currency and try to imagine possibilities like direct democracy, distributed ledgers, online security, smart contracts, anonymity etc. As an accountant one of the traditional roles is to provide record keeping and transparency. Would you prefer an investment where you could see all the transactions on a distributed ledger? Would you prefer a contract where payment was automatically executed? Not perfect for all instances but the possibilities are very interesting to me."

My understanding is that distributed ledgers are basically copied ledgers. Distributed means there are lots of copies "distributed" out there, and they all automatically run comparisons so that they all agree they are the same. That way, you can't fabricate something or change the ledger, because it would be nearly impossible to change all of the copies, or at least more than half of the copies which is what I understand is required with Bitcoin.

These ledgers can contain different types of information, things other than just currency codes and exchanges, which makes a whole world of possibilities seem plausible. Things like voting ("direct democracy", which is arguably not as good as it sounds), real estate transactions and records, and all kinds of financial transactions and records, thus the idea of a new blockchain-based financial system.

But I don't think you can just disassociate it with cryptocurrency as One Traveler said. This type of distributed system is highly inefficient as you can imagine, due to all the repetition and copies that must be generated, maintained and stored. And each distributed ledger is supposed to be run by an independent operator, making the network decentralized and unhackable. Therefore, there needs to be a financial incentive built into the process of running and maintaining these ledgers, and that's where the cryptocurrency is the necessary foundation.

I don't follow this space closely—at all really—so I'm sure there are some counterarguments out there. I'm curious to hear any that don't include some form of corporate centralization or corporate cooperation.

One Traveler asks if I would prefer an investment where I could see all the transactions on a distributed ledger. My answer is no. The reason for that question is all the fraud present in the $IMFS. But absent that, no, I prefer privacy and trust. There's a good reason why the 300-year-old London gold market is so opaque.

Also, would you prefer a contract where payment was automatically executed? He's talking about Ethereum's smart contracts, but that doesn't really tickle my fancy. I avoid automatically executed payments like the plague myself, your Speakeasy subscriptions notwithstanding. ;D

MdV had a good question: "So how does blockchain work when goods must be delivered? How are both parties satisfied?" And: "Then there is the energy question. Will it always require enough power to run a small town just to pay for a burger?"

Haha! A few weeks ago, Aaron sent me the following video. Five minute later, he sent me another email: "I'm 5 minutes in and this must be the MOST inefficient ledger system ever devised by man. I recall the videos you sent me about how data throughput for distributed ledger reconcilation does not scale, but this is just another way of saying the same thing. Bitcoin millennials. Too bad. I guess they'll have to learn the hard way."



I'm really not a Luddite. I was saying the same stuff about Bitcoin from the very beginning, back when I had at least 30 BTC, was still accepting donations in them, and was still learning about the technology. I'll be the first to admit I'm not an expert in this stuff, but the same gut that informed me on A/FOA and Freegold which I had no idea about previously, also informed me on this. So for anyone who cares what my gut says about this stuff, it agrees with MdV. ;D

But enough about that, right? Here's a good snip from Moneyness 2: Money is Credit:

"Blondie once asked me how I would describe money in as few words as possible. My answer was: "Money is credit." I followed that up with a little more detail: "More specifically, it is the recording of current balances of credit. It can be recorded in your head, represented on an institutional ledger, or carried in your pocket as pieces of paper or metal with numbers recorded on them. But notice that it's the recorded numbers and not the paper/metal in your pocket that constitutes the money."

But you can't possibly understand the pure money concept without also understanding the wealth concept. The pure concept of wealth is really simple. Its only attribute is possession (or at least unambiguous ownership of something tangible, if it's not in your immediate possession). Your wealth includes all of your owned possessions, from the air you breathe down to your comfy, worn-out slippers. Value is subjective—it's in the eye of the beholder. Value comes from utility (usefulness) to the user. If something in your possession has no use to you, no value, then it is likely that you won't go to the hassle and expense of continuing to possess it. You'll probably just throw it away. So possession is the distinguishing characteristic of wealth, which also puts wealth squarely in the physical plane.

What sets your gold apart from your stinky slippers and other items you possess is that it is the most tradable. Tradable wealth! Imagine that! It's tradable because someone else values it too, unlike your slippers. But not only does someone else value it, almost anyone anywhere in the world values it nearly equally, even the Giants! How many of your other possessions would measure up to the quality standards of a Giant? None, I imagine. This is what FOA meant by "equal footing".

That's basically it in a nutshell. Those who have been following the comments know that Blondie prefers the term "credibility" more than "credit". It's a fine line, and I could go either way. In this post I'll use both words almost interchangeably, but I think I'll stick with "credit" as the closest proxy for the pure concept of money.

Think of it like this. Value is subjective—it's in the eye of the beholder. You value your slippers, but no one else does. Gold is the one item in the world that comes closest to having a relatively objective value because your knowledge that others value it for the same reasons you do is the very reason you value it in the first place. It's the reason behind gold's utility as a store of value or, phrased another way, a wealth reserve. Salience is a good descriptor.

Credibility, like value, is also subjective. But unlike value, it's not something you can claim for yourself. Only someone else can judge you credible. Ergo, credibility must be earned. It is subject to the judgment of others. Credit is like spendable credibility. Money is the fungible exercise of credit (accepted everywhere, even by those who don't understand why you're so darn credible when you're wearing such ugly slippers). A bank doesn't really give you credit. You earn it before you ever walk into the bank.

If you want to buy a house, you don't need to have saved the full price of the house. All you need to have is earned credit/credibility. You walk into the bank, the bank checks your credit and, if it's not found wanting, facilitates the fungible exercise of your credit/credibility. And then, because it's now fungible, it circulates!

The real world operates on massive amounts of credit. And by real world, I mean the businesses that make everything in your life. Credit is not just about consumer credit cards, evil speculators maxing out their margin and housing bubbles. And the hard money view of "money" as something we all want to hoard is just as pedestrian a view as thinking credit (or debt) is something intrinsically bad. Money has always—ALWAYS—been credit/debt. That's not bad at all. Debt is simply credit (or credibility) fungibly facilitated and then exercised!"


You can read more of my thoughts on this subject in Moneyness 2: Money is Credit, Money or Wealth, and Is Bitcoin Money? But for now, I'll leave you with this:

FOA: In this light we should know that our real things in life will not change all that much. Your tools, chairs, clothes and cars will remain yours. Houses and land, TVs and boats, all will retain the exact same "value" they always had. What will change is our ability to use our currency and paper assets as a medium to measure the "real value" that's always so inherent in these items, yet so well hidden in our perception of today. Yes, the currency price of things will greatly change, even as their "use value" moves little. Such is the nature of dying paper money systems. Such is the ending of a currency timeline!

Trail Guide

ARI: So you see, learning how the world works is all about each man coming to the understanding about the real wealth we all require to best ensure our survival. Knowing that Gold is the master proxy for our life's day-to-day and year-to-year shifting requirements for food, clothing, shelter, and energy, it simply makes more sense to gather in Gold for later use than to gather in clothes (that we may outgrow,) food (that may spoil,) houses which are more than our needs, or energy (that we can't store.) You see, time bears witness to this undeniable fact: Gold can be called wealth because it is an enduring wealth proxy in exchange for our life's needs. Currency, on the other hand, serves a specific modern economic purpose--to be borrowed and inflated in placation of man's immediate desires. It is not wealth, it fails as a proxy for the Gold it tries to imitate. Do not confuse the two.

Understanding how the world works is easy as soon as you understand the Wealth Hierarchy. Like this: Earn money/currency, buy what you need, save Gold, enjoy what life has to offer.

Real wealth. Get you some. ---Aristotle


Sincerely,
FOFOA