2025
Year of the Golden Age
"old world, gold economy, as viewed thru modern eyes"
or "way to move from US$ without war".
-Another (5/5/98)
or "way to move from US$ without war".
-Another (5/5/98)
As you can see, I decided to change the name. The conflagration didn't play out in 2024 as I expected, even with my broad range of probable scenarios. It tried hard, but it appears to have encountered some sort of uncanny resistance. First, Trump narrowly dodged an assassin's bullet. Then the Big Red Wave finally arrived. And after that, the Left seemed shaken and stunned.
Kamala just disappeared. Obama popped out of a hole to say something incoherent about Republicans stealing elections. Christopher Wray quit. Nancy fell and broke a hip. And a partridge in a pear tree.
Don't get me wrong, though. I'm not saying it's going to be smooth sailing. There are still 20 days until the inauguration, including January 6th. A lot can happen in 20 days, especially these 20 days. But at this point, I'm looking beyond the inauguration. January 20th is still a big, historic turning point, probably the biggest we've had in our lifetime, but Trump is just the catalyst.
We remain at DEFCON 2 for now, but that could change at any moment. If it changes sometime during the next 20 days, then all bets are off. But as far as this post is concerned, it changes sometime after Trump is back in the White House.
The way I see it, there are two camps, two schools of thought on how the problems get fixed. It's like this: We exist within the $IMFS fishbowl, an analogy I've used many times. The water in which we swim is so old, putrid and foul, that it is practically choking the entire human race.
The two camps are the "fix it inside the fishbowl" camp, and the "outside the fishbowl fixes it" camp.
The school of thought for the inside-the-fishbowl camp is that we somehow clean up the water inside the fishbowl, and move on from there. It's the "fix it from the inside" school of thought.
The other is the "burn it all down and rebuild from the ground up" school of thought. That's where the fishbowl shatters, the putrid water quickly dilutes into an ocean of clean water, and the fish are free to explore the fresh, new environment for the next thousand years.
Within these two camps, there are also two distinct sub-groups: 1. The activists, and 2. The passivists.
--END OF EXCERPT--
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Glimpsing 4 – CB Gold in Freegold
11/19/24
11/19/24
Under FG, what should be the central bank disposition toward holding gold as a reserve asset?
None at all? Some but not all? Hold gold as the lone reserve asset but let its value float a la the ECB model? Other?
Reading Judy Shelton's new book...meh.
I responded:
I’ve written about this before. Now I have to find the post…
And he said:
Thought you might have...
It took me a little while, but I finally sent him two excerpts, one written in 2014, and the other from 2017. Here are those excerpts:
2014:
In order to see how the dollar can collapse, you need to understand how and why it is overvalued today, not just in the monetary plane with its monumental overhang of “financial savings”, but also in the physical plane of production and trade. By the end of this post, you might be surprised to discover how the dollar would still collapse even if we could hypothetically erase all of the dollars and “financial wealth” that has accumulated in the system.
Also by the end of the post, I hope you will see how simple Freegold really is, but for those of you who are impatient, or don’t like to read long posts, or don’t care about understanding things deeply and would rather just have an abstract that can be easily dismissed so you can get back to the stuff you already know, here’s the gist of it.
Freegold is all about gradual, natural and automatic adjustment mechanisms in the modern world of fiat currencies. An adjustment mechanism is quite simply anything that periodically corrects physical plane imbalances. In economics, the term “adjustment mechanism” is often used to describe the flow of gold between different countries back when gold was used as base money in those countries. But this is not at all what Freegold is about, so I am using the term in a much broader sense that applies at any scale, from the global scale on down to the individual.
Whenever you buy a gold coin, or even a coffee at Starbucks, that’s an example of an adjustment mechanism at the individual level. Monetary plane balances (like “financial wealth”, the “idea of long term debt being held as a money asset”, or even cash in your wallet) represent physical plane imbalances. Whenever monetary balances are reduced, real world imbalances are reduced. Likewise, when monetary balances are accumulated, physical plane imbalances increase. It’s a simple concept and a simple view.
The flow of money within a common currency zone, like the United States for example, is the most basic and automatic adjustment mechanism. Other adjustment mechanisms include changes in wages and in the prices of various goods and services in general, and in different locales, and the movement of people and capital from one location to another.
Wherever multiple currencies interact, like on planet Earth for example, changes in the exchange rate between them are the primary adjustment mechanism. Fixing, pegging or otherwise manipulating the exchange rate of different currencies does, in fact, preclude other adjustment mechanisms and causes imbalances to accumulate, often to the point that abrupt adjustment becomes unavoidable, economically disruptive, and financially destructive, in other words, painful.
Currency collapse and hyperinflation are natural but not gradual adjustment mechanisms, as are controlled devaluations. Floating exchange rates are a more gradual adjustment mechanism between different currency zones.
These adjustment mechanisms have always been with us, so the real change in Freegold is the “gradual, natural and automatic” part. Gradual (or ongoing) is self-explanatory, but what I mean by “natural and automatic” is that these ongoing adjustments will be allowed to happen or made by choice, not forced or induced by a central bank, because such ongoing adjustments will be in the self-interest of anyone in a position to choose, on any scale.
I’m sure that some of you are already skeptical about what I’m saying. You’re probably thinking that Freegold relies somehow on gold and whether or not it’s embraced by the masses. But here’s another thing that will probably surprise you in the end. Gold has very 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.
2017:
“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.” –Alan Greenspan (1999)
[…]
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.
[…]
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 were 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
--END OF EXCERPTS--
After that, he came back with this:
All makes sense but CBs must hold some assets to secure their monetary base liabilities. In the euro example, returning “excess” gold reserves to the national CBs is fine and I follow.
But, what do CBs then do in the event that they wish to increase/decrease the monetary base stock post revaluation? Back to sovereign debt open market operations with no changes to their respective gold stocks?
I suppose that if the nominal price of gold floats as assumed, then the CB capital positions will float in sync but you suggest fixing the MTM valuation post revaluation.
I don’t have a major beef here as I’ve yet to game this all out, post revaluation in my mind but, it does seem important.
Thanks!
And this:
Thinking further, if commercial banks looking forward are expected to expand their nominal balance sheets (highly likely), then they'll probably need a growing pool of nominal reserves to facilitate that growth.
With your fixed gold price/stock scenario (at the post revaluation price), the only assets then that CBs could acquire to expand liabilities would be non-gold assets which is basically how the developed market CBs have operated post-BW, right?
If that's the case, is that a legitimate path forward for the fiat currency system? At first blush, I suppose it is and it would then operate independently from a private gold market in FG.
Here were my replies:
I’m responding in red…
All makes sense but CBs must hold some assets to secure their monetary base liabilities. In the euro example, returning “excess” gold reserves to the national CBs is fine and I follow. I didn’t say no assets, I only said no reserves, and I defined CB reserves as the IMF does: foreign currency and gold.
But, what do CBs then do in the event that they wish to increase/decrease the monetary base stock post revaluation? Back to sovereign debt open market operations with no changes to their respective gold stocks? CBs can buy and sell assets denominated in their own currency. I don’t care what those assets are. CBs can issue new CB liabilities to buy assets if they wish to increase the money supply, or they can sell assets if they want to decrease the money supply.
I suppose that if the nominal price of gold floats as assumed, then the CB capital positions will float in sync but you suggest fixing the MTM valuation post revaluation. Post-reval, public gold becomes a public asset, just like national treasures like the original Declaration of Independence, public land, public buildings, historical sites, mineral rights, etc. Think of it like the USA’s policy on gold. The Fed only has paper gold. The US Treasury owns the real gold. The price on the Fed’s balance sheet is fixed, but it’s not the real price of the gold, because the Fed doesn’t own the gold.
I don’t have a major beef here as I’ve yet to game this all out, post revaluation in my mind but, it does seem important.
Thanks!
Thinking further, if commercial banks looking forward are expected to expand their nominal balance sheets (highly likely), then they'll probably need a growing pool of nominal reserves to facilitate that growth. Since CB liabilities are commercial bank reserves, the CB can facilitate that growth.
With your fixed gold price/stock scenario (at the post revaluation price), the only assets then that CBs could acquire to expand liabilities would be non-gold assets which is basically how the developed market CBs have operated post-BW, right? Yes.
If that's the case, is that a legitimate path forward for the fiat currency system? At first blush, I suppose it is and it would then operate independently from a private gold market in FG. Exactly. There’s no need for gold to be part of the fiat currency system. Keep in mind the IMF definition of reserves: foreign currency and gold. CB reserves in the past were for exchange rate manipulation, any way you cut it. If a CB buys or sells foreign currency or gold, it is de facto manipulating its currency’s exchange rate with the other one.
Then he replied:
Under that model though, CBs will need to keep some gold reserves (or BTC haha) such that they have an asset to revalue upwards in the event of the next sharp rise in nominal interest rates. Only alternative would be the incessant application of QE and/or YCC of which neither ends well in the longer term.
And I came back with this:
You need to think outside the fishbowl. There won’t be sharp corrections in Freegold. “Sharp” indicates an abrupt adjustment to an imbalance that has built up over time. Freegold, by definition, is a system of gradual, natural and automatic adjustment mechanisms that prevent such imbalances from building up.
Today we have negative real interest rates. They were driven negative by money hoarding by passive non-bank entities (savers). Once you get the passive entities to quit hoarding money (and lending your surplus income to someone else at interest (ie., buying bonds, the most common form of money hoarding), then you will have positive real interest rates again, and all will be well with the world. Sorry for the long excerpt, but I trimmed it down quite a bit. From Global Stagnation in 2014:
Notice that he mentioned the “Wicksellian natural rate” which I noted as being the same as Summers’ FERIR. This theory of interest rates was Knut Wicksell’s most influential contribution to Economics, published in 1898, and it comes from the Austrian School which theorized that an economic boom happened when the natural rate of interest was higher than the market (or monetary) rate of interest. The inverse would be that an economic slump, or stagnation, would happen when the natural rate (or FERIR) was lower than the market rate of interest, which Larry Summers showed that it was.
[…]
Where we differ is in our perspectives on the big picture. Think of it like this: The $IMFS is like a fishbowl, and we are all like goldfish swimming around in that confined environment, wondering why our economy has stagnated and why there's no more room to grow. Krugman, Summers and everyone else are all trying to understand the cause in order to cure the problem within the confines of the fishbowl, while the fishbowl itself is the limiting factor.
It should be no surprise that a fish, immersed in water inside a fishbowl, would not identify the glass boundary as the problem and recommend breaking it in order to grow. Most would not even be aware of the bowl, and even if they were, breaking it would seem like a suicidal means of escape. So imagine that global stagnation is a real problem, but that all 23 economists and virtually everyone else discussing its possible causes and cures are all viewing it from an inside-the-fishbowl perspective, and that what I am offering you in this post is an out-of-the-fishbowl view, even though I'm stuck inside the fishbowl just like everyone else.
What if I told you that the fishbowl is only an illusion? That even though it confines us, we remain inside its boundary not because it really exists, but because we think it exists? And what if I told you that there's a big ocean out there, just waiting for us to break free from our self-imposed confinement?
[…]
As I said, I agree with Krugman and Summers on the symptoms of global stagnation. Where I disagree is on the causes and cures. This is what my Freegold lens (my out-of-the-fishbowl perspective courtesy of FOA) reveals a different cause and cure for today's global economic stagnation.
Okay, let's start with the low inflation problem. Remember that low inflation combined with a low or negative natural interest rate (the FERIR) leaves central banks stuck between a rock and a hard place, the rock being sluggish growth and the hard place being financial bubbles and instability. But with loose monetary policy and explosive growth in the money supply since the 1970s, what could possibly account for more than three decades of low inflation?
I'm talking about consumer price inflation here, which is where the rubber meets the road. Physical plane (the real world and the real economy) price inflation has been surprisingly low relative to growth in the monetary plane (the financial sector and the money supply).
[…]
In a world with many different fiat currencies, the value of each one is a reflection of its economy. "Where the rubber meets the road" means where the monetary plane meets the physical plane, meaning that a currency is worth what its economy produces that can be bought with that currency. But price and value are not necessarily the same thing in the world of many different currencies.
In order to price something, you need a numéraire. So while the value of a currency is what its economy produces that can be purchased with that currency, the price of a currency is its exchange rate with other currencies from other economies. In a clean float with Freegold, I think that the price and value of each currency will be pretty close to equal, but that's not the case in the $IMFS.
The $IMFS is characterized by two things that work in tandem to not only misprice currencies relative to the physical plane, but to systemically cement the mispricing and make it cumulative over the long term rather than cyclical with periodic corrections.
[…]
I don't want to spend too much time on this point, but what it means is that, in an open system with many different fiat currencies, the two things which I said characterize the $IMFS, subjugate, supersede and overpower local inflation drivers. Those two things, once again, are oversized private sector international capital flows and their structural counterpart, public sector capital flows known as the dirty float. As FOA said, "the real cause of price increases is when the exchange rate is allowed to balance a negative trade deficit." In the present case, the cause of price stability in the $IMFS is the dirty float, in which exchange rates are not allowed to balance trade.
In a clean float, you'd have more closely balanced trade, and therefore the local inflation drivers targeted by monetary policy would begin to reassert their influence. Private sector capital flows would still have an effect, but it would correct periodically. And because changes occur more slowly in the physical than in the monetary plane, imbalances driven by private sector financial drifts would not become structural, cumulative and therefore systemically dangerous. Furthermore, and I hope to get into this more later, the predicted transition implies a smaller financial sector, smaller international capital flows, and a shift from financial pyramids and volatility-churning into real economic enterprises as the most profitable focus for "hot money".
People, especially economists, tend to think they understand the causes of inflation. What I am proposing to you here is that, inside the $IMFS fishbowl, most of them are wrong, or at least what they understand theoretically is subjugated globally by the $IMFS and the dirty float.
[…]
In my view, where we are today is stuck in a physical plane (real economy) that is subjugated, superseded, overpowered by and therefore subservient to the monetary plane (oversized financial capital flows). We have actually achieved a remarkable level of price stability for most of the world and for a very long time, but at what cost? In my view, there are two big costs, persistent economic stagnation in a relatively stable price environment, and inevitable periodic currency collapse.
[…]
Even with a higher target inflation rate like Krugman and Summers both recommend, monetary policy would likely have little or no effect as it stands today. In fact, we can see with our own eyes that it has little effect, as central banks have printed trillions in new reserves, practically monetizing consumption directly in some cases, while lowering both short and long term key interest rates to unprecedented lows, and still no effect on inflation.
Some have suggested that, in the case of Europe, the monetization of a broader range of assets, including gold, might be appropriate for monetary policy easing [15]. But all that does is raise demand for the monetized assets, likely raising the price, and in the case of gold causing inflow from other currency zones thereby putting downward pressure on the price of the currency itself. These kinds of purchases do not raise consumption, demand or create new borrowers, but instead they simply transfer existing purchasing power from the economy to prior asset holders. (And in the case of gold, CB purchases beyond a prudent reserve level are just currency manipulations that punish the workers in the economy while actually incentivizing lower consumption as more people will elect to forego current expenditures in order to buy gold: "Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises." - Another).
Even if they could get inflation up, I doubt that it would have the intended effect on the real economy. A certain rate of price inflation may well accompany the kind of economic growth that economists and central planners desire, but I'm not sure causation works in the direction they hope it does. In other words, economic growth may cause inflation, but inflation does not cause real economic growth.
[…]
During the post-war years of 1946-1953, with the US economy roaring on its own, cranking out a trade surplus with Europe as evident in the gold inflow which peaked in 1952 (see Fiat 33), we saw some of the highest price inflation rates ever, reaching 20% in 1947 and 10% in 1951. The point, once again, is that even though inflation may well accompany periods of economic growth, it does not follow that higher inflation rates cause higher economic growth.
For that matter, neither does low inflation—also known as price stability—cause economic growth. In my view, today's price stability has the same cause as today's low interest rates, which is also the same cause as today's global stagnation. As I've said many times before, correlation does not imply causation, and the treating of symptoms rarely cures the disease.
The "cause" that I am referring to is massive, systemic and global money hoarding. Money, at its essence, is credit. It is the credibility of future production revenue made spendable in the present (see Moneyness 2: Money is Credit). That is how new money comes into being, and then it circulates right along with the rest of the money pool as a medium of exchange in the present. The hoarding of such credits, however, overvalues the unit of account itself, as the credits that are not hoarded enjoy a present purchasing power that would otherwise be lower if all existing "fungible credibility" circulated, and such credits were only held as short term balances rather than as wealth reserves. Hoarding, by the way, includes re-lending the credits to someone else, which is the primary way money is hoarded.
The re-lending of credits earned as surplus revenue simulates the money creation process without actually creating any new money, again overvaluing the unit itself as the credits enjoy a present purchasing power that would otherwise be lower if new money had actually been created. Re-lending is fine and normal to a degree. That degree is where it is done professionally, with one's own surplus revenue.
Where it becomes hazardous is when it is done systemically and passively by savers who leave it up to someone else to determine the lending standards. All of this money circulates in the same pool, so using credits as the system's reserves, and the passive savings of virtually everyone in the world, crowds the banks and professional investors within the financial and monetary arena. This crowding pushes the banks and professional investors into riskier and more questionable activities in order to make a living.
The result is low interest rates (because there is too much money competing for a limited pool of credible borrowers), lower lending standards (because passive money is being managed by people who make an up-front percentage and then have no more skin in the game), low inflation (because the process itself systematically overvalues the currency on an ongoing and cumulative basis), and economic stagnation (once debt and malinvestment levels reach a certain point of saturation). That's where we are today, in my view, on a global scale.
Money hoarded as savings or foreign reserves must find a vehicle to be hoarded into. This creates a massively oversized and passively generic demand for debt and equity investment vehicles, which leads to bubbles, malinvestment, debt saturation, across-the-board unprofitability, and ultimately to persistent economic stagnation where uneconomic and unprofitable businesses continue operating at a loss just to service their debt, and in some cases where government stimulus is involved, just to keep people employed.
[…]
In essence, global savings (because in the $IMFS "savings" is defined as money hoarding) has outstripped profitable investment opportunities. There are more "savings" in the world today than there are truly-economic opportunities to make a profit, therefore the very act of saving for the future today worsens imprudent lending standards, inflates valuation bubbles in overpriced (and therefore unprofitable) industries, and promotes the illusion of new rising stars of productivity like [bitcoin].
In supply and demand terms, there is too much savings relative to investment opportunities that are profitable due to real economic value creation. The return on "savings" (interest in the case of debt and dividends or profits in the case of equity) is low because there is too much supply (savings) relative to demand (profitable opportunities). These are exactly the conditions in which bubbles arise—when "savings" or investment capital are in overabundance.
If you think it's good for the economy or for society in general to loan your surplus revenue to someone else, or to buy a company's stock, or even to stuff it in your mattress for later, guess again. You are part of the problem. If you're willing to give it away and forget about it, that's fine, but if you're hoping to reclaim that purchasing power at some point in the future, you are only adding to the congestion that is bringing the global economy to a standstill.
[…] The cure for global stagnation, I think, is very simple. In fact, unlike Krugman and Summers, I don't have a prescription. What would be my recommendation is already happening, so I only have a prediction for how and why it will end.
[…]
The cause of the dollar's overvaluation is the exorbitant hoarding of dollars by foreigners, including both foreign investors (which, yes, includes some of the foreign oil producers, though not to a great extent) and foreign central banks doing the dirty float. And of those two (foreign investors and foreign CBs), it is the CBs that were the cause of the perpetuation which lasted many decades, because they were the ones who bought dollars when everyone else was not.
Eliminate that particular cause, and you don't immediately eliminate the overvaluation, but you do end its perpetuation. And that's where I think we are today.
[…]
What you'll find, if you play out this thought experiment honestly, is that the weakest link in the whole system, the one that will lose its grip and make those numbers meet, is where the rubber meets the road—the prices that connect the dollar to the physical plane of goods and services. [Consumer price inflation]
[…]
The sudden elimination of net consumption by the US as a whole is what FOA called "crashing our lifestyle," but he added in the very next sentence: "Something our currency management policy will confront with dollar printing to avert." A simple devaluation of the dollar would not only eliminate our trade deficit immediately, but in the case of the dollar because it is the global standard for savings and reserves totaling more than $60T, it would deliver a global haircut in real terms to the value of those savings and reserves. Nominally they would still be the same, but their real value would have been halved.
That, alone, would probably be enough to start a cascading avalanche of panic out of dollar holdings that would take the dollar much lower than the initial devaluation. But what FOA wrote—"Something our currency management policy will confront with dollar printing to avert"—is even more true today than when he wrote it and will, in my view, precede and amplify the avalanche, making the US dollar look more like the Zimbabwe dollar than the krona, peso or ruble in the end.
The reason I say it is more true today than when he wrote it is that, when he wrote it, the US private sector was the primary net consumer. But ever since the 2008 financial crisis, the US private sector is no longer a net consumer. We have, in essence, already "crashed our lifestyle." Yet the US as a whole, which in sectoral terms means the US private sector plus the US public sector (the USG), hasn't crashed its lifestyle at all.
Beginning in 2009, the net consumption of the US public sector, the US federal government, with net consumption defined as spending in excess of income, has been equal to or greater than the net consumption of the US public and private sectors combined. Stated simply, the USG's budget deficit has been equal to or greater than the US trade deficit for the last six years.
What this means, if you play out my thought experiment honestly, is that "the sudden elimination of net consumption" will be borne entirely, or at least almost entirely, by the one entity that can unilaterally, not unlike Mugabe, "confront with dollar printing to avert" (or at least attempt to avoid) bearing the brunt of that crash of lifestyle. That singular entity is the USG, and that's the basis for my view of how the US dollar will come to look more like the Zimbabwe dollar in the end.
[…]
As I wrote earlier, my predicted transition implies a smaller financial sector, smaller international capital flows, and a shift from financial pyramids and volatility-churning into real economic enterprises as the most profitable focus for "hot money". I know that many of my readers find this "glimpsing the hereafter" stuff challenging. I mean, everyone's into stocks and bonds today, right? So won't they run back into the warm embrace of paper IOUs right away?
Well, remember the Roaring 20s when everybody including the shoeshine boy was in the markets? After that crash, the average saver did not want to touch the stuff for four or five decades, and that was without hyperinflation wiping out his or her "savings" to 0.01% of their previous purchasing power. This time, I think it will be quite obvious that the only things "left standing" will be "real things".
Even among real things, the degree of purchasing power retention in real terms will vary greatly. This should lead to the usual mentality of risk reduction and channel future savings to a different focal point than today. And it's not just about the focal point which is for truly surplus (i.e., not needed anytime soon) revenue, but all forms of real wealth that enhance one's standard of living through their presence and use will gain widespread appreciation. Like nice, heirloom-quality household goods and furniture, instead of the cheap crap we buy today with the virtually-unlimited credit from an overvalued currency.
Ensuring that you own your home free and clear by retirement is another thing we should see post $IMFS, because it reduces risk. And no, I'm not talking about anything like the housing market speculation of today. All this "glimpsing the hereafter" stuff is based on common sense flowing from the elimination of money hoarding which will have proven so disastrous through the reset. This is what FOA explained so brilliantly, how our very human nature leads our behavior, especially through change.
One other thing I mentioned earlier that I want to expand upon in this final section is that any central bank purchases of gold, or any foreign currency for that matter, beyond a level that is prudent for normal international banking liquidity needs and emergencies (a level which I might add that all major CBs already have in reserve), are just currency manipulations that punish the workers in their own economy by reducing the purchasing power of their wages and transferring that purchasing power to someone else. Such transfers do not increase aggregate demand (i.e., purchasing power), they only transfer it from one person to another.
You may have seen the term "GOMO" used recently, which means Gold Open Market Operations or a CB buying or selling gold on the open market. While this idea has been associated with Freegold, I will tell you now that I don't agree that it is part of Freegold, a good idea, or even that we should expect to see it tried by the incompetent. Don't count on GOMO, because it's not what you are probably thinking it is.
I see a lot of people falling into the trap of thinking that "physical gold purchases can only be good no matter who's doing it", because they are thinking of their own holdings and projecting that personal feeling onto a CB that represents an entire economy made up of both debtors and savers. If you thought it was hard to think like a giant, it's even harder to think like a CB. A giant can underconsume and save just like us, but if a CB tries to do the same thing, it's not really saving. It is merely preventing the exchange rate from balancing trade via the relative prices of goods and services, and thereby mispricing its currency and unnecessarily punishing its own labor force.
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Monetary policy, by definition, is stuff you do at home; Reserves—gold and foreign currency/foreign debt—and operations pertaining to reserves, are not part of monetary policy. They are exchange rate manipulations, and the ECB has made it clear that they aren't doing the dirty anymore. Monetary policy won't change. If you hate this system because of CB monetary policy, then you'll probably hate the next one as well.
What will change is that exchange rates will no longer be manipulated, therefore foreign currency, foreign debt and gold will just sit there, unchanged, on the CB balance sheets. Simple as that. The CBs will still mess with interest rates, reserve requirements, and buy debt and other stuff within their own currency zones, because that's what has at least a little effect on aggregate demand.
--END OF EXCERPT--
Continuing that thought in 2020:
You see, our perpetual trade deficit is the structural foundation underlying everything, and the US dollar exchange rate is the key. “Make no mistake, CB support for our US unit is the only reason its exchange rate didn’t plunge, throwing us into a massive, local price inflation.” Foreign public sector (CB) support wasn’t meant to bolster our markets, it was meant to slow the decline of the USD whenever it became unprofitable, so that it wouldn’t plunge into the abyss. A dollar consumer price inflation that matches the dollar’s past currency inflation would end the US trade deficit in a heartbeat, and the entire $IMFS along with it.
In Freegold, with the clean float it implies, there will still be trade deficits and surpluses, but they won’t be perpetual with a cumulative imbalance that builds up until it collapses. There will still be financial markets in key financial centers around the world that will drive trade imbalances at various times, but they will correct periodically and revert to the mean. There will still be reserve currencies which will be the larger, more liquid currencies that will be held in some proportion by the smaller CBs for the purpose of international liquidity in their local banking system. But none of them will be structurally supported—bought for the sole purpose of maintaining an imbalanced system. And gold will be the primary reserve asset held by [nation-states] as an insurance policy against future crises.
[In the post it said CBs, but I changed it to nation-states because, as I said, in Freegold, CB gold will be recognized as the public’s gold, not the property of a bank to be revalued to recapitalize the bank in a crisis. The revaluation will have already happened, and it will only happen once.]
In the future, if you look at a long-term balance of trade chart for any of the reserve currencies, you will see that it bounces back and forth from surplus to deficit and back again on a regular basis.
[…]
The problem is that getting the US chart there will require a collapse in the USD exchange rate, which will be accompanied by full-blown hyperinflation.
Think about how that will look on a nominal chart … the US trade deficit will explode to huge negative numbers, while it collapses to zero in real terms. And then once the new dollar is established (minus a few zeros via The Great Lopping™), it will be at zero in both nominal and real terms and begin fluctuating up and down like everyone else.
I think the clean float, as I imagine it operating in Freegold, is basically already here, and now it’s just the foreign private sector piling into The Dollar Bomb Shelter™, global stagnation (The Dollar Short Doom Vortex™) and possibly a few other technical phenomena playing out that are supporting the dollar and the entire $IMFS as it gasps for its last few breaths. I don’t think it (the clean float) has been here for a very long time, but maybe for the past six years or so, since 2014.
Our perpetual trade deficit is really just an effect of the rest of the world’s monetary and financial actions, not a cause. But even so, it has become structural to not only the entire global financial system, but to our own economic system and, most importantly, to our voracious and spendthrift federal government, who also controls the US dollar printing press in extremis.
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Freegold isn’t about gold settling imbalances at all levels, only at the individual saver level. At the sovereign or central bank level, it will just be a reserve, one that lies very still until it is needed in an emergency.
--END OF EXCERPT--
I realize that wasn’t all exactly on point, but thinking outside the fishbowl requires a full picture of the landscape.
So, CBs will still have the gold that they currently do. Debt will be held by banks and professional investors, and there will be some risk involved for the higher returns it provides. Inflation will be in the low single digits and stable, and interest rates will be slightly above inflation. Banks will compete with professional investors for the most qualified borrowers, and since banks can create lendable funds from thin air, they will always get the better debtors by providing the lowest rates. Investors will buy the bonds of riskier borrowers, like riskier businesses. Gold will finally track inflation, providing the perfect, risk-free savings.
The US national debt will have been wiped out by hyperinflation, and the USG will have been forced to dramatically downsize. It took a long time to get to its present size with the help of the exorbitant privilege, and that will be gone as well. So, the USG will be back to funding itself through taxation (or tariffs?), just like state and local governments, and everyone else, and the current UST structure that’s supporting the entire banking system will no longer exist. It’ll be a blank slate for a newly reduced federal government and international monetary and financial system.
Freegold is what remains when the current system implodes.
Gold at the national level will be a wealth reserve to be tapped only in the case of a national emergency, natural disaster or war. It will lie very still until it is needed.
Gold at the individual saver’s level will keep the world in balance. When a saver hoards money, that hoarded money represents an imbalance between the monetary and physical planes. Gold is in the physical plane, so when the saver buys gold with his hoarded money, it reduces the imbalance between the monetary and physical planes. The same amount of money still exists, but it has gone back into circulation. It has gone to an older saver who is now in the process of dishoarding, and needs the money to support his retirement. Multiply that by a few billion, and the world is suddenly stable again.
Hoarded money overvalues the numeraire (in our case, the US dollar). Circulating money does not. The US dollar is so overvalued today that there’s no way out except through collapse. It’s a Gordian knot. It is too complex to be untied, so it will be cut. And when I say it’s overvalued, it’s not that a single dollar buys too many donuts, it’s that the accumulation of perceived dollars in dollar-denominated assets can never be redeemed at anywhere near today’s prices. That’s the clearest way to see the overvaluation. That, and the size of the USG.
Price inflation is eating away at the dollar’s purchasing power right now, but not in the purchasing power of dollar financial assets, ie., perceived dollars. Asset appreciation via the Dow or S&P 500 is handily beating inflation at the moment. Up 26% to 36% in a year. So, even with current inflation, the dollar overvaluation is still increasing. When this sucker blows, it’s gonna leave a crater. And imagining what that crater will look like is what I do! 😉
Sincerely,
FOFOA
