Glimpsing the Hereafter

Welcome back, Ari!! If you don't know ARISTOTLE, that's probably because he took a brief hiatus of 7 years and 3 days from posting comments about Freegold. And that was after 6 years of posts and comments prior. So needless to say, I'm THRILLED to have him back!

Ari wrote me an email the other day including this: "In the meanwhile, I'm happy to note that Bill Gross has (yet again) stepped up to the challenge of carrying some water for us today. Begins folksy and ends golden. Now that's what I call having a worthy waterboy(!),,, he being manager of the largest mutual fund on the planet (i.e., PIMCO's $242 billion Total Return bond fund)."

Here's the quote with which Bill Gross begins his latest and greatest, Life and Death Proposition:

Where do we go when we die?
We go back to where we came from
And where was that?
I don’t know, I can’t remember

Virginia Woolf, “The Hours”

With this lead-in he draws a comparison between death and the hereafter, and the death of our financial system built upon the lending of real savings to debtors with what comes next. He goes on to explain, "The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter." But at least he gives it a shot with a little help from Virginia, ending with, "Where does credit go when it dies? It goes back to where it came from."

Now, while I can't help you very much with the pearly gates, I can indeed help you imagine the monetary and financial hereafter. It matters little to me if you believe me or not, because I still think there is value in sharing this vision either way. Someone (who incidentally named his band Third Eye Blind) once remarked, "I don't really believe in crystal balls, but I respond to the need for them." And so now I'll dust off my own very special crystal ball with a wink and a nod to a few of you who understand this need.

I do recommend reading Bill's entire piece as he lays it out nicely how hitting the zero-level floor in USD interest rates is inevitably leading to a "liquidity trap" for earned savings. It sounds to me like the inescapable gravitational pull of a black hole singularity that, perhaps, creates similar difficulty in trying to see through to the other side.

Bill Gross is in the business of helping savers lend their savings to debtors through the use of bonds. And he has done very well in this business, which is why he is acutely tuned in to the implications of zero interest. With zero interest, you can't earn a yield or a capital gain as you can when interest rates are high and falling. And so there is no reason for savers to lend money to debtors for the longer terms necessary in order to run an economy. In fact, it is terribly risky for savers to do so in a zero rate environment.

The New Normal

There is no "fiat management" solution for the problem Bill describes. The savers simply cannot lend their savings to debtors anymore in a way that is beneficial to both the economy and the savers. Even the King of the bonds himself is sounding this alarm. But there's another trend in this new normal that should be even more alarming to savers still holding longer dated debt. Whenever and wherever push comes to shove, the savers will be and are being forced to take losses while the system protects itself on a nominal basis. Just look here:

Obama to Use Pension Funds of Ordinary Americans to Pay for Bank Mortgage "Settlement"
"[P]revious leaks have indicated that the bulk of the supposed settlement would come not in actual monies paid by the banks (the cash portion has been rumored at under $5 billion) but in credits given for mortgage modifications for principal modifications. There are numerous reasons why that stinks. The biggest is that servicers will be able to count modifying first mortgages that were securitized toward the total. Since one of the cardinal rules of finance is to use other people’s money rather than your own, this provision virtually guarantees that investor-owned mortgages will be the ones to be restructured. Why is this a bad idea? The banks are NOT required to write down the second mortgages that they have on their books. This reverses the contractual hierarchy that junior lienholders take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administration’s instigation."

Please allow me to translate. If you or your pension fund bought any kind of fixed-income securities (also known as bonds), you loaned some of your savings to debtors. Private debt is created by banks expanding their balance sheets. Some of it remains on the bank balance sheet and some of it is sold to savers like you. Securitized and sovereign/public debt is the $IMFS proxy for gold. But when the debt defaults, the savers take the loss. The system will be protected at all costs. It may make you angry, but that's just the way it is and always has been.

So it appears that the system will write down the debt held by savers before that held by the banks in this case, to protect the system. When debt defaults, SAVINGS are destroyed because debt is the proxy for a store of value in the $IMFS. Wherever possible, earned savings will be forced to take the losses first. But if too many losses happen at once, they will be socialized to protect the system. The system always protects itself, first by sacrificing the low hanging fruit, then by sacrificing the currency itself.

I'm sure that by now you have all learned the two new buzz-terms, "the ISDA" and "the credit event". If not you can read about them here. Basically, a group consisting of bankers has the job of deciding whether the banks or the savers will take the loss on Greek debt. The deck is stacked against us wherever we turn.

I'm not here to cast judgment on this systemic inequity between banks and savers. I have long followed in FOA's (and ARI's) footsteps in pointing out that this is simply the way it has always been. That's a pretty good reason to not save within the system, wouldn't you say? When push comes to shove, the system will protect itself and force losses onto the savers. Ultimately, inevitably, today's dollar will lose so much real value that it will save the banks nominally while putting all systemic losses onto everyone holding dollars, regardless of the default of debtors.

Here's a quote from an article that caught my eye the other day:

"It’s tough for risk averse savers but that is what US monetary policy has been about—forcing them to buy risk, and higher returns. That policy is working but trillions of savings still sit in cash or bonds."

Savers are not investors, traders or speculators

This little concept is something ALL Westerners are going to relearn one way or another. Mark my words right here and now. In The Studebaker Effect I wrote:

"A saver is different from an investor or a trader/speculator. A saver is one who earns his capital doing whatever it is he does, and then aims to preserve that purchasing power until he needs it later. Investors and traders aim to earn more capital by putting their already-earned capital at risk in one way or another. This takes a certain amount of specialization and focus. But this difference is a big topic for another post. And anyway, it doesn't matter so much in terms of the gold thesis for today.

Today the system is in transition, so you can throw your ideas about these differences out the window. There is no safe medium for simple preservation of purchasing power when the entire system shifts from the old normal to the new normal. When systems implode, the safest place to be pays off big time!"

That second paragraph denotes the difference between stasis and punctuation in monetary evolution. Today we are approaching a period of punctuation, but in the hereafter stasis we will all understand that savers are not investors, traders or speculators.

I have refined my best advice for buying gold over the last few years. Here it is, quoted from a recent email response I wrote to someone asking if his parents, serious savers, would do well to take on as much debt as possible in order to "save" more physical gold:

"Firstly, let me say that I never recommend anyone taking on debt to buy gold. That is what speculators do and savers are generally not equipped with the necessary tools it takes to be a successful speculator. There are too many potential pitfalls for savers to do something like that. In general, my advice is to get out of debt and put at least 5% of your savings into physical gold coins or bars in your possession (or at least under your immediate control). I believe that 5% is a no-brainer. You don’t really need to understand much about gold to go in 5%. But I wouldn’t do it in any kind of paper gold or even paper products claiming full physical backing. Paper gold is for ease in trading, not for saving. I say do it in physical and 5% will at least keep you whole come hell or high water.

Beyond that, I say buy only as much gold as your understanding allows. For many who have read my blog for years, understanding has led them to be 90% to 100% in physical gold. I, myself, am very close to that. And I know a few that have been 100% all in since the late 90s, with $millions in physical gold. But you don’t do that unless you have complete understanding of what you are doing and why. Only buy a percentage of gold equal to your understanding. 5% is a no-brainer and anything less than 5% is reckless pigheadedness with what's happening today. That’s my best advice."

You see, a saver is still just a saver, even today, even when we are in the punctuation phase. And that's not a put-down. The greatest giants in the world are savers. When we look at what it is to be a Capitalist, it is completely separate from the act of saving. The primary definition of a Capitalist is one who has capital invested in business.

There is a difference between preserving purchasing power and trying to increase your purchasing power by navigating your way through risk. As the quote above correctly describes savers, they are "risk averse". That's the very definition of a saver. Any deviation from full risk-aversion and a saver becomes something else; an investor, a trader or a speculator.

My point is that the header for this section is a deep concept, a timeless truth, a little bit of wisdom from the ages. Savers are not investors, traders or speculators. And since this post is about glimpsing the hereafter, give me a few minutes while I consult my crystal ball. Here's some music while you wait…



After The Transition

One of the things I have found that people have a hard time grasping is that ALL savers will want to be in gold after the transition, even though it won't deliver ANY real gains like we've had over the past decade. This is a difficult concept to wrap one's head around. People seem to think that they are in gold only for the big 30-bagger revaluation and then they'll want to find something else in which to put their little dollar soldiers to work earning a yield. Either that or they imagine that Freegold will be an environment of perpetual real gains for gold holders. It will not.

Freegold will be simple purchasing power preservation, and you'll love it! No gain, but also no risk and no loss. That's what savers need and want. And most of us are savers whether we admit it or not. This is a really big idea we need to contemplate if we don't want to be run over in the end.

Any financial advisor in today's $IMFS can explain the reasoning behind investing in fixed income securities also known as bonds. They are for risk-averse investors looking for a constant and secure nominal return on their investment. In theory, the safest bonds will deliver a nominal return equal to the purchasing power your principle investment loses to inflation over time. So, in theory, the safest bonds are supposed to do what gold will in fact do in Freegold, perfectly preserve your purchasing power over time.

How can gold perfect the preservation of purchasing power you ask? It's quite simple really. It will come from a global shift in perception as to the very reference point for purchasing power. What is the benchmark for purchasing power today? The Big Mac? Ha! Think about that one and get back to me. In the meantime, check out my post Reference Point Revolution!

So in today's system, securitized debt is the way various tranches of debtors bid savings away from the savers. And over the three or four decades in which this has been the norm, a strange concept has grown into nearly universal acceptance. That is the idea that savers have a moral obligation to society to lend their savings to the debtors, and that by hoarding gold instead, you are somehow depriving society of your vital net-production. An absolutely ridiculous, bass-ackward notion!

Charlie Munger said it this way:

"Oh, I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me, that's not optional. That's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk."

To Charlie I responded with this:

"So Munger and the Dingbat are wrong wrong wrong! You're a jerk if you save in paper, enabling the destruction of Western Civilization. Rational people everywhere have a moral obligation to buy ONLY physical gold with their savings. If you're capable of understanding the REAL world, you have a moral obligation to become rational. And I don't see how you become rational investing in Charlie Munger's paper. Even if it works, you're a jerk, just like ol' Chuck."

Imagine I produced 50 million iPhones for the marketplace. And through that net-production I was able to save $10 billion. If I buy gold with my $10 billion rather than lending it, am I depriving the economy of my iPhones? Of course not! Have I deprived the economy of my accumulated purchasing power? Nope. I simply gave it to another saver who was ready to end his consumption deferment. And, amazingly, the credit money system still allows the debtors to borrow purchasing power to buy my iPhones. But the best part is that hoarding gold does not deprive the economy of anything. You can read more about this concept and my response to Charlie M. in my post A Winner Takes the Gold.

Before and After

My long-time readers are aware that, beginning with All Paper is STILL a short position on gold in March of '09, I have been refining a conceptual model of the $IMFS stasis and punctuation periods based on the inverted pyramid developed by the deflationist economist John Exter in the 1970s.

Exter put gold at the bottom of the liquidity pyramid, just below the dollar. He said that gold was the most liquid asset. And in the end, he envisaged a rush down the pyramid to liquidity in which we would see the dollar and gold rise together for a time. As Gary North wrote in 2009, "So far, his theory has yet to be tested. We have not seen a rising dollar and a rising price of gold."

But I will note that ANOTHER wrote something in 1997 that seems to back Exter's view:

Date: Wed Nov 05 1997 20:33
ANOTHER (THOUGHTS!) ID#60253:

The price of the metal in currency terms will be made for all to see as it moves quickly upward for a very short period of time ( 30 days ) . After that only black market traders and third world noones will understand its price! When is this going to happen? I have no idea. Is there anything to look for that will tell us when the problems have started? At first the US$ and gold will go up together against all other assets!

Interesting, huh?

8 months after the "All Paper" post I wrote Gold is Wealth in which I built an upright pyramid under Exter's, representing the physical plane of goods and services, and forming a kind of hourglass shape:


10 months later, in Just Another Hyperinflation Post - Part 3 I used this model to illustrate the flow of capital during a currency collapse:


And now, what I'd like to do is to take a stab at modeling what this might look like after the transition to Freegold. All modeling up until now has been before and during transition. But presumably things will look a little different hereafter, don't you think? Costata and I have been discussing where gold should go in the "after" model for a while now. Should it be in the monetary plane or the physical plane? Should it be parallel but off to the side of the currency, or what?

While we have not come to an agreement on the nitty gritty details of the "after model", I'd like to put my general thoughts out there because I think that you will find them useful (and my crystal ball says so too). So here's the very basic before and after. I have put gold up where the financial system collapsed in the old $IMFS. But don't worry, I'm not going to leave it there:

The placement of gold in the "before" really doesn’t matter for our purposes right now. It could be in either plane or both. But in the "after" it has filled and replaced the arena formerly occupied by derivatives, securities and paper trading wealth in general (securitized debt).

So what’s the purpose of this exercise? Here’s what I’m thinking. Everyone uses the bottom pyramid, both debtors and savers. And everyone uses the currency portion of the monetary pyramid. But only the savers utilize the top portion of the monetary pyramid. The debtors are no longer the counterparty to the savers so they have no business up there. The only way to get up there is to produce more than you consume so that you have some excess capital with which to buy gold. Then you are a saver. So it looks something like this:

(If you'd like to see these in full size,
right click on the image so you can
open it in a new tab or window)

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Side Note:

Yes, I do realize that there will still be investors, traders and speculators willing to risk capital in search of a yield, even in the hereafter. But once you come to terms with how much of that investing and trading world of today is actually filled with savers who think that's the only way to preserve purchasing power, you'll see just how tiny by comparison it will be after the transition.
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We ALL exist in the physical plane. That’s where we produce and consume. Currency facilitates the flow of value in the physical plane of production and consumption. Some consume amounts equal to their production, some consume more than they produce, and some consume less than they produce. Only this last group ventures above the currency line. The rest all exist comfortably below it.

Currency’s main purpose is to lubricate the flow of value. Gold’s main purpose is to store or stockpile value. Stock and flow. Gold and currency. Currency will also store value for periods of time, but that is not its main purpose. If currency happens to behave as a temporary store of value, that’s only a secondary effect created by its suitability to its primary role. Mises said as much (which is in my Honest Money post):

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.

It’s probably best to replace Mises' use of the term "money" with "currency" for the purpose of my new model. It comes down to the whole semantic issue of whether Freegold is DEmonetizing gold as FOA said, or REmonetizing it as Moldbug says. Potato po-tah-toe semantics IMO. FOA's demonetizing really means de-currency-fying, or removing any sort of link between gold and currency that would cause a direct correlation between their prices. Moldbug's remonetizing means gold moving from a commoditized role into a wealth reserve or store of value role, which is commonly thought to be one of the three functions of "money" today (although Mises might disagree as in the above quote).

So that whole gold section of the top pyramid is like an exclusive country club for savers, like the men-only clubs of yesteryear, where we savers all sit around smoking cigars, practicing secret handshakes and agreeing that we'll only buy gold with the excess left over from our net-production and deferred consumption. And if there was an actual club, the savings medium could theoretically be anything we agreed on, like baseball cards. But because there’s not an actual club nor a secret handshake, we rely on the focal point and network effect principles to identify and optimize that singular item.

All gold transactions are essentially from saver to saver. The debtors need not be involved nor concern themselves with our exclusive club interactions. When a saver produces some excess and leaves it on the proverbial table at the economic fair, he buys gold from another saver (either inside or outside of his zone) who has decided to dishoard some of his gold in favor of consumption. It is the changing purchasing power of gold that determines how much gold (by weight) changes hands. (Please review my post The Debtors and the Savers if you are unclear about my novel demarcation.)

Debtors net-consume on a sliding scale ranging from consuming exactly in proportion to their production on down to consuming as much as they can get away with borrowing. So netting it out, all net-exports from a zone come from the savers. The debtors consume their own production plus some of the savers' production, and if there’s anything left over it is exported. That’s what happens in the "surplus ex-gold zone". Gold is flowing into that zone. So the debtor's actions do have an influence on the balance of trade even though they don’t contribute to exports.

But when the debtors are borrowing too much currency and consuming too much in the physical plane, there is a mechanism in Freegold that ultimately slows them down. That mechanism is the purchasing power of the currency. When the debtors are consuming too much they'll experience price inflation which will force them to consume less. So it is the purchasing power of the currency that regulates the debtors. But changes in the purchasing power of gold within the exclusive savers' club is not linked to the mechanism which limits the debtors.

The purchasing power of gold can be rising or falling regardless of whether currency prices are inflating or deflating because gold is like an isolated circuit. Savers choose to hoard or dishoard (produce more or consume more) based on the changing purchasing power of gold, not currency. So the savers' savings is circulating in a closed circuit where it can be experiencing the same or opposite effects as the currency. It is truly an escape option like OBA's Maglev.

So we can cut gold off of the pyramid structure if we want to, and we can put it wherever we want. We can stick it back in the physical plane since gold is physical, just like baseball cards, or we can set it off to the side, or we can just ignore it and cut it off, like this:

Where’s gold? Who cares? It is a closed, isolated circuit for the savers only. Now (above) we are dealing with only the parts that involve everybody. And it is no surprise that the monetary plane is so relatively small. At least it is no surprise here. A little currency goes a long way. From Gold: The Ultimate Wealth Reserve (2009):

Imagine an island of 100 men with a money supply of 1,000 sea shells. That's 10 sea shells for each man. But over the course of a year each man on the island works and earns an annual salary of 100 sea shells. So the total economic power of the island over a year is 10,000 sea shells. We could say that the GDP of the island is 10,000 ss. We could also say that the demand for sea shells is 10,000 over the period of one year and that demand is met by a supply of only 1,000 sea shells.

Now imagine that ownership of a piece of real estate on this island costs about 2 year's salary, and that there are enough pieces of land for each man to either own or rent one. So each piece of property might cost about 200 ss. The entire island's worth of residential real estate would be in the ballpark of 20,000 sea shells, twice the GDP. Yet the money supply still remains at 1,000 sea shells and that limited supply somehow meets demand.

The reason this works is because sea shells are the currency. They circulate and pass from hand to hand over a short timeframe. This is called velocity and it has the exact same effect on the value of a single sea shell as does the size of the money supply. On our island 1,000 sea shells change hands 10 times per year creating an island GDP of 10,000 ss. If they changed hands 20 times a year the GDP would be 20,000 ss. Or if we doubled the money supply to 2,000 sea shells that changed hands 10 times per year it would also yield a 20,000 ss GDP. So velocity and money supply of the currency have exactly the same effect.

So we can have a physical plane whose total net value is much greater than the total amount of cash. That’s because "The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things." (quote from Moneyness, a must-read post IMHO!)

Same goes for gold. All the gold can be worth many multiples of all the currency. There is no need for any correlation. Gold (in size) circulates slower than homes. It circulates on a generational time scale. So the currency denominates the value of everything else without needing to have any quantitative correlation with all that stuff. Can you imagine if there had to be $500,000 cash sitting in a vault somewhere earmarked specifically for your house in order for your house to be worth $500,000? No, of course not! Your house is worth $500,000 because that's its value relative to other things with known prices.

So now let's talk about the debtors.

What they like to do is indenture themselves for the future in order to obtain purchasing power in the present. They can only spend that purchasing power once and then it's gone. It has gone from them to someone who earned it. So the next person who spends that "borrowed into existence currency" is someone who already contributed to the economy and earned it. The borrower gets to spend it once and then he has to work it off by contributing to the economy over a period of time.

In the previous section I told you that price inflation will be the automatic governor of any consumption binges undertaken by the debtors in the hereafter. But while price inflation will limit the debtors' ability to perpetually consume, it will not affect the purchasing power stored in gold by the savers. In fact, my crystal ball informs me that it is the savers lending their excess production directly to the debtors that allows for the perpetual deficits we struggle with today.

I think that if we look closely at how the debtors use the fiat money system with and without the assistance of the savers, it will become clear that we will all be better off with a bifurcated monetary system. And it will certainly be clear that the savers have no business taking debtors on as the counterparty to their savings.

It would certainly be massively inflationary if we went from no debt to all of a sudden everyone borrowing at the same time. But in reality, there is someone working off his past debt whenever a new debtor goes into new debt. Of course old debtors and new ones don’t precisely offset each other, but that’s okay, because gold savings first float against the currency, and then they also float in their isolated circuit of choices made by savers based on the changing purchasing power of gold (not its currency price, but its purchasing power).

So gold has kind of a double float. It floats with the inflation/deflation of everything else. And then it also floats in a closed circuit consisting only of savers (and their "hoard/dishoard" choices), of whom the majority (measured by value stored) are intergenerational giants.

Now that I've hopefully established that in the hereafter a) "a little money (currency) goes a long way" and b) the savers are sufficiently protected against any inflationary mayhem the debtors may cause, let's zoom in on that small "monetary plane" and think about how it works.

In a future post I plan to delve into the vital and delicate relationship and balance between base money and bank credit money and how it affects the value of our money in terms of its ability to lubricate commerce. But for now, I have a couple of questions for you to ponder.

In thinking about the money supply (cash and credit inclusive) that is actually in the economy, would you count cash that is stacked up inside an ATM as part of that supply? Here's a hint: That cash is not in the economy until someone withdraws it from the ATM. If you count it while it's still inside the ATM then you are double counting that money.

Is it a positive sign for the future when there are $Trillions in savings sitting in cash and near cash equivalents? All that money must mean we are loaded, right? It must mean our cash dollar is strong which implies the market thinks it will be that way in the future, right? If $Trillions are good, wouldn't $Quadrillions, $Quintillions or $Sextillions be that much better? And with this thought in mind, does a rising amount of savings crowding into cash and near-cash equivalents represent a positive or negative view of the future?

Those super-low rates at the short end of the yield curve represent really big money, too big for FDIC protection, that just wants to save itself. It is big money that, like Bill Gross says, is far more concerned about the return of money (purchasing power preservation) than the return on money (yield). That short end is an awfully crowded place in the land of ZIRP forever and monetary evolution, especially when you consider the time factor. (H/T OBA)

Of course, what I have described above is a simple model. The reality will be a bit more complex. For instance, gold will have some competition although it will be tiny in comparison to today. Some government debt will likely compete for your savings. But the US government, for example, will have to compete just like the Greeks do today. And we will still have a much more limited menu of investments and trading opportunities to lure you into putting your hard-earned savings at risk.

Like I said at the top, I can't help you much with what it will look like after you die. My crystal ball ain't that kind of crystal ball. But I can tell you that somewhere, some way, some day we will all find out. Fortunately though, my crystal ball does work for the monetary and financial future. It paints a nice, clear picture, yet on timing it's still a little hazy. But one thing it does make perfectly clear is that it's just a question of time.

Sincerely,
FOFOA

My Candid View – Part 9

"Gold is the only money the world has ever known"
Sounds like a simple thought, but it isn't.

To understand the following you must rethink your basic
knowledge of money and investments. Get your aspirin ready.
–ANOTHER

What will change is how we view money and wealth

Everything else in Freegold flows from that!

HI FOFOA,

Your e-mail to XXXXXX on GOFAUX has, so far, left me with just one question, is the warehouseman draining his inventory (of gold) simply a matter of price? If not, what allows the warehouseman the ability to "drain"/reduce his inventory?

On a very different note,

You wrote the following in an e-mail to me:

"but if you could frame this detail (the monetary history of paper gold which extends from the 1922 Genoa Conference up to the present day) in a way that dovetails with Rickards' recounting of a few events…"

I think what would be meaningful, and what I am guessing you may have in mind, is discussing how the freegold narrative views paper gold as an approximately 91 year old phenomenon featuring a few different iterations that were designed to prolong whatever system was in place at the time. Freegold is a solution to approximately a century of paper gold machinations that were either erected to save whatever gold standard existed at the time or to cope with the problem that was incurred when the gold standard was terminated. The gold problem (and the monetary system's state of chronic crisis) is, in large part, down to nothing less than the inability for prior generations to employ gold most effectively, i.e. floating against all currencies in the absence of paper proxies.

Cheers,
Edwardo

Hello Edwardo,

"is the warehouseman draining his inventory (of gold) simply a matter of price?"

No, not at all. The warehouseman doesn't care about the price, because all he is essentially doing is arbitraging two different prices, the spot price and the future price. When that spread is wide, he's adding inventory. When it is tight (or negative), he's draining inventory. But don't get hung up on causation, because maybe the spread (contango) is tight because he is draining inventory, or because of that which is actually causing him to drain inventory. So then why is he draining inventory? Perhaps because the supply flow (at the top level, not in our field of view) is so tight that he has no other choice.

If you are interested in this perspective, Fekete's seminal paper on it was in 2004 and it is here:

http://www.professorfekete.com/articles/AEFWhatGoldAndSilverAnalystsOverlook.pdf

The paper is 16 pages long, but I only recommend the first 9 pages, up to the sub-heading "Understanding the Silver Market". Even though it is peppered with bits of HMS nonsense, it is a great description of the basis, contango and backwardation which I reread to refresh myself whenever discussing this subject. If you can understand it in the grain elevator terms like he explains, then I think you will have a deeper understanding than even someone who has mastered more complicated explanations.

Regarding this: "Freegold is a solution to approximately a century of paper gold machinations that were either erected to save whatever gold standard existed at the time or to cope with the problem that was incurred when the gold standards was terminated."

I think (and so do you) that Freegold is the solution to thousands of years of problems stemming from the use of the same medium in two contradictory roles. So I would say that the last 91 years since Genoa is more like the period of evolution of the thoughts underlying this elegant solution. Jacques Rueff's 1932 speech, which was focused on comparing the Genoa monetary conference 10 years earlier with another monetary conference that also occurred in Genoa back in 1445, is the oldest text I have read that hints at the beginning of this evolution of Freegold thought. In fact, I would probably call Rueff the father of Freegold thought. Here's how that speech in 1932 began:

"The story I am going to relate covers a long period. It is the life story of the gold standard, now afflicted with so grave an ailment that only time will tell if the victim will succumb or be left, at the very least, in a state of virtual paralysis."

This is the same person who, 40 years later in 1972, wrote:

"The situation I am going to analyze was neither brought about nor specifically wanted by the United States. It was the outcome of an unbelievable collective mistake which, when people become aware of it, will be viewed by history as an object of astonishment and scandal."

So that's how I would portray the period consisting of the last 91 years; as the period in which Freegold as the solution emerged through trial and error, some planning, some theoretical thought, and the practical efforts of self-interested players at the highest level.

Sincerely,
FOFOA

Regarding the drain from the warehouse, I have this silly remnant of an idea in my mind that amounts to "drain=removal" as in the warehouse is literally being emptied of its physical, which is not the case. It could be that pallets of gold go out, but it is by no means de rigueur.

Regarding freegold as an evolution that solves thousands of years of years of problems stemming from fusing the MOE with the SOV, well, that is going to make a very powerful talking point, and one I look forward to introducing.

Think about the warehouse as having two sections, or two sides. On one side they simply offer the service of storing your gold for a fee. That's where all of the allocated gold sits. On the other side they store gold that they bought, mostly from the mines, while collecting the fee from the speculators playing in the futures market. They buy up any slack in the flow and sell futures at a higher price keeping the difference as the storage fee, rather than collecting a fee directly from the owner of the gold.

That way, you can think about the "draining" of the warehouse as all of the gold either a.) leaving the warehouse or b.) being slid over to the other side where it's all allocated to specific customers.

Drained gold going to allocated vaults I understand, but what about gold that is leaving the warehouse that is not going to an allocated account?

Where might that gold be going? To folks who want to store it somewhere besides the warehouse vaults? Sorry to keep banging on about this but I wants to know.

Some might be going East or Mid East, but I doubt it's as much as people think. At least probably not as much LBMA LGD bars. Remember, there's still some flow of new gold coming in, so that would go to supply "outside of the LBMA demand" before LBMA bars would be shipped. Some might be going to Switzerland to be melted and recast into kilo bars which are very popular in the East. Bron and Warren speculated that this is why it seemed like more "four nine" bars were being redeemed from GLD than the lower purity bars. Kilo bars are all "four nines" whereas London Good Delivery bar specs do not require that much purity. So if they were going to melt them to make kilo bars, the lower purity LGD bars would require additional refining i.e., additional cost.

But I'm not so sure about that explanation. Today more gold is being refined to .9999 anyway, so the "newer bars on top" might tend to be higher purity and, like I said, the "new" flow should be going to fill that "outside demand" before they move a single LGD bar. Remember also that XXXXX said HSBC was requesting gold shot from the refinery's scrap recycling. That would likely go toward the "outside the LBMA flow".

I think that there's probably enough "inside LBMA demand" to prevent too many LGD bars from exiting the system. So I think that a lot of the movement we see is probably just location swaps within the LBMA system. Think about the tight flow being asymmetrical amongst both individual bullion banks and locations. Gold coming in doesn't necessarily match the demand for gold going out in terms of which BBs are taking in versus which BBs are putting out, and the locations where the gold is being demanded.

So, netting out the entire LBMA system in aggregate, I tend to think that there's probably not as much "physically leaving the warehouse" as most people think. Basically just the entire new inflow is "leaving" while the bars already inside are being shuffled around to match allocation requests. I'm sure there are some LGD bars leaving the LBMA and heading east or being melted down, but probably not too many IMO.

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Are you ready for your interview? Do you have your hair, make-up, wardrobe and set design sorted?

My shirt has been picked, my hair will be in reasonable shape, so to speak. My background will likely be a bookshelf, though it may be a window (a symbolic reference that some on the blog might appreciate) or even just the wall behind my chair.

I have some questions: One is about gold for trade settlement come freegold. Will gold move a great deal or will the flow not necessarily require it to actually leave vaults. I feel silly asking, but I'm just not sure.

Also Another and FOA's predictions and analysis that have come to pass/been borne out. Care to offer a list?

"I have some questions: One is about gold for trade settlement come freegold. Will gold move a great deal or will the flow not necessarily require it to actually leave vaults. I feel silly asking, but I'm just not sure."

I think it will be a bit of both. The flow will be automatic, not unlike how the US trade deficit has automatically equaled demand for new issue Treasuries. Of course today the supply of Treasuries has overtaken demand, but that's another subject. The supply of gold will not overtake demand in the way it has with Treasuries, it will simply meet it. So gold will simply flow opposite the net flow of goods and services.

It will do this in a much more distributed way as compared to the more centralized way Treasuries flow. So distributed, in fact, that we will likely not even track it other than reporting its net movements on the BOP, which will magically balance once gold is figured in.

Those who trade inside the LBMA will likely be mostly private Giants, and in some cases London will be, by far, the safest place for them to store their gold. I'm not really sure how those capital flows (changes in ownership) will be reported on the BOP, and I don't really think it matters. It'll probably show up as some form of foreign investment or something.

But basically trade will balance without the need for massive and ever-increasing debt to keep it balanced. Gold will flow across borders in sizes ranging from grams in envelopes to pallets on planes. Geographical demand will come from zones shipping out more goods and services than they are shipping in, so the balance will be filled with gold. And if some of that demand is from Giants who want to buy gold that's already in London or Zurich and keep it there, that'll probably be recorded the same as if they bought some other immovable asset, like a building, although gold may get its own category in that regard.

"Another and FOA's predictions and analysis that have come to pass/been borne out. Care to offer a list?"

Most people would say that their predictions have not (yet) been borne out. And of course I focus more on the conceptual truth in what they exposed. But here's one courtesy of Michael H:

Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

Michael H: "Who says that events since 2001 haven't played out as A/FOA expected?"

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600

Another one was this comment:

Date: Wed Nov 12 1997 20:41
ANOTHER (THOUGHTS!) ID#60253:

Date: Wed Nov 12 1997 14:26
Markus ( BIS Decisions ) ID#283277:
ANOTHER: Could you please enlighten us as to the Bank of International Settlement decision you allude to in your recent post?

Markus,
A BIS meeting was held and from those doors the world did change. The Bundesbank has now made clear to all what will now be policy for CBs. A crisis is at hand! All physical gold sales will stop. All gold lending will wind down.

Less than two years later we had the WAG. And more recently, we have the release of the Bundesbank's gold actions over the years, both of which support the idea that ANOTHER must have been an insider of some kind.

I'd have to say that my fascination with them has very little to do with their predictions that have already been borne out. But it has everything to do with the perspective they shared, a perspective which I have endlessly explored from countless different angles all leading to the same inescapable conclusion that the Freegold revaluation they described is inevitable. Of course their predictive powers will amaze one and all once it happens, but until then it's all about the lens they gave us and how we can use it to view events as they unfold in a different light. Of course this is one of my favorite FOA quotes, one which you might want to print out:

FOA: "I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."

It occurs to me that there are two concrete predictions that have played out, one of which is QE and the diversification into Euro denominated debt.

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Hi FOFOA,

The interview is concluded. I'll be receiving a link in due course. The Q&A touched on a variety of issues related to freegold but it was not, by any means, an in depth interview. You can decide for yourself how I did.

See the e-mail below regarding what we covered. Bob wants to do another interview, perhaps two more. The more one learns about the subject the more questions arise. I didn't really get anything like as in depth into, for example, the paper gold market as I would have liked. And, though I tried to get in some important soundbites, I didn't always manage to. For example, the last question (I think it was the last question) that I was asked was "why should people buy gold?" I said they should buy gold because it is the asset that is going to recapitalize the system, which as an answer leaves out the critical information that as part of the recapping process, gold will be reevaluated-which he never asked me about. I didn't get to see him, but he saw me. I was responding, in fact, to a disembodied voice. I've had experience as an actor dealing with acting against a camera, so it was not as awkward as it might have been. He also said something about sending the interview to unspecified persons for their response.

I have to tell you, your email to XXX, somehow, the central idea in that response penetrated in a way that it had not before. I still have some questions, but I feel that I understand something that very few, except for a select number on the blog, fully comprehend. Perhaps I am kidding myself, but basically the idea is simple yet profound. I'd like to discuss it with you further at some point.

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Checkmate 2 - Slow History

"Building a coherent and cohesive narrative around events of the past is a natural part of our process of understanding. And every good story has a beginning, middle and an end. But what if the end of a particular narrative is still in the future?.."

From Checkmate 2 - Slow History, here's Levon (the Gold Trail):

"Over time, one could never compare the returns of investing in stocks and bonds to owning gold. This is simply because when gold is entangled in currency schemes, its fiat value is falsely presented while the currency system ages. Only the commodity use of gold is reflected, not its much higher wealth "reserve asset" function.

However, this present era has become one of those unique periods in paper money history when gold will take a great leap in value during the relative short term."



Glimpsing the Hereafter 2

"Think of them as relative constants when compared to the wild-ass variable of savers, the elephant in the room, or more like the bull in the china shop, as long as they don't have a good focal point to herd them out of the busy economic highway. The best thing the savers can do for the economy is to get out of the price signal transmission business and settle their accounts. Simple as that. We don't need anyone to "help" the Superorganism in identifying and enabling credibility. That's a natural process. The savers, which most of us are, should simply get out of the way, settle their accounts and let the organism work. It is only the lack of such settlement that messes it all up. And that's the main point."

From Glimpsing the Hereafter 2 and Superorganism Open Forum, here's Let It Be:

Four!

Four years and three months ago I stumbled upon an extensive archive of ten-year-old posts by anonymous writers with names like ANOTHER, FOA and ARISTOTLE. Prior to that momentous stroke of luck, I'd been poring over anything and everything I could find that was attempting to explain a series of events that I found very troubling.

I had already been exposed to personal losses a year earlier due to the reversal of the real estate market which initially caused me to sit up and pay attention. And so I was hyper-aware during a string of alarming events related to sub-prime and its securities in August and September of 2007.

As time wore on I started to take notice of other odd occurrences in the markets. In late 2007 the Canadian dollar suddenly became more valuable than the US dollar… for the first time in 30 years. Then in February of 2008 an entire market collapsed for a specific kind of security that had been marketed to conservative investors as "safe as cash—kind of like money markets but with higher interest rates," cutting little old ladies off from their savings. And then one month later Bear Stearns collapsed.

I quickly read any book I could find in the small (but growing) financial crisis section at my local book store. I read "America's Bubble Economy", "Crash Proof" and "Financial Armageddon" in early 2008. Online I spent a lot of time reading the likes of Jim Sinclair, Peter Schiff, iTulip and anything that came up on forums like the old Gold Is Money forum. But I had yet to purchase my first gold coin.

With such a rush of new ideas coming in over maybe a six month period, I found myself struggling to make sense of it all. The message I was receiving seemed complicated and disjointed. I knew there was something important in there, but for some reason it felt like an incomplete puzzle. Something was missing.

Then one day someone posted an excerpt of ANOTHER (THOUGHTS!) on the GIM forum with a link to the archives. It was a strange quote, but something in it caught my attention like a beacon as bright as the sun, so I clicked on the link. And for the next two months I stopped reading everything else I'd been reading while I worked my way through maybe a thousand-pages-worth of USAGOLD archives. Then I went back and read it again.

In August of 2008, while still digesting it all, I wanted to talk to someone about the most amazing and mind-blowing ideas I had ever encountered. The markets were teetering on the precipice of an abyss, Hank Paulson had his new "bazooka", and all I wanted was to talk to someone about Freegold. So four years ago today, I started this blog.

Four years, 370 posts, 37,000 comments and millions of hits later and we're still talking. All I can really say is THANK YOU to everyone who showed up to chat! Well, almost everyone. ;D Those of you who have been here any length of time know that I certainly attract my fair share of detractors. And I do realize that the subjects I write about are controversial. It's not easy to encounter a foolproof argument for something you never even considered before.

It's not easy because it runs counter to all the baggage you've picked up elsewhere. I've seen the baggage, so I know what it looks like. There are myriad morality plays based on a poor understanding of money, and wonderful stories of monetary and financial intrigue, depraved intent and consummate, destructive comeuppance all over the internet. But the truth, as it is revealed first logically and then empirically, is so much more remarkable, so utterly amazing, a beacon as bright as the sun.

These are not my foolproof arguments. I take no credit for them. They come from ANOTHER and FOA and I simply distill and extrapolate from their posts because they are no longer doing it themselves. My blog is a tribute to them. If you believe the arguments are not so foolproof, then by all means, bring it! I have never shied away from a worthy debate, but I do tend to ignore tired old arguments which I already dealt with so as not to waste any more precious time.

But if you are one of the many people who incessantly email me requesting that I address Martin Armstrong's failed attempts to bring it, I'll waste a little time for you now. I have read a few of his recent posts and it is clear that he thinks I am using hyperinflation as the reason to buy gold:

The presumption here is you move in a straight line until HYPERINFLATION somehow makes gold $50,000 and ounce, everything else remains the same, and this is better than a Miracle of 34th Street. This is being marketed trying to suck people in like those who are broke sitting in a casino desperately trying the pull that leaver and become a millionaire. This a just pathetic preying upon those who can afford bad advice the least. [sic]

This, like his many other remarks directed this way, is so preposterously off the mark that it is not even worth a comment. He apparently considers predictions of dollar hyperinflation to be a scare tactic meant to frighten you into buying gold:

So Don’t Worry – Be Happy. Gold is not going up because of all the conspiracy claims nor because the real gold will conquer the paper gold. This is all about reality.

But then he delivers his own (less scary?) prediction:

It is not… HYPERINFLATION we need to worry about. How about plain old fashioned extinction of society as we know it today?

That's not scary? Well, fear not, because three paragraphs later he lets you know that you'll soon be able to purchase his famed computer prediction system so you'll know when the plain old fashioned extinction of society will arrive:

Institutional clients seeking the stand-alone systems to monitor the entire global portfolio are nearly ready. We will be providing those systems at $25 million annually.

We will be providing only three global systems fully covering everything worldwide for $100 million. We guarantee that the long-term forecasts will be correct or your money back.

Umm, give me a break? As for his argument that hyperinflation is impossible in a core economy, he is not only way too focused on the monetary plane (bondholders, financial assets, capital flows), like the deflationist that he is, but he is also apparently completely unaware of FOA's slam-dunk rock-solid reasoning for inevitable dollar hyperinflation which I extrapolated in these posts among many others:

Peak Exorbitant Privilege
Inflation or Hyperinflation?

Another one of my more notable (albeit indirect—he simply dismisses me as an anonymous blogger and then says I'm wrong) detractors is Gary North, ever since I caught his attention by extracting a concession from a prominent deflationist with whom Gary had argued for years. You can read more about it (along with references to me) in these two posts:

Rick Ackerman Defects to the Hyperinflationist Camp After 30 Years
by Gary North
Wherein Gary North Rallies My Deflationist Side by Rick Ackerman

Anyway, Gary is an inflationist and he therefore argues against both deflation and hyperinflation. Just this month he wrote separate posts against the arguments for deflation and hyperinflation. I mention this mainly to demonstrate how those arguing against dollar hyperinflation from any side are apparently completely unaware of FOA's slam-dunk reasoning. If this was not the case, I'd expect someone credible to critique it.

My case in point is that Gary's latest (and therefore presumably toughest) argument against hyperinflation is that the Fed cannot solve the USG's problem of unfunded future liabilities of $222T through hyperinflation and it therefore will not adopt a policy of hyperinflation. Furthermore, he believes that the Fed will be able to somehow resist the USG's spending addiction if push comes to shove. He writes:

I am convinced that, unless Congress nationalizes the Federal Reserve, the Federal Reserve will not adopt a policy of hyperinflation. That would be to the detriment of the banking system in general.

Now I realize that his post was not directed at me because I'm just an anonymous blogger who's wrong, but if it had been, just like Martin Armstrong's attempt, it's so far off the mark it's hard to know where to begin. My (which is FOA's) hyperinflation reasoning is not about a Fed (or USG) policy decision to solve the debt problem. It is simply the corner that the dollar is backed into and there's only one way out.

The rationale is so remarkably simple that I'm surprised no one like Gary or Martin who believes dollar hyperinflation is anything less than certain has attempted to tackle it. It's not a difficult argument to understand. It's basically that the only thing preventing high rates of dollar price inflation is foreign support for the dollar. Take that away and you'll have a high rate of dollar price inflation. And then, partly because the USG budget deficit eclipses the trade deficit today, the government will be forced to quickly hyperinflate the dollar simply to maintain its status quo. The alternative would require the government to shut down, but it won't even consider that option. Simple.

I'll add one other post to my above recommendations for anyone who wants to "bring it":

Moneyness
Peak Exorbitant Privilege
Inflation or Hyperinflation?

Like I said, these are not my foolproof arguments. I take no credit for them. To prove it, here are a few quick quotes from FOA in 2000 and 2001:

So, dollar hyper inflation never arrived and gold did not make its run because world CBs bet your productive efforts on supporting the dollar reserve. In the process, the US standard of living was raised tremendously on the backs of most of the world's working poor. But this is not about to last!
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Central banks gorged themselves with worthless dollar reserves and prevented a hyperinflation of the dollar in the process. They did this, because they knew that gold had the ability to completely replace any and all loss of dollar reserve value once a new system was in operation.
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We are only just now arriving at a time period that will bring about "The Currency Wars". Everything prior to this was only a preparation period to build an alternative currency. The years spent traveling this road were done to prepare the world for an escape medium when the dollar finally began its "price" hyper-inflation stage.

Few investors can "grasp" that in reality, our dollar has already been hyper inflated, but without the higher price effects. Years of deficit spending, over-borrowing, debt expansion have created an illusion that the dollar was immune to price inflation. This illusion is evident in our massive trade deficit as it carries on with no negative effects on dollar exchange rates. Clearly other investors, outside the Central Banks were helping in the dollar support process without knowing they were buying into a dying currency system.

The only thing that kept this process from showing up in the prices of everyday goods was the support other Central Banks showed for our currency through exchange intervention. As I pointed out in my other writings, this support was convoluted at best and done over 15 to 20 years. Still, it's been done with a purpose all this time.
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A grand hyper inflation of prices is now directly ahead on the trail. It should be ushered in with a large "crackup" in the currency derivatives market. Once this event is "in process" the paper gold markets will quickly rush to discount against physical gold. A discount that will break our gold market pricing and physical allocation system.
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This country is diving head first into a grand hyper inflation and no amount of Fed maneuvers will stop it. People that learn this early on, before the physical comes into short supply, will be miles ahead. Buying gold between $400 and $200 will be like knowing a member with Masters Tickets.
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Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place.
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For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained
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The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!
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Again; this all works as long as the world "buys into" using our dollars. As I said; an expanding fiat works to grow the economy thru expanding credit buying power because the fed can support the system with credit creation that has no "inflation premium". That lack of premium only exists as long as Americans can exchange free credit for real physical goods. Once this perception changes it's over. Once the world understands that it's not local US goods that stands behind dollar growth, but less expensive foreign goods,,,,,,,,,, the stage is set for our "supporters" to sell to themselves!
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The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of their last 30 years of hard money success.

Of course, as I mentioned earlier, hyperinflation is not the main reason to buy gold. You can get the same "hyperinflationary gain" by buying artwork, antiques, classic cars, baseball cards or any other hard asset. The reason to buy gold over those other choices is Freegold. Freegold is gold revalued in real terms, independent of hyperinflation. Those are my two main topics, Freegold and hyperinflation, because those were ANOTHER and FOA's two main topics. I'm not really going into Freegold in this post but I will give you a quote that a reader named Steve sent me. It comes from Bill H at Lemetropole Café and I think it captures the relevance of Freegold to shrimps like us:

We used to be a nation of "choices". Many many choices, good ones, bad ones, whatever, but there were multiple choices at every turn.

Now, do we as individuals have "multiple choices"? Not many. Many are unemployed, many have negative equity in their homes and cannot move even if they want to, many rely on food stamps to eat, savers are being forced to "eat" their balances or take on the higher risks of the rigged stock and bond markets. The only "choices" that we as individuals have left are those involved with protecting ourselves and families. It is no longer about living the American dream, living within your means and enjoying your "golden years". No, it is now about "keeping what you have" or just plain outright survival. I believe that even today's current circumstances will be looked upon in the future with "too bad it can't be like it was back in 2012".

It is not however ALL bad, we will "reset" and hopefully go back to a rule of law and respect where everyone is not looking to rip everyone else off. Right now it is imperative that you be ready for this coming reset because once it happens there will be no "do overs". You will "have what you have" to start out in the new system and nothing more. Think about it, how many times have you thought back and said "gee, it really would have been nice if my Great Grandfather had invested in oil wells" or "if my parents had invested in coastal real estate or IBM back in the 1950's". What if you had the smarts to invest in Gold back in 1971? As I said, there are no "do overs" but it would be nice. What we have coming in our immediate future is not only "one" of these past opportunity moments in time, this era, right now, is THE moment in time where futures will be altered... permanently. You are either locked and loaded...or you are locked out. This as I see it is the last "choice" that investors can still make that will affect the rest of their lives and probably several generations to follow.

And lastly, you Martin Armstrong fans might be interested in this. FOA critiqued Martin's public/private dichotomy, one of the core foundations of his Economic Confidence Model… back in 1999! And if that doesn't draw some ire, I give up!

So that's basically what I do, and what I've been doing here for four years now. Please click on the gold bar below if you'd like to send me a little blog birthday present and encourage me to keep this thing going for another year. Or, if you'd prefer that I "make like 'N Sync and quit while I'm ahead" (which someone actually suggested by email this month), then don't click on the gold bar. I have only been here this long because of your generous support. I have no other income.

Thank you!

FOFOA Playlist #4

As it has become a personal tradition, I periodically gather my favorite YouTube song selections from the last few months into a playlist with links to the posts. Here is where you can find my #1, #2 and #3 playlists. And here's #4. Enjoy!

Glimpsing the Hereafter

…this is a deep concept, a timeless truth, a little bit of wisdom from the ages. Savers are not investors, traders or speculators. And since this post is about glimpsing the hereafter, give me a few minutes while I consult my crystal ball. Here's some music while you wait…



…my crystal ball does work for the monetary and financial future. It paints a nice, clear picture, yet on timing it's still a little hazy. But one thing it does make perfectly clear is that it's just a question of time.




Superorganism Open Forum

…in a wild colony of ants these individuals end up specializing in what they do best which leads to a collective intelligence far greater than the intelligence of any individual ant.

…an “extraordinary miracle … millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding!”




Savings & Capital Theory Open Forum

…The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse. Savers drive the economy, the Superorganism organizes it, and the $IMFS kills it softly.




Ball of Twine Open Forum

FOA: "They will not be pushing on a string; rather picking up the ball of twine and throwing it!"

I may be crazy, but if there was a contingency plan/how-to manual on throwing the world's largest ball of twine, it might just look like this:






Peak Exorbitant Privilege

…That's right, I saved the "crazy super-hyperinflation talk" for the tail end of a really long post. Because A) people who think they have it all figured out already tend to abandon a post once they read the word "hyperinflation", and B) the stuff in this post really happened and is still happening so it's only fair to you, the reader, to give its inevitable denouement the appropriate weight of a bold conclusion. If I didn't do that, I would not have done my job, now would I? ;)




Inflation or Hyperinflation?

…The dollar is so vastly overvalued today because the rest of the world has kept it on life support for 30 years past its expiration date. It is the stability of dollar prices at that small marginal flow that sustains the illusion of wealth in the entire, massive monetary plane. And yet the modern "hard money thinkers" think that we can somehow retain this level in real terms by simply devaluing the dollar against gold and then managing that new "gold value". I wish all the modern hard money thinkers – you know who they are so I don't need to mention any names – would just take a few minutes and listen to FOA and maybe, just maybe, see how wrong they are…




The Debtors and the Savers 2012

…Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money.

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve."




Fallacies – 1. Paper Gold is just like Paper Anything

…it is the very existence of the paper gold market which is keeping the price too low, because if you took it away, price alone would have to regulate the flow.

___________

As a bonus track I thought I'd include Freegoldtube's latest creation, even though it didn't make it into a post. Here's No Time to Lose:



Sincerely,
FOFOA

Happy New Year!

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)

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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 Fishbowl

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.

The reason I am painting the picture this way is to show you how President Trump and I differ. I like Trump. I support Trump. I voted for Trump in 2016, 2020 and 2024. And I'm extremely happy that he won this election, but he and I are on completely opposite sides of this matrix:

Remember, this is what I do. I give you a different big-picture way to view things—a lens, if you will. It's not the only lens. It's not even the only correct lens. But it's my lens. It's how I see things. And I think that the ability to see them in this particular light will help illuminate future events that are still inevitable, even though Trump won, and regardless of how successful his presidency ultimately is.

--END OF EXCERPT--

You can read the rest at the Speakeasy. CLICK HERE to subscribe. You don't need a Paypal account to subscribe. Just click on the "Pay with Debit or Credit Card" button at the bottom, or email me at fofoamail at gmail dot com for an invoice. It's $150 for 6 months, which works out to about $0.82 per day.

And now, here's a post from the Speakeasy that I wrote back in November, titled Glimpsing 4 – CB Gold in Freegold...

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Glimpsing 4 – CB Gold in Freegold
11/19/24

I received an email from our resident economist the other day, asking me this:

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.

[…]

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.

[…]

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