Saturday, October 31, 2009

Monday, October 26, 2009

Gold is Money - Part 3

Allow me to start by beating a dead horse. There is a vital difference between what may in fact be the ideal, perfect monetary system and what are the real monetary changes we are heading straight into today. My purpose for writing this blog is to share with you, and in return to receive your feedback on my own discovery and understanding of the latter. There are plenty of other sites that discuss the former.

If we can discover together where we are heading financially, economically and monetarily, and why we are heading there, then perhaps we can know, in advance, how the understanding of the global consciousness will evolve and unfold in the coming weeks, months and years. And, with this understanding, hopefully we can gain a certain peace of mind with regard to our own financial decisions, positions and future as we head into very stormy waters.

I know from my own experience that a little peace of mind is a priceless asset. It is one worth sharing, and one worth growing. Sharing and growing this asset together with you is my goal. Onward...

Our Understanding of Money

Let us quickly run through an assortment of common understandings of the term 'money'. The most common, mainstream understanding of money is that of a device bearing three functions. The three functions are 1) medium of exchange, 2) unit of account and 3) store of value.

A more purist understanding states that money is only a medium of exchange. And that the usability of money in other roles flows from its declared form. For example, if our common medium of exchange is physical gold only, then it is also an excellent store of value.

In fact, as a medium of exchange, money is only one half of a full barter exchange. The other half is when you change your money into that item you desire. But when physical gold is the common medium of exchange, then it is possible that the concept of a "medium" (or middleman) is incorrectly applied, because if gold was what you were after (for its store of value function), then the exchange is completed in only one step! Direct barter!

Finally, there is our new understanding of "the pure concept of money" which is our innate human ability to associate relative values. And within this understanding of 'money', it became clear that in order for our ability to function properly and efficiently in the way it has evolved over millennia, gold must be free for each of us to impute value to it.

Gold Exchange Standard

Our most recent experiment with gold as the conceptual medium of exchange ended badly. The purist understanding of money, the common medium of exchange, longs for it to be a real commodity, or at least linked to a commodity so that the actual medium can have a relatively stable value and double as a store of wealth. But when we lock a finite commodity into a parity relationship with an inflating paper currency, we only drag down that commodity's relative value compared to the rest of the real world as the related currency is inflated.

Over time, pressure builds up in this relationship set at par, the same as pressure builds between two business partners where one is lazy and unproductive and the other must carry the business through hard work. Sooner or later some of that pressure must be released and parity must be broken. Perhaps the lazy partner's equity position in the business is cut or reduced to reflect his lack of contribution, buying the ill fated relationship a little more time. This is what Roosevelt did with the dollar/gold relationship in 1933. But eventually these mismatched partners will have to part company once and for all. Just as gold and the dollar did in 1971.

In 1971 official parity was broken, but not forgotten. In the years since, an unofficial parity of sorts has been maintained through the paper gold market. Paper gold, like dollars, can be expanded and inflated while being locked at a par with the real thing. This is still going on today. But the pressure has been building for a long time now. This pressure held in the parity relationship between paper and physical gold is about to blow.

Gold Coin Standard

Even the gold coin standard we had leading up to the creation of the Federal Reserve System ended badly. You see, people put their gold coins into the banks and the banks lent them out. And then when confidence suffered a shock and the banks faced a run on gold, the system collapsed, many banks failed, and people lost their gold.

Human people want to be able to borrow money in the present that they plan to earn in the future. Not all people want to do this, but enough to influence the system certainly do. And this practice, by its very nature, expands the money supply beyond its physical commodity limits, even in a pure gold coin standard.

During the late nineteenth century, all the major nations of the world moved toward a gold coin standard, wherein the gold coin itself was the common currency and medium of exchange. Between 1873 and 1912 some forty nations used it. []

The following is a post by Randy (@ The Tower) describing the end of the gold coin standard and the dawn of the Federal Reserve System (in blue).

Continuing our investigation into the meaning/essence of "money"... In 1907 America was on the Gold standard and WITHOUT any central bank. Many modern goldbugs might be inclined to yearn for those "good ol’ days" when "money was money and banking was as it should be!"

However, that year is best known by the Panic of 1907 in which the people's economy was plagued by runs on trust companies, banking panics, and a bear market in stocks. Across the nation, banks were unable (and refused) to deliver gold coins and currency to satisfy the requests of depositors for withdrawals of money from their own accounts -- and 246 banks collapsed. It is not difficult to see how the frustration of depositors unable to obtain currency from banks (even solvent ones!) holding their deposits would lead to pressure for political intervention and change.

For a quick exercise in perspective, imagine what you would do today if faced with the same situation in which your bank could not give you any currency ($1s, $5s, $10s, $20s $50 or $100s) to carry away with you as a representation of the money residing in your bank account. No problem. You would simply write a personal check to meet your spending needs, or perhaps ask for a bank draft, or wire the money wherever it needed to go. Amazing! What IS money??? How did you get yours; where did it come from? How do you know what its value is?? Ponder that, and now we return to our glimpse at history...

In the wake of this banking panic, a National Monetary Commission was formed to undertake a scholarly look at the failings of America's financial system. Of these, the four major flaws cited were that the banks were decentralized, clearing methods were inefficient, the huge cash holdings of the federal government were not distributed where most needed, and the currency supply was inelastic. (Please ponder for a moment how or why the CURRENCY supply would ever be an issue if the amount of MONEY found in banks were at a one-to-one ratio with the currency (gold) that represented it. Surely, in this absence of a central bank there couldn't be more money than gold coin! That's impossible!! ) By 1911, the Commission had recommended a plan for a "Reserve Association of America" as the solution to these defects, giving rise two years later to what became our central bank -- The Federal Reserve System. However, that's another story for another time.

Through the coordinated stabilizing actions of three prominent NY bankers to arrest the banking panic [J.P. Morgan, George F. Baker (First National Bank), and James Stillman (National City Bank / Citibank)], their wealth and power was perhaps made more conspicuous in the eyes of the nation than perhaps it would otherwise have been. A prominent Wall Street lawyer named Samuel Untermyer suggested that there was a "Money Trust", and The Wall Street Journal also took notice of affairs and wrote, "So long as Congress will not give us what every other civilized country possesses, a central bank, it forces Wall Street to improvise something of the kind itself."

The House Banking and Currency Committee formed an investigative subcommittee to determine whether a Money Trust existed in NY. The chief counsel was Sam Untermyer, and I think you might gain some insights about the true nature of money from the testimony delivered by Morgan and Baker before the committee in Washington DC at the beginning of 1913.

In questioning Baker about the proposal for banking reform regarding expanded disclosure of bank assets and investments, Untermyer probed, "Why should not the assets, and the detailed assets, be a matter of public knowledge?"

Baker replied, "Business would come to rather a standstill."

Untermyer demanded, "I want you to explain to the committee why."

Baker declined, "I can not explain it."

Untermyer pressed further, "You mean you can give us no reason?"

Baker admitted, "It would be exposing all the details of that business to the whole world."

After following a sidetrack in questioning, Untermyer returned to this issue, asking, "Why should the public do business on confidence when it can get the facts?"

To which Baker proclaimed, "Mr. Untermyer, THE FUNDAMENTAL PRINCIPLE OF BANKING, perhaps more than some others, is CREDIT." [emphasis added]

It seems that George Baker sensed (rightly?) that the public, familiar with their Currency being a tangible asset (gold coin), would NOT be readily comfortable with the truth about Money. That is to say, that they might struggle to accept the reality that their Money Supply, as represented on the books of the bank, was created by credit, and existed through the grace of confidence. In effect, the tangible Currency had become a mere symbol for the Money (credit) it represented while circulating outside of bank account ledgers.

If you don't care to believe my assessment, I have another point for you. When Untermyer had J.P. Morgan on the witness stand, he asked him, "Is not commercial credit based primarily upon money or property?" [In this exchange, it appears that Untermyer ignorantly used the word "money" as equivalent to gold coin, a usage which Morgan plays similarly until his concluding point about granting CREDIT.]

Morgan responded, "No, sir, the first thing is CHARACTER." [emphasis added]

Untermyer, shocked, reiterated, "Before money or property?"

Morgan reassured, "Before money or anything else. Money cannot buy it. [credit]"

Untermyer remained obstinate against this notion, as though there were communication difficulties, and pressed again on this point.

Morgan then conclusively stated his conviction on the point that commercial CREDIT is based on character: "Because a man I do not trust could not get MONEY from me on all the bonds in Christendom."

From two eminent bankers who surely knew their business, you now have it that the creation or granting of Money (the extension of Credit) has more to do with the creditworthiness of the borrowers than the collateral that secures against possible default. And recall, these comments occurred while on a gold standard AND in total absence of a government-sponsored central bank -- which was authorized (against Baker's preference) a year later.

As you come to understand how Money and Credit are interrelated, the more you will understand the separate Wealth of gold and why you need it now more than ever.

The point here is that our modern understanding of money, or any money concept for that matter, combined with our modern taste for borrowing, lending and trading of credit and debt, may not NECESSARILY be a perfect fit with a pure gold standard. Even a gold standard, with gold as the actual currency, is manipulated by the banks through confidence-based lending schemes. Sure, a gold standard somewhat limits the collective in its more nefarious pursuits, but it also has flaws that always seem to lead to the same conclusion... failure.

Perhaps it is time for us to consider another alternative, even a natural one that is happening whether we like it or not. How about a new, de facto, free market-driven stasis instead of the old de jure (rigged) false parity relationship... how about Freegold?

The Fourth Dimension: Time

At any given moment, a snapshot of our world appears to be only three dimensions; left/right, backwards/forwards, up/down. But with the passage of each and every moment, the world changes. Values change! People change. Everything changes. And all of these changes happen as we move through the fourth dimension, time.

This fourth dimension is very important as we consider the pure concept of money. For it is in this fourth dimension that our pure concept of money resides!

If time was not a factor, then anything accepted as a generic medium of exchange could perfectly perform all the functions commonly linked to the term 'money'. You do your work (somehow without the passage of time) and get paid, and then spend your money on anything within that same moment in which your work's value was judged against the entire universe of real things. A perfect stasis of values would exist everywhere, all at once.

But here in the real world we must be concerned about how far we carry our money through the fourth dimension. Without this vital consideration, we stand to lose everything!

Breaking the Triangle

In part 1 of this series I used a diagram I created called The Modern Money Triangle. The three corners of the triangle represented the three primary functions of our modern understanding of money.

But as we pass through the coming phase transition in which the parity between paper gold and physical gold will be broken, cracks will start to form in certain parts of the triangle.

The fractures you see in this diagram are time related. On a short timeline [length of time is the key variable: "t"] fiat currencies will perform our necessary monetary functions, medium of exchange and unit of account. But at some point on the x-axis, 'length of time', we will switch to a different medium, gold.

On a long timeline, gold will perform our necessary monetary functions perfectly, store of value and long term unit of account. By the way, there is no upper limit on the x-axis of 'length of time' when it comes to gold. If plotted out it runs to infinity!

The outcome will be my new Freegold Quadrangle!

The "x-axis" represents the amount of time you are willing to hang onto the fiat currency you either earn or receive in payment. If the monetary authority is printing money, "t" will be shorter and shorter. In a hyperinflationary situation "t" will slide all the way to the left with a value close to zero. [1]

As the new Freegold system of natural, pristine balance emerges, the fiat monetary authority will find its wisest move is to keep the money supply under control. And with a "wise" CB, gradually the "t" value will shift back to the right, little by little.

The further "t" moves to the right, meaning the longer people are willing to hang on to their fiat, the more investment will flow into new businesses in that currency zone, and the more tax the greedy collective can grab. This is how it will work.

But even MORE interesting to us physical gold advocates is how we will get there!

In part 2 of this series I explained that "they" will save the system at any cost. And that this stance presented them with a dilemma. You see, if they don't save the system then "all paper will burn" and gold will "shoot the moon" as the wealth reserve par excellence. But if they DO save the system, "the cost" will be the devaluation of the dollar along with all fiat currencies... and gold will "shoot the moon" as the wealth reserve par excellence.

Q.E.D. [quod erat demonstrandum].

The Catch-22 of Modern Paper Wealth

The phrase "Catch-22" is common idiomatic usage meaning "a no-win situation" or "a double bind" of any type. [Wikipedia] "The catch" in our modern concept of paper wealth is that on one side it is collapsing from its own unsustainable debt service making it, in fact, a non-wealth. But on the other side, if we rescue it from its own un sustainability by guaranteeing or propping up the debt service, we collapse the very denominator of the wealth itself, the currency, and make it a non-wealth. It is a lose-lose situation... a Catch-22!

Do you remember the 1985 movie Wall Street? In it Gordon Gekko liked to buy whole companies through the stock market, shut them down, break them up, and then sell off the pieces. He had figured out that the pieces were more valuable than the whole. Remember in the end of the movie he went after Blue Star Airlines? My, how things have changed in 24 years.

On Friday we learned that Japan Airlines is now completely worthless. Its net worth is now NEGATIVE $8.8 billion!
JAL faces $8.8 billion excess debt if liquidated: source

TOKYO (Reuters) - Liabilities at Japan Airlines Corp (Tokyo:9205.T - News) would exceed its assets by as much as $8.8 billion if Asia's largest airline by revenues were liquidated, a source with direct knowledge of the matter said on Friday.

The estimate of JAL's negative net worth, calculated by a government-led task force in charge of its restructuring, underscores the depth of the problems facing the airline as it seeks aid from banks and the state to avoid bankruptcy.

Did you know that on Friday people were still buying JAL at a market capitalization price of $3.4 billion even though it was worth [NEGATIVE] -$8.8 billion? One thing I know for sure; Gordon Gekko would NOT have been interested in this one.

Which begs the question, how is the rest of the (publicly traded) economy doing after 24 years of debt accumulation?

This is where the $-debt regime has left us. With empty, hollow shells of corporate entities enslaved to produce revenue only to service their unsustainable debt. What if the owners of JAL decide to leave their vacuous corporate shell behind like a hermit crab abandoning his home, for the greener pastures of a fresh start? That debt hole, the $8.8 billion, is what we hold today as wealth!... inside the financial system! It is gone, not there, if they walk away. Just like an underwater homeowner walking away from his home. If the debt-slave quits, the value illusion is gone!

The entire financial industry today is marked to model, myth, illusion, whatever... just not reality. It is amazing that we even got a story like this, exposing a small portion of the gap between reality and "high finance". JAL is a dead man walking.

At least we are getting some honesty with regard to the real value of JAL. How about the rest of them? How about the banks? Who's debt do YOU hold as wealth? How is THEIR balance sheet doing? Do you have any idea?

Gold is pure equity... no one's debt. No one to walk away. No one to default in bankruptcy. Nothing to liquidate in an attempt to recapture 10 cents on the dollar.

The entire US banking system today is built upon the idea that debt-slaves will continue servicing their debt on millions of underwater houses marked to mythical values at which the loans were established. If you hold your wealth within this freakish system... all I can say is good luck!

The knowledge of the difference between principle and interest must be dead. Everyone is chasing an imaginary yield from entities with negative equity today... with their hard earned principle savings. Can you believe it?

But don't worry about JAL. It won't be quitting. It has been deemed too big to fail! This means that the printing press will guarantee not only its debt-slave service, but its executive bonuses as well (to keep the slaves in the field)!

Next up, the idiotic concept of too big to fail is set to bring down all the imaginary currencies, and with them, the system itself. And once again, gold is not only immune but highly levered in the OPPOSITE direction.

Consider this: You may not fully understand where we are heading. You may be figuring it out at your own pace. But the millions of ungodly fortunes in the world (yes, there are millions of fortunes) don't have that luxury. They must figure it out FAST... or die.

Survival of the Fittest

Try to imagine each and every fortune that exists today as a distinct animal. These "fortunes" can be held by individuals, organizations, by funds, or even by sovereign collectives. They can also be held in any number of vessels at this current time. For instance, the Saudis' fortune is largely held underground in oil deposits. Other fortunes are in paper financial products, like your pension fund, and others are already in gold.

As we move forward, the law of nature, the survival of the fittest will come more and more to the forefront. The wholesale creation of new digits is one way that some of the more inbred fortunes are trying to survive. Will it work? Others, with a deeper gene pool, are fleeing to the safety of gold.

Imagine this world of TOO MANY "fortunes" vying for survival in the limited landscape of the real world which is actually too small for them all to survive. The fortunes that have moved entirely into physical gold have already staked out their claim to a specific volume of real estate that is needed to survive in this brutal world. They now own their own territory, a true slice of the real world pie, on which to live and thrive.

Those that are still trying to increase their claim size by inflating paper digits may miss out because the landscape of reality is quickly being bought up by the more clever and observant animals. Survival of the fittest! Those fortunes that make the right moves in these trying times will be the ones to survive and thrive. The rest will die.

These "fortunes" are the giants. Their titanic battle for survival in the limited real world is what will take us where we are going. They need to figure things out quickly if they want to survive. Natural selection will pick the winners and kill off the losers. Today this epic battle nears its climax.

Stake out your own claim today before this final act unfolds. Then spread the word to as many people as possible. This is the best we can do, Lilliputians that we are.


[1] No, the y-axis is nothing but a perpendicular connecting line to a parallel function. I am making a point with the help of visual aids and common understanding. I am not making a mathematical proof. Sorry if I offended any mathematicians with my terminology. :)

Wednesday, October 21, 2009

Gold is Money - Part 2

In our last discussion we distilled the pure concept of money down to the innate human ability to mentally associate relative values. Today we will expand this thought in order to apply it to some very different functions we associate with our modern, common understanding of money. Hopefully this exercise will help to reveal a deeper understanding of where we are heading.

Confusing the Human Instinct of Value Association

Taking the pure concept of money further, we can say that money is the range of numbers that we hold in our memory, or numbers that we write on paper in a bookkeeping account, for the purpose of value association.

Imagine an ancient barter system, where one cow trades for two goats. And one goat is worth five chickens. In our mental association of values we might use the chickens as the primary basis and attach a value of 1 to a chicken, to make trading a little easier. So a chicken is 1, a goat is 5, and a cow is 10. We now have a simple monetary system of 1 through 10 in which the numbers themselves are our money, and an object of wealth, the chicken, is our unit of account.

So if I have two cows, three goats, and 25 chickens to trade, I might calculate in my head that I have a total trading value of 60 monetary units with which to trade. That number 60 is my primitive concept of money. But I wouldn't say that my money account was only in chickens. I would have to say that I have a total value of 60, but my money account is in chickens, goats and cows.

Over time it was discovered by early man that gold was the most accepted tradable wealth of all, and soon almost everyone was accounting for their wealth using gold as the basis for the mental unit of account. Gold was better than chickens for many reasons, not the least of which that sometimes chickens died. Also, gold could be divided into smaller and smaller pieces. When you did this with chickens, again, they died. This was certainly acceptable at meal time, but not out on the road, traveling the trade routes.

So the pure concept of money was the account, the rating system for value, the worth association in your head. Physical gold became the main wealth object used in that bookkeeping practice. This is how it was for at least a thousand years. But as all things evolve, man eventually became accustomed to speaking of gold in the context of money accounting. Even as languages evolved the concept of money accounting and the physical wealth holding of gold became mingled as one and the same.

This transition was subtle and unnoticed, an evolution transcending generations and even civilizations. But it has led to what has become a major conflict in the money affairs of our modern world. As gold receipts took over as the concept of money accounting (the mental value association role), man became confused as he now had to value his cows and goats against chickens that were never there in the first place. Receipts for chickens that far exceeded the actual chicken count. And how to value real chickens in this case? One imaginary chicken receipt = 1 real chicken??

You see, man has not changed as much as we might think since his barter association days. We freely exercise our skill at the value associations of all real things. Real things must remain free to float up and down as the reality of supply and demand dictates in order for our innate skill to be most efficient. Our inherent need to constantly change valuations as we see fit is what is driving physical gold to break free from its modern monetary attachment.

We inherently want to use gold as a wealth item par excellence. We want to trade its changing value within the same universe of floating values that all other tangibles trade. But for the benefit of the bankers and the US Govt, in the pursuit of stable credit and debt values, we have tried to fix gold's value to our "pure concept of money" so that banks can lend THE MONEY CONCEPT ITSELF, in lieu of lending real things, or real gold. Gold cannot be rigidly fixed to any money concept that must constantly inflate in order to survive, as any lendable and borrowable fiat currency must do, because physical gold is in finite supply.

Lending a Mere Concept

Today's dollar is a purely symbolic currency. It is not officially attached to anything. Our modern money system, like those in the past (even ones attached to gold), is built upon the notion that a mere CONCEPT can be lent in lieu of actually having to lend (temporarily part with) something of real value. The banking system wants to lend us 'the number 10', and have us pay it back, with interest, in chickens, goats and cows. They literally want to have their cake and eat it too.

This system of lending a purely symbolic monetary CONCEPT instead of lending real wealth requires the perceived value of that CONCEPT to remain relatively stable or else the entire banking system will collapse. It is to this end that bankers, governments, politicians and economists always try to entangle (think: forced quantum entanglement) gold into the money system and control its value in order to keep their CIRCULATING DEBT CONCEPT viable and valuable.

This is the problem with the architecture of the dollar, versus how all non-reserve fiat currencies will work in a free gold environment. The dollar must cheat in order to retain any illusion of stability. There are other ways for a fiat to remain stable. Responsible currency management is one. And in a system where the value of all real things (including gold) float freely against the parallel universe of fiat currencies, this will be how they will work.

When the dollar became a mere concept in 1971, so did all fiat currencies in the world. Their only value lies in the tradable value associations we give them, based on what can be purchased in the parallel universe of real things. But because we have been encouraged to save these symbolic debt concept units in lieu of anything with real value, a mismatch has grown to epic proportions whereby not even a fraction of these debt units can be traded back into the real economy at anywhere near today's prices.

We have lent, borrowed, saved, sliced, diced, sold, resold and insured so many units of a mere CONCEPT while neglecting to pay attention to the comparative size of the real economy with which the CONCEPT must run in parallel.

Our political drive, our collective spirit, and our American lifestyle has encouraged the near-exponential growth of this system so that we could buy real goods from others without sending them real wealth in return. So that we could grow and expand our great nation on a CONCEPT alone! We have proclaimed a strong dollar for the past 15 years, promoted it to be "as good as gold" and not only a perfect substitute, but a much better substitute for real wealth holdings... "because you must earn a YIELD". The dollar is even held as a "hard money" wealth reserve behind other currencies!

And over this period of the last 38 years, while our dollar perfected its role as a medium of exchange, it also left in its wake a world chock full of worthless CONCEPT-denominated paper wealth that people and nations bought and held in lieu of anything real. Today we are in a transition that will take us out of this jumbled mess and, in the process, will destroy much of our wealth illusion as it appears to simply evaporate away. But the truth is that it was never there to begin with!

Saving the System - Not its Value

It was said, many years before Paulson, Bernanke and TARP, that the financial system will be saved at any cost! Apparently this statement has proven to be true. But at what cost?

You see they are now faced with a dilemma they will not discuss publicly. On one side is their product, the conceptual unit of credit account, their currency. And on the other side is their offspring, the financial system, Wall Street. What saves one will kill the other. They can save the present value of their product and kill their offspring through starvation. Or they can save their offspring by delivering what it desperately needs to survive... a constant expansion of credit (aka monetary inflation). But this will, of course, kill the value of their product, the currency.

They can save one or the other, but not both. And it was always known, but has now been proven, that the system will be saved at ANY cost. (Unfortunately for them, they did not think it through far enough to realized that the cost of saving their offspring will also kill it and a whole lot more. But that line of Thought is straying a little too far from the topic of this post.)

In order to survive, the system, the financial industry, Wall Street NEEDS a constantly increasing supply of CREDIT! If the population won't give their own blood to save this dying Frankenstein monster, then the CB's and governments WILL! It is happening now. Right under our noses. For more than a year now!

This is why it is SO important that we hold only physical gold in our own personal possession in order to escape this tangled mess. Only touchable, graspable physical gold metal under full ownership conveys ALL of the properties that have come to be attributed to this kingly wealth asset. By contrast, financial contracts denominated in gold as facilitated by bullion banks, gold derivatives, gold loans, gold depositories, gold pool accounts, gold ETF's, or known by any other name, are all at their core pure and simple... (wait for it)... CREDIT. And what feeds the monster?? All together now... CREDIT EXPANSION!!

And because the underlying potential for depositors to exercise their claim on the gold metal within the system poses a constant threat (to pull the rug out from under the confidence in this particular variety of credit) which grows as the credit expands, a limit is eventually reached where the participants will tolerate no further expansion. And guess what? We may have just reached that limit!

The bottom line is that the banking system will be "saved" at the expense of sacrificing the market value of every last credit instrument they have created. Anyone and everyone with their savings inside the system will take a serious purchasing power haircut. The only people that will enjoy the full value of their wealth (and more) are the ones who hold it outside of the imploding system. Inside the system, credit of any color, green OR yellow, is only credit.

Long versus Short

Today's paper currencies are not just a medium of exchange, but they are still a pretty good store of value in the short term. The greater the rate of price inflation, the shorter the term that you will want to be holding the actual currency. Wealth assets, on the other hand, are the store of value for the long term. This differentiation is understood by almost everyone today. And it is so close to the concept of Freegold that it will not be "a giant leap for mankind" to get there.

The only difference is that right now, most of the public has come to believe that wealth is simply paper ownership of wealth producing industries and paper claims on real assets that can never be recovered at today's values. This is true for most all items, not just gold. And as we hold these paper documents for the long term, understanding them to be better than holding the actual currency because they provide a "yield", the recoverability of the underlying real asset is being constantly eroded away. In other words, we are unknowingly losing principle at the same time as we think we are gaining a yield!

From 1980 to 2001, the expansion of the financial industry far beyond the means of its parallel real world counterpart was a signal that our human instinct to buy things, or assets (even if only paper debt assets), rather than to hold the actual currency, was still intact. But the fact of the matter was that the dollar currency itself was expanding during this time period at a furious pace to meet its global usage demand WITHOUT causing the price inflation that should have accompanied such an expansion.

This strange "pseudo-deflationary" signal (versus gold) during a time of high currency inflation might have told the people that it was okay to hold the currency itself during this period. That something odd was afoot. As the currency was expanding with such ease, but at the same time gaining purchasing power especially against gold and oil. But the people only spent their currency, which demonstrated their natural inclination. To spend currency, and to buy real wealth assets for the long term (even if those assets were little more than a value illusion).

But today a totally different signal is being broadcast loud and clear, and being equally ignored. That gold is now about to resume its historic role and value as a wealth asset, long suppressed by its troubled association with inflating transactional currencies.

Ever since our dollar became a mere concept in 1971 it has required the illusion of a stable gold price in order to remain viable in its various roles. And a stable gold price it has had! Yes, even with the spike in 1980 and the quadrupling in price of the last 8 years, gold has remained relatively stable and locked into its confusing association with inflating currencies, mainly with the help of the inflating paper gold market, but also through anti-gold propaganda.

If gold had truly abandoned its currency role in the 1970's, and taken on the unfettered role of wealth reserve par excellence, we would have seen prices in the many thousands even before the 1980 price spike. The dollar and its insidious wealth-derivative offspring had multiplied that much even before the official link with gold was finally broken.

Half versus Whole

Our ancient instincts have not gone away. We have not "advanced" as much as we think. Our use of "the pure concept of money" has not changed since the days when we engaged in direct barter trade. We still want to accumulate wealth item along side and separate from our transactional "pure concept of money" which is really just a number in our mind, or marked down on paper. We know that this "number" is not something to be saved, except perhaps for as long as it takes to arrive at the next transaction. (See: Fekete's A ‘fairy’ tale)

You see our modern money concept has been surreptitiously eroded into only one half of our ancient barter understanding of the money concept, and one half does not equal a whole. Most of today's money, other than the monetary base, is borrowed into existence. It represents a debt, and a debt is an incomplete transaction. It is only one half of what our instincts require as a wealth reserve, which is a fully completed transaction resulting in an accumulation of hard value. And yet we still buy these "wealth assets" denominated in only "half a concept", half of the monetary concept that our mind intuitively understands.

This is a flaw! It is a big one, especially now as "the other half" is waving the white flag of surrender and default. Some very smart analysts see this as deflationary. They truly believe that the waving of the white flag will make this "half a concept" actually rise in value against its parallel real world economic counterpart. But that is not what will happen.

Paradigm Shift

What will happen is a paradigm shift. The paradigm shift will be the sudden planetary recognition that the global debt(concept)-based paper investment pyramid is collapsing from its own weight and size. And that the best safe haven retreat is physical possession of the one and only hard asset that is globally recognized as an official monetary wealth reserve, an officially recognized hard collateral asset, a true national treasure, and an historic denominator of wealth with a history longer than recorded history itself!

As I see it, we are running out of time... fast! All it takes is for one event to destroy global confidence. One event. Maybe the current rumors will turn out to be just that, rumors. I hope so, because the dominoes that would fall will stretch all the way to empty shelves at your local grocery store. But even if the current rumors are a dud, how many other explosive probabilities are lurking in the murky swamp of banking, finance, money, and paper gold?

Clear anecdotal and circumstantial evidence is emerging that some sort of a squeeze is underway against institutions that might be short gold. A PR battle royale is also underway in the media to counter the effects. It is amazing to me that we can still walk into our local coin dealer and buy gold at a small premium to the paper price. But this, too, is probably part of the confidence battle that is being waged. Someone may be going to great lengths to ensure that the shortage at the top is not visible at the bottom.

The mint has already canceled certain gold coins because of too high of a demand. We have gold hitting all time record highs. Yet the mainstream media think it is most important that you understand the solid fundamentals behind each down-tick in gold.

I hope you can see what is happening. The giants are battling it out like Greek Titans while the masses are being subjected to an anti-gold propaganda machine of unthinkable proportions. All I can say is don't delay if you are still planning to move your savings out of the Frankenstein feeding tube and into the safety of gold. If you are waiting for a dip or a correction, you may just miss the greatest transfer of wealth the world has ever seen. Any price within $2,000 of today's gold price is a steal. Forget about corrections, even if they come. It is only a matter of time until physical gold runs dry, the paper markets suffer "an event", and the value of physical gaps up higher than ANY of the analysts have predicted. Don't miss this one time event!


THOUGHT, concept and some writing credit goes out to Randy (@ The Tower) circa 2001, and of course to my Trail Guide! Thank you for your priceless guidance!

Saturday, October 17, 2009

Gold is Money - Part 1

Does this strike you as a curious title for an FOFOA blog post? I'll bet some of you are saying yes while others are thinking "huh? What kind of a stupid question is that?" Onward...

One of the greatest compliments I receive is when people say that I write in a way that anyone can understand. But one of the reasons my posts come across this way is that I really try to avoid stereotypical and dogmatic words. I especially try to avoid words deeply embedded in our elite academia. The problem is that these words carry so much baggage. They carry a standardized mental picture that is often wrong. In fact, some words carry multiple images specific to different factions of belief.

This "word problem" creates confusion and often stirs misguided debate founded on different definitions. "Inflation" versus "deflation" is a perfect example. So to avoid misunderstandings, I try to explain my Thoughts through descriptions rather than dogmatic words.

Hyperinflation, however, is one word I do use, because I think it portrays the best visualization I can deliver as to how the dollar's collapse will unfold. At the same time, I am careful to explain that I believe gold's price explosion is a totally separate event that is coming. It is not DEPENDENT on hyperinflation. In fact, hyperinflation could theoretically be avoided while gold's price explosion cannot.

Along these same lines, explaining myself descriptively, I state that my position is "deflation in real terms"... in terms of gold! What makes it so difficult for traditional "deflationists" to grasp this concept is that deflation (my description of deflation) will end in hyperinflation! "Hyperinflation", as I have shown, has much more in common with their understanding of "deflation" than it does with the common understanding of "inflation". As I like to say, the only thing hyperinflation and inflation have in common is nine letters. And I also like to say that in the end we will have hyper-DE-flation in all things measured against gold, and hyper-IN-flation in all things measured against dollars.

I am opening with this long prelude only to demonstrate my "descriptive" intentions as I now tackle the most dogmatic and divisive word of all... MONEY! What is money? Answer this question honestly and I think a lot of what I write may suddenly come into clearer focus.

Gold is Money

This is the dogma among most in our crowd, is it not? Gold is money! Who on earth can dispute this (practically) divine statement? Well, I'm not here to stir up trouble, so I will leave this one alone for the moment. But I hope we can all agree on at least one thing for the moment. How about this one?... "Gold is a form of wealth!" Hopefully we can at least agree on this statement as we proceed. Gold is a form of wealth.

Functions of Money

"Money", as it is understood today, has three main roles. The late Dr. Willem F. Duisenberg, former President of the ECB, in his famous acceptance speech for the International Charlemagne Prize in 2002 stated it well...
What is money? Economists know that money is defined by the functions it performs, as a means of exchange, a unit of account and a store of value.

Our modern understanding of money is that it has three roles or functions: 1) A medium of exchange, our TRANSACTIONAL currency, 2) a unit of account, a "number" used for comparing relative values, held in each person's memory AND on paper for bookkeeping (and legerdemain), and 3) a store of value, or wealth.

What I would like to do now is to take a broader view of money. A thought experiment that will transcend the last 38 years of our monetary experience. I hope to transcend even the last century, the last 233 years of our United States, perhaps even the last millennium. Let us think about money in terms of the last 2,500 years. And perhaps then we can gain a new perspective that yields a fresh understanding of what the heck is going on right now!


Etymology is the study of the history of words. Now I am no expert, but I would like to point out what the dictionary says about 'money' and 'currency'. From my post, On Hyperinflation:
Two definitions are important in this discussion. These are from Webster’s Dictionary:

Currency (1699) 1 a: circulation as a medium of exchange b: general use, acceptance, or prevalence 2 a: something (as coins, government notes, and bank notes) that is in circulation as a medium of exchange b: paper money in circulation c: a common article for bartering d: a medium of verbal or intellectual expression

Money (13c) 1 : something generally accepted as a medium of exchange, a measure of value, or a means of payment

Note that the first known use of the word Money in the English language was in the 13th century. The word Currency didn't make it into the English language until more than 400 years later.

Note also that the appearance of the word 'money' in the English language came 800 years after the fall of the Roman Empire.

Thought Experiment

Now on to our Thought experiment. This comes to us courtesy of FOA on The Gold Trail. I have edited the length of FOA's presentation for the purpose of this post, but will keep it in blue to differentiate the source. The entire post can be found at the link above.

Owning wealth aside from official money units is nothing new. Building up one's storehouse of a wealth of things is the way societies have advanced their kind from the beginning. What is new is that this is the first time we have used a non wealth fiat for so long without destroying it through price inflation. Again, a process of using an unbacked fiat to function as money and building up real assets on the side. Almost as if two forms of wealth were circulating next to each other; one in the concept of money and the other in the concept of real wealth.

This trend is intact today and I doubt mankind will ever pull back from fiat use again. Fiat used solely in the function of a money concept that I will explain in a moment.

Understanding all of this money evolution, in its correct context, is vital to grasping gold's eventual place in the world. A place where it once proudly stood long ago.

All of this transition is killing off our Gold Bug dream of official governments declaring gold to be money again and reinstitution some arbitrary gold price. Most of the death, on that hand, is in the form of leveraged bets on gold's price as the evolution of gold from official money to a wealth holding bleeds away any credible currency pricing of gold's value in the short run.

To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory, not a real item. In proper vernacular; a 1930's style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature.

By accepting and using dollars today that have no inherent value, we are reverting to simple barter by value association. Assigning value to dollar units that can only have worth in what we can complete a trade for. In effect, refining modern man's sophisticated money thoughts back into the plain money concept as it first began; a value stored in your head!

So you think we have come a long way from the ancient barter system? Where uneducated peoples simply traded different items of value for what they thought they were worth? Crude, slow and demanding, these forms of commerce would never work today because we are just too busy, right? Think again!

Lean back and think of all the items you can remember the dollar price for. Quite a few, yes? Now, run through your mind every item in your house; wall pictures, clothes, pots and pans, furniture, TVs, etc... Mechanics can think about all the things in the garage, tools, oil, mowers. If one thinks hard enough they can remember quite well what they paid for each of these. Even think of things you used at work. Now try harder; think of every item you can remember and try to guess the dollar value of it within, say, 30%. Wow, that is a bunch to remember, but we all do it!

I have seen studies where, on average, a person can associate the value of over 1,000 items between unlike kinds by simply equating the dollar price per unit. Some people can even do two or three thousand items. The very best were some construction cost estimators that could reach 10,000 or more price associations!

Still think we have come a long way from trading a gallon of milk for two loves of bread? In function, yes; in thought no! Aside from the saving/investing aspects of money, our process of buying and selling daily use items hasn't changed all that much. You use the currency as a unit to value associate the worth of everything. Not far from rating everything between a value of one to ten; only our currency numbers are infinite! Now, those numbers between one and ten have no value, do they? That's right, the value is in your association abilities. This is the money concept, my friends.

Unlike the efficient market theory that was jammed down our throats in school, we all still use value associations to grasp what things are worth to us. Yes, the market may dictate a different price, but we use our own associations to judge whether something is trading too high or too low for our terms. We then choose to buy or sell at market anyway, if we want to.

In this, we have moved little from basic barter. In this, we are understanding that an unbacked fiat works because we are returning to mostly bartering with one another. A fiat trading unit works today because we make it take on the associated value of what we trade it for; it becomes the very money concept that always resided in our brains from the beginnings of time.

In this, a controlled fiat unit works as a trading medium; even as it fails miserably as the retainer of wealth the bankers and lenders so want it to be.

So how did your Thought experiment go? Did you come to the conclusion that the concept of "money" in its most pure and primal form is the mental association of values in trade? That it is the actual thought process inside of our minds that we use to associate the relative value of real things? "Money is just a book keeping accounting of real wealth!" "Why do we need to save this stuff anyway?"

So, to assign this concept to one of the three "functions" of modern money, the pure money concept fits best within the unit of account function.

Modern fiat currency, our modern physical transactional medium fits best in the means of exchange function. And real wealth, with gold as the most liquid, durable and portable example par excellence, fits best in the store of value function.


Now let us take our Thought experiment back in time, before the words money and currency entered the lexicon. In those times, gold was just another form of wealth that was traded in simple barter. But gold had certain qualities that made it especially convenient to trade. And it also had qualities that made it especially good to hold as wealth! For one thing, it was not needed for other functions, so one could hold as much as possible without infringing on anyone else!

A hat was also wealth. So was a pig. A hat could be traded for a pig just as easily as a piece of gold. But pigs were for eating and hats were for wearing. And if one man became wealthy enough to hoard all the hats, there might have been an outbreak of sunburned heads! :)

The point is that gold was not "the pure concept of money" any more than hats were, or any more than paper dollars are "the pure concept of wealth"! When the ancients stamped gold into coins, they were simply making a true barter item, a wealth item more recognizable and easier to use. Even without any legal tender laws, this barter item, coined or not, still carried its value in its weight.

But as "the pure money concept" (the unit of account function) crept in and attached itself to the numbers stamped on gold coins, the door was opened to the debasing of wealth and public theft through the clipping and diluting the metal content of the coins. Enter the appearance of Gresham's Law!

Even still, was gold really what we think of as "money" back then? According to FOA, the answer may well be no:

We were first alerted to the "gold is money" flaw years ago. When considering the many references to gold being money in ancient texts, several things stood out. We began to suspect that those translations were somewhat slanted. I saw many areas in old texts where gold was actually referenced more in a context of; "his money was in account of gold", or; "the money account was gold", or; "traded his money in gold". The more one searches the more one finds that in ancient times gold was simply one item that could account for your money values. To expand the reality of this thought; everything we trade is in account of associated money values; nothing we trade is money!

Well, I put it off at the beginning of this post, but I'll ask it again now... Gold is money! Who on earth can dispute this (practically) divine statement?

I ask this again only as a rhetorical question. Because as I pointed out in my long prelude, this post is all about confusing and misleading dogma presented through the use of stereotyped words. Money being the worst of all!

Are we using Wim Duisenberg's definition of money, consisting of three roles? Or are we using our own newly discovered "pure concept of money" definition, consisting of only one of those roles? Or are we suggesting, when we say "gold is money", some NEW definition based on a hybrid role assignment? What is "honest money"? And what does someone mean when they say "gold is money"?

Can you see how common words that different people define differently can cause great confusion and disagreement, even when it is not really warranted?

And can we now agree on these three statements at least? 1) Gold is a form of wealth. 2) The pure concept of money fits best within the unit of account function. 3) The word currency best describes what we currently use in the medium of exchange role.

Okay, with this newfound partial agreement in place, let us take a look at where we are heading. And let's see if we have gained any new understanding. Here is a little more from FOA:

Today's talk is, once again, a more detailed continuation of our theme: the evolving message of gold. I'll begin now.

Our modern gold market price illusion is little more than a product of the fiat dollar system; a design that denominates gold credits in a contract form. Is it a free market? Why yes, very free. But... TOO free, in the sense that contract supply is totally unlimited. Investors bought into this market even though they fully well knew 90% of the volume was represented by only cash equity on the other side. Knowing that, they somehow expected that those contracts were limited in creation by the fixed amount of gold in the world. Their mistake, not the market's.

Clearly, anyone schooled in classic hard money Thought should have known that this was just another gold inflation; a transitory era between money systems. This was a time to gather gold over the years, not invest in the leveraged aspects of gold's new fiat versions. Nor, to buy into the gold industry that owed its life and cash profits to the maintenance of such a system; transitory as it was. The expanding fiat universe was best used to gather real wealth each time the transactional fiat currency cycled through your domain.

Anyone that understood this knew that this is how you handle an evolving process. For myself and others, knowing that gold's inherent value could not change much and was historically undervalued in its comparative value to all things, we bought gold in quantity. We tossed aside Western concerns about shifting currency prices of gold.

This entire paper-gold trading realm represents the conclusion of a convoluted, decades long attempt by mankind to tie his fiat money concepts to physical gold. These centuries of gold/money tie-ins will end in a colossal breakup of the entire fiat money-plus-gold concept; leaving gold and fiat to trade independently of each other.

Unfortunately, it's on the dollar's watch this will all end as this gold failure is running in parallel to the dollar ending its position as a world reserve currency.

The above is a good summary of FOA's message. I am sure that some of you have read The Gold Trail, but I'm curious if you felt a slightly deeper meaning in it now that we have discussed the pure concept of money. And if so, you should try reading the whole of A/FOA again! It can be found at the top of my favorite links to the right.

You know, I often visit websites and forums that proclaim, "Gold is Money!" I have no argument with them. Obviously they are talking about the store of value function in Wim Duisenberg's definition of money. I mean, clearly gold is not our currency nor unit of account. And sometimes I visit sites that proclaim "We must return to honest money!" And again I have no argument. I understand that they are simply fed up with the built-in inflation in our modern medium of exchange that infringes on their store of value concept. I couldn't agree more.

Yet here I am to tell you that gold is now becoming completely demonetized! That the odds of us going back on the old gold standard are right around zero! That the inflating paper gold contract market has kept gold in a monetized state, even though we left the gold standard. But that is now coming to an abrupt end. I am here to tell you that even if we get some sort of new super sovereign global reserve currency with a certain "portion" held in gold, this will not mean the remonetization of gold!

Look no further than the political stylings of the Euro to see how this new super sovereign currency would work. Gold may be a portion of its reserves, just like the Euro. But also, just like the Euro, that gold will be marked to market! (See: Your Own, Personal, Freegold)

Indeed, Duisenberg also had this to say in his famous speech:
[The Euro] is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state.

Yet somehow its required 15% gold reserves have risen to 55.6% in ten years! And for some reason its gold reserves are still on LINE 1 of its financial statement! Hmm...

But current global confidence is too shaken for a new reserve currency to work just yet. Gold may end up being the single object that restores confidence enough for a new reserve system shared by many nations, but not at today's gold price. Not anywhere even close to it!

The human concept of money is changing whether we like it or not. It is being torn apart. Gold, as a wealth reserve and wealth asset, will exist and trade parallel to the world of fiat, the world of credit and debt. Producers and savers will finally have the option to switch tracks so to speak. To get on a parallel track that avoids the inevitable collision with the debt-hungry collective their savings have always faced.

And as we pass through this phase transition, as gold switches from the transactional track to the wealth-reserve track, it will take on a whole new meaning... and a whole new value! The non-dollar part of the world already knows this. This is why they are buying gold now! You see, as a truly demonetized wealth asset, gold has a much much higher value to mankind than it does as a transactional money. To get an idea of the difference, just compare the basic transactional money supply with the vast quantity of so-called "paper wealth dollar derivatives". This should give you an idea of what is coming!


Wednesday, October 14, 2009

Fair Value Gold?

I was asked by email today what would be my counter-argument to this new piece by Paul van Eeden. I thought I would share it with you. But first, here is a snip from Paul's article, "Gold is over $1000 an ounce - Now what?"
Given that the gold price is trading at a 25% premium to its fair value and that we can imagine several scenarios whereby the US dollar could rally and the gold price could fall, it seems to me that betting on a higher gold price right now is merely a bet on the Greater Fool Theory. That is not to say that the gold price could not continue to rally - markets can remain irrational far longer than rational people ever imagine they would. Personally, though, I have no interest in buying an over-priced asset in the hope that it will become even more over priced - not even gold.

Here was my reply...

The dollar is so much more than just its quantitative body, its size. If it was not, it would have surely collapsed back in the 1970's after being set free from gold. But something else developed, an insatiable demand for dollars that allowed for the supply of money to be increased time and time again with little inflation showing up in prices and almost a negative affect on gold over a 20 year period. How was this possible in a world that was supposed to actually perform under Austrian principles of monetary inflation?

Obviously the printing of money and the expansion of credit had little to do with gold price inflation, at least from 1980 through 2001. 1971 to 1980 and 2001 to 2009 were different, but what was happening? Was it a shift back and forth between a quantitative monetary effect or something else entirely?

What changed in our first and only 38-year experiment with a completely symbolic, unbacked fiat currency was that, from an Austrian perspective, we were shocked and surprised to find such a tremendous demand for such a singularly worthless currency.

This demand came from its ease of use and from the ease of credit creation and international transactions. We got little plastic cards and key fobs that could pay for anything from gas to groceries. The banks got the equivalent of the Midas touch when it came to credit expansion. And the globalization movement got the most liquid capital movements ever imagined.

Perhaps it took 9 years for all this new demand to mature, but once it did, we got the 1980's!

But did you notice something about all the demand developments I listed? The were all based on the dollar's ease as a transactional unit. None of them were based on its intrinsic value. None were based on its store of value function. None were because of its superior use as a denominator of debt. Only for its ease in issuing debt.

But for hundreds if not thousands of years these two separate functions of money have been ingrained into our human psyche as one and the same. Money, as we know it, is both a transactional medium and a store of value.

So in the 1970's, we watched as acceptance of this new symbolic transactional unit grew. In the 80's and 90's we watched as the dollar exploded in quantity and global use, with relatively little inflationary impact. And then in the new millennium, we are seeing another shift: the recognition that the dollar is really only good for its transactional use. But quite poor as a store of value.

So gold's price rise is not a function of inflation, as van Eeden says, but is instead a function of a global sea change away from using the dollar as a store of value. When viewed from this perspective, gold's rise has only just begun.

What do you think allowed for 20 years of dollar expansion with no gold price inflation? It was the soaking-up of newly created dollars as people all over the world held them as a store of value. Wall Street exploded as the enabler of this misguided demand, while the real demand was for the dollar's transactional ease. China followed, as did much of the developed world. But now this trend has reversed.

This is why van Eeden's money supply analysis is meaningless. I fully expect transactional dollar demand to swell from time to time as large holders of debt liquidate into a new form of savings. This is because that fading value must pass through dollars to get where it is going. But you must understand that whatever the USDX does, it does not represent new savings flowing in.

The transactional money supply is tiny compared to the supply of dollar-denominated savings. It is a bottleneck that must be traversed to get into gold. So the USDX is a misleading metric for those of us watching gold rise in value. Jim Sinclair will be right in the end, but the path there may still hold some confusing hiccups along the way.

The quantity theory of money DOES apply, but in a much more complex way than van Eeden shows. Too complex, in fact, for anyone to fully understand. The QUALITY of money also applies, alongside the quantity.

For this reason, my personal focus on the quality and quantity of money revolves around hyperinflation, a currency event that is separate from the rise in gold which is driven by the first ever separation of monetary functions. The various qualities of modern money can be simply viewed as M0, and then M1, M2, and then M3 and broader. My argument is that only M0 matters once hyperinflation takes hold. And that all of the money creation over the last year has been M0. I argue that large swaths of wider money have been converted to M0 by the Fed, like turning a living creature into stone. I also argue that guarantees foreshadow future M0 conversion, and that guarantees are being handed out like candy on Halloween. For all these reasons I see the tinderbox of hyperinflation being rained down upon by hot embers from the forest fire of burning dollar-denominated derivatives and other Ponzi paper.

It is the principles above that must be understood because any quantitative analysis in today's rigged financial environment will deliver dubious results.

I notice that van Eeden focuses on the collapse of credit money but discount's the Fed's current monetization as being "only" $900 billion of base money (M0). Then he says,
And while the increase in the US money supply as a result of the Fed's priming is material, and has maintained US monetary inflation at historically high levels, it is nowhere near hyper-inflationary rates, nor is there any reason to believe that hyperinflation is remotely likely in the US.

Here is where Richard Maybury's description of "velocity" (as opposed to money supply) comes into play. Velocity, as Maybury says, can turn on a dime, and has the same effect as increasing the supply!

Hyperinflation begins as the dollar is first repudiated as a store of value (a reversal of velocity), and second as an international transactional unit. Hyperinflation does not begin with the printing of million-dollar-notes. That comes later as the government responds to the failing dollar value in the way we all know it will. Iceland's government did not have this option last year. But the US does. It will print to "slow the pain". But in reality it will be causing long term pain that will be felt by the whole world, especially us in its legal tender zone.

To make the kinds of quantitative conclusions that van Eeden makes is to assume that free market adjustments to the real value of the dollar are fully up to date. This is the wrong assumption, as the dollar's (non) value has been masked for 38 years by both willful acts of the Fed, and also an irrationally exuberant market for Ponzi paper.

In 1971 the dollar became intrinsically worthless. But the advent of computers made this symbolic currency explode in value as a transactional unit. Only now, 38 years later, are we starting to realize that transactional value and time-store-of-value are not the same thing.

So to assume, as van Eeden does, that gold's value should simply counter-lever the supply of worthless dollars completely ignores the global separation of monetary roles that is happening today. This is NOT simply a figment of Another's imagination. You can see it on all scales from individuals on up to the CBs if you bother to look outside of the United States.

From a quantitative perspective, like van Eeden takes, we could be looking at something on the order of a $60 Trillion flow that will move from symbolic-idea-denominated savings into hard gold savings, when all is said and done. And as this happens, the very denominator of the former will explode numerically so that the final outcome will appear much different than any quantitative analysis could even deliver at this point in time.

On the issue of interest rates, the dollar is only as valuable as what it can purchase either inside the US or outside. The outside is now working on other forms of pricing, so the dollar's only future value must be juxtaposed against what it can purchase inside the US, even for those holding dollars on the outside. And any increase in interest rates, whether market-driven or Fed-driven, will have a decidedly negative affect on an already failing economy. In other words, 'not much to purchase here'. This is why, and how, an increase in interest rates this time around (unlike 1980) would only exasperate hyperinflation and send the price of gold into the outer solar system.

The dollar is in a serious Catch-22 this time around, which is why I say my conclusions are unavoidable.

Van Eeden assumes that gold is always going to be the inverse of the dollar. But even Another and FOA said that, in the end, the dollar and gold will rise together. I have been saying this for a while too. It will be the final exit from paper into gold that must pass through the bottleneck of a few trillion transactional dollars. But this belief that van Eeden and so many others have will cause them to miss out on the greatest transfer of wealth ever.

In this same vein, technical analysts and Elliot-wave deflationists will also sell gold as it hits $1,300, the worst trade in the history of planet Earth!

Regarding China: China is in a badly manipulated and rigged position right now as well. Only its position is the inverse of ours. In my last post I said that (Savings) = (Production) minus (Consumption). The Chinese people are in a position of forced savings by their communist collective. They are being forced to produce, but not to consume the fruits of their own labor while it is being shipped to the USA. And the communist collective is stockpiling this windfall profit by printing local currency like it's going out of style, stealing purchasing power from its own people as it forces them to save.

But as trends reverse, which they are now, these same people who have been forced to delay consumption will suddenly find themselves supporting their own economy as they use their savings to purchase a higher standard of living. On top of this, they are now starting to save gold! Which will only AMPLIFY this effect as we transition to Freegold!

Another concept that van Eeden ignores is that at the same time as the dumping of the dollar in international transactions is being discussed, China is signing new international deals for the renminbi. I don't believe that China wants to print the new global reserve currency. But this new usage demand for the renminbi will have the de facto result of soaking up some of this Chinese inflation. And as this slow, global process moves forward, I think a lot of people (including the Chinese themselves) will be surprised at the result.

I do not believe that Chinese communism has created a great economy. I only believe that the mistakes they have made simply happen to be the inverse of ours. Dumb luck! And that everyone will be surprised how things actually play out.

I believe that we are witnessing a market-driven global shift to meritocracy; economic power based on merit and credibility. I believe Martin Armstrong nailed it when he said this will be the end of socialism. And honestly, I wouldn't be surprised if the transition to Freegold signals the beginning of the end for Chinese communism. I'm not predicting this (it would take 20 years or more), I'm just saying I would not be too surprised!
Given that the gold price is trading at a 25% premium to its fair value

Fair value against what? A piece of paper? Or fair value against the REAL wealth of the world?

In my opinion, time will reveal who was "the Greater Fool".


Saturday, October 10, 2009

Your Own, Personal, Freegold

Feeling unknown and you're all alone
flesh and bone, by the telephone
lift up the receiver, I'll make you a believer

Take second best, put me to the test
things on your chest, you need to confess
I will deliver, you know I'm a forgiver

Reach out and touch faith
Your own, personal, Freegold

Paying for Profligacy

The financial people of the world, Wall Street, and the "big money banksters" have all been bailed out by the Fed, the US Treasury and Congress through TARP and dozens of other Ponzi schemes. In addition to these bailouts, the Obama socialist dream including the ill-conceived stimulus plan has, and is, being funded totally through public debt. Does this mean that you will owe it all back in the future? Does it mean that you, your children, your grandchildren and your great grandchildren will be paying for all this profligacy and theft sometime in the future?

No it doesn't! The fact of the matter is that transfers of real wealth always happen in the present. When you borrow money, you are bringing your future earnings into the present and spending them now. So, in other words, you are acquiring real goods and services in the present and promising to work it off in the future.

But what if you die tomorrow? Or what if you go bankrupt in a year and never pay off your debt. Or what if hyperinflation makes it possible for you to pay off your debt with a single gold coin in your pocket?

Let's say you borrowed $100,000 to buy a fast boat. You now have a boat, a real hard asset transferred to you in the present. Someone somewhere had to work hard for many months to build you that boat. And now that wealth has been transferred to you in the present for nothing more than a promise of future payment. And as I have recently shown, that future payment is far from guaranteed.

So if all transfers of wealth always happen in the present, how should we properly view the transfer of wealth to Wall Street and Washington, DC by pure government fiat, that is happening right before our eyes?

First of all, we must understand that in today's world, this transfer of wealth will NOT be paid by our children and grandchildren in the future. Instead, this theft of present real, hard equity will be paid in the present, right now! It will be paid through the total loss of purchasing power by anyone holding dollars, dollar denominated long term contracts, dollar denominated bonds, or dollar denominated Ponzi paper promises of any kind including annuities, corporate debt, and even those promises made by the present Congress of the United States of America.

Our future obligations like Social Security and Medicare will not be paid in this way. In fact, they may never be paid at all. But the current debt will, as will the present transfer of wealth to Wall Street and Washington DC! (See: Washington, DC - BOOMTOWN in No Free Lunch)

The good news is that there is a way for you to avoid paying your share. If you are a good little socialist that would like to pay your fair share of Washington, DC's present profligacy, you can stop reading this blog right now and turn on CNBC. Just follow the advice you hear and you will be sure to pay your fair share!

Gold Standard?

There are plenty of blogs about what we should do as a society. About how we need to start a new gold standard; a return to honest money. How we must return to a hard, commodity-based currency that will restrain the profligate governments and their greedy bankers from inflating the money supply at will. But what we must understand, what is often difficult to understand, is that there is a big difference between what SHOULD happen and what WILL happen. There is a difference between FIGHTING for something and simply OBSERVING the real world to plan your next move. There is a difference between being an ADVOCATE or PROPONENT and being a PASSIVE OBSERVER of the changes we are actually living through.

This blog takes the latter position in all of these cases. If you would like to be an activist for a better world, this may not be the blog for you. But if you are a hard working producer and a saver worried about how to protect your purchasing power from the hungry collective, this blog may be just what you are looking for!

Money Versus Wealth

Modern man has dug himself so deep into the hole of debt that he will never get out!

What I mean by this statement is that he will never again accept a 100% Pay-As-You-Go monetary system. This is not to say that every man in the world wants it this way. Indeed, most of "our crowd" would like to go back to a gold standard of some sort. But for the Global Collective, this is simply not acceptable.

As we know, some nations, corporations and individuals are already so deep in debt that they will never get out. But what I am talking about is mankind's addiction to money being a form of credit. Man can no longer live with the idea of a gold money that cannot be inflated. Better said, "if you cannot borrow it, lend it or inflate it, it's not a money we can use."

It is with this understanding that I attempt to show you how natural evolution is returning to those of us that wish to live a "pay-as-you-go" lifestyle, the most important role of gold: the store of value function! The ability to retain hard-earned purchasing power intact, over any period of time.

The idea of any "basket" of finite commodities used to back a "super-sovereign currency" is this same supposed "perfect vehicle" as the old gold standard. It is the same concept that we used to tie gold into a credit inflating system. Just as the early bankers did by first promising to issue singular gold storage notes instead of circulating actual bullion through the economy.

It didn't take long for the basic cravings of humans to demand a subtle change in the workings of that system. That is, "lend us some of those gold receipts so we can buy a better lifestyle today and pay for it tomorrow". "If later we cannot pay for it, all of us will get the rules changed so you bullion storage guys can just print some more gold storage receipts".

Any "commodity basket" currency will ultimately be inflated beyond the commodity itself, punishing those who save that currency as if it truly represented those commodities.

Think of the IMF right now printing a trillion brand new SDRs, supposedly a balanced "basket" of national currencies. Yet they can print them at will, whenever the global collective demands more money. Remember, the collective demands that money be available whenever it is needed, no matter what money is declared to be!

History has proven that when real wealth units are tied to our credit money, credit inflation blurs our ability to measure our worth. It is for this reason the Austrian definition of monetary inflation is so important. To view inflation only as it is reflected through rigged CPI pricing measurements removes the perspective necessary to see what is actually happening to our paper-denominated wealth.

And once again, we as a society make the demand that drives the "buy now pay later" illusion. So, our demands will be met with bankers' supply in the form of more Ponzi credit IOUs for gold, or commodities, or national currencies (or whatever) that doesn't actually exists. Both then, now and in the future!

Further, people today never value their wealth in terms of other wealth items. Such as in an ancient "gold wealth barter system" context. Modern Western thought cannot conceive this because there is no standing wealth medium that can mark to the real market all forms of real value! Gold is and was the only wealth asset that could do this well. Again, as long as gold is tied into a money credit system - as the dollar reserve still tries to do - its value will be subjugated by the credit inflating needs of society. In this function, gold cannot be saved as a "wealth asset" that measures our true worth. A worth that carries our savings from generation to generation. But it will again... soon.

Be HAPPY that our collective WILL NOT go back to a gold standard, but will instead leave gold FOR US as a stand-alone wealth reserve asset that will put anyone who holds it on an equal footing!

Official money has always... ALWAYS been a political beast. As I said in a recent post, when the collective decides it needs money, it will have it. It will take it by force, or it will print it. Always has... always will. Even if we returned to an "honest money", this simple fact of life will not change!

Another simple fact of life: The people want credit! They don't want to "pay as you go". Ever since the concept of money and credit combined, this has always been the case, and it always will be the case, at least for the rest of our lifetime.

This is the basic reason modern economic systems use a fiat as their trading unit. Barter along with its finite payment is no longer wanted as a trade vehicle. You see, once society has a "money" unit declared and usable, the credit expansion qualities of said fiat money are restrained by tying the "transfer of ownership" to some physical barter unit. In other words, gold only gets in the way of man's socialist credit expansions.

If we combine credit with "honest money", the "honest" money supply becomes automatically inflated and subsequently DISHONEST as a store of value. This is unavoidable. It happens in a gold standard, in a gold exchange standard, and today, under the global, purely symbolic fiat "trust me" standard.

Money is always subjugated to the needs of the state. And when it is, who pays? The savers do!

Here is a simple equation. (Savings) = (Production) - (Consumption).

And another one. (Debt) = (Consumption) - (Production).

Production and consumption both happen in the present. Savings and Debt represent the belief that this PRESENT transfer of real wealth will be settled some time in the FUTURE. This is not the case today! To believe it is to put your faith (and savings) into highly flammable paper "promises to pay" as some sort of rickety store of value.

The monetary economy is like a see-saw, with money on one side and all the real, solid 'wealth of the world' on the other. As the money supply is expanded and diluted it is weighted down driving up the nominal value of all real wealth.

In our modern world of collective control over money dilution, any real, solid wealth item tied to the monetary system is wrongfully placed on the money side of the see-saw, and must be taken down in value along with the money.

Freegold is different as it places gold opposite the money supply for the first time in history! Gold can still be held as a wealth reserve by the money-diluting collective, but it will automatically offset any profligacy by rising in price as money is weighed down through printing. Gold will be truly demonetized. We are almost there. All that is left is for gold to break the chains of the dollar, the Fed, and its proxies like Goldman Sachs and JP Morgan. We are so close!

Freegold for Everyone!

I will now demonstrate from a practical perspective how the transition to Freegold will work using the Eurosystem as a primary example. This same, simple principle demonstrated by the balance sheet of Freegold's very own architects will also work on all scales, even for you as an individual. Yes, you can have your own, personal, Freegold!

In July of 1998 the ECB and Eurosystem Freegold concept went public. The ECB would take in a small portion of the overall Eurosystem foreign exchange reserves as its own. Of those reserves held by the ECB itself, 15% would be gold. Furthermore, any change in the Eurosystem's consolidated foreign exchange reserves, consisting of 30% gold at that time, would be subject to the approval of the ECB.
ECB Press conference: Introductory statement

The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB.

The precise modalities of the initial transfer will be finalised before the end of the year.

Before the end of the current year the Governing Council will also have to adopt an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will subject all operations in foreign reserve assets remaining with the national central banks -including gold - to approval by the ECB.

In connection with the setting-up of common market standards, the Governing Council also reached agreement on a number of issues related to the quotation and publication of reference exchange rates for the euro. Specifically, it was agreed to recommend to market participants the "certain" method for quoting the exchange rates for the euro (i.e. 1 euro = X foreign currency units) and to have daily reference exchange rates for the euro computed and published by the ECB.

So, upon establishment of the Euro, the plan was that gold would remain an important part of the foreign exchange reserves for the entire Eurosystem, and that their value would be quoted each quarter in the consolidated statement priced in euros. That was step one. Put 30% of your savings into physical gold and then mark it to the market price quarterly!

Step 2 said that going forward there was no need to worry about keeping the physical gold portion of your savings at 30%. Just do it once and watch what happens!!

Remember, this was 1999. And ever since they have been net sellers of gold under the control of the Washington Agreement which was signed on Sept. 26, 1999, renewed on Mar. 8, 2004 and again on Aug. 7, 2009.

So in 1999 they had 30% of their savings in gold. Since then they have liquidated a small, controlled amount of that gold on a regular basis. Now let's take a look at where they stand today, in 2009!

Eurosystem International Reserves

Today the total Eurosystem reserve assets stand at 428 billion, including foreign currency reserves, IMF reserve positions, SDRs, foreign assets and, of course, gold! 428 billion Euros total. And the gold reserves now total 233 billion Euros. So in the past 10 years, through many liquidations, gold has now grown to 54.4% of the total reserves!!

But wait! There's more. Have a look at this news article from last Wednesday, Oct. 7:
ECB-Gold reserves up 6.26 bln euros after repricing

FRANKFURT, Oct 7 (Reuters) - Gold and gold receivables held by euro zone central banks rose by 6.26 billion euros to 238.169 billion euros in the week ending Oct. 2 after a quarterly revaluation, the European Central Bank said on Tuesday...

Gold holdings rose because the quarterly revaluation more than offset the sale of 15 million euros worth of gold by one euro zone central bank, consistent with the 2004 Central Bank Gold Agreement, the ECB said.

So in just this latest quarterly report filed on October 7th covering through Oct. 2, 2009, despite selling more gold, the Eurosystem's total gold holdings ROSE another 6 billion Euros through the simple process of marking to market the gold held in reserve! You can see it here on the official quarterly financial statement, line 1 (a seriously bold position to place a very serious wealth reserve... LINE 1)...

Eurosystem Consolidated financial statement - as of Oct. 2, 2009

So let's see. Just in the past quarter of 2009 those Eurosystem gold reserves have swollen from 54.4% to 55.6%!

Can you see what is happening? Can you see what will happen when gold heads for the moon? Can you see how "dollar reserves" are becoming less and less significant at exactly the same time as physical gold is taking over the balance sheet?

This is why China is buying gold. Very soon China's balance sheet will be swelling in size even as it writes off its remaining dollar holdings. They will become worthless. Even so, their balance sheet will EXPLODE in real value!

Now think about your personal balance sheet. Think about your savings. Would you like to lever your savings so that your purchasing power is preserved even as the dollar is devalued? Or would you rather lever your savings to EXPLODE in purchasing power as gold explodes in value?

In the 90's it was fairly common advice to put 10% or 15% of your portfolio into gold. What do you think was the reasoning for this advice? Can you see now that we are living the last days before this "insurance" will pay off big time?

Somewhere between 0% and 100% lies the exact percent that will perfectly preserve the purchasing power of your savings today. Anything above that number will EXPAND your real savings as we transition into Freegold. Anything below it will DIMINISH your purchasing power. So what is the magical number? No one knows. It is unknowable! Is it 1%? Is it 5%? In my view it is probably somewhere between 3% and 10%. But as I say, know one knows. This is why FOA said the REAL LEVERAGE is in physical gold in your possession. Not in leveraged contract paper!

When you buy gold coins, you remove your savings from the reach of the collective. You remove your wealth from the expansionary, dilutionary practices of the entire financial industry. Have you noticed how even good companies like to inflate their stock by issuing more? It's called stock dilution! The entire international financial industry is at risk right now. Remove your wealth from the system! Don't end up paying for the collective's profligacy WITH YOUR SAVINGS!

Some day in the future we will know what that magic number was on October 10th, 2009. And anyone who went double that number, doubled their savings... and so on. Imagine if you put 20% of your savings into gold coins! Or 40%! How about 80%? Or even 90%! Or, God-forbid... 100%. So grab your calculator and have some fun with numbers! Just remember to go with a percentage that matches your personal level of understanding and comfort. This is the best advice I can pass along!