Monday, November 1, 2010


As the global reserve currency, the dollar finds itself in the position of being a global "network good." A "network good" derives its utility to the user (its value) from the "network effect," the number of other people also using it. A "network effect" is normally a self-reinforcing positive feedback loop. The more people that use a "network good," the more valuable it becomes and then more people use it, and so on.

A few random examples of a "positive network effect" are Facebook, Wikipedia, eBay, the Internet, the NYSE, perhaps even this blog. The opposite of "network value" is "inherent value." In the latter, you derive value from simply using a good. In the former, you derive value from other people's use of the good. If we all stopped posting on this blog tomorrow it might have some residual inherent value left in the old archives, but the network value would be gone.

Two big threats to network value are complacency and competition. The complacency of the network operator and the emergence of competing networks tend to begin the process of negative feedback. A few examples of a "negative network effect" are AOL, the USPS, the New York Times and the U.S. dollar.

For the last 88 years or so the dollar has expanded into many global uses that today lend it its only value, its "network value." More things are priced in dollars today than any other currency, to provide easy calculation and transparent pricing across the globe. More contracts are denominated in dollars today, invoiced in dollars, settled in dollars, and more savings are denominated in dollars today than any other currency.

But despite its popularity, the dollar still has two fundamental flaws. The first flaw is that it is a national currency, not a supranational one, and the second is that it once tried to be as good as gold. So much so that even today the dollar cannot sever its link to gold. From the U.S. Treasury's FAQ's on its own website:
Under 31 U.S.C. 5118(b) as amended, "The United States Government may not pay out any gold coin. A person lawfully holding United States coins and currency may present the coins for currency . . . for exchange (dollar for dollar) for other United States coins and currency (other than gold and silver coins) that . . ." citizens may lawfully own. Although gold certificates are no longer produced and are not redeemable in gold, they still maintain their legal tender status. You may redeem the notes you have through the Treasury Department or any financial institution. The redemption, however, will be at the face value on the note. These notes may, however, have a "premium" value to coin and currency collectors or dealers.

Back to that first flaw, the dollar is the national currency of a single nation-state, yet it is also held globally as a reserve currency to serve all of its global uses, which in turn give it value even today through the global network effect. So how is this a flaw? Well, it leads to a conflict of interests between the issuing nation-state's internal and external obligations as manager of the currency. This is called the Triffin Dilemma.

From Wikipedia: The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency to fulfill world demand for foreign exchange reserves.

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency.

Onset during Bretton Woods Era

Due to money flowing out of the country through the Marshall Plan, US defense-spending and Americans buying foreign goods, the number of U.S. dollars in circulation began to exceed the amount of gold backing them up in 1959.

By the fall of 1960, an ounce of gold could be exchanged for $40 in London, even though the price in the U.S. was $35. This difference showed that investors knew the dollar was overvalued and that time was running out.

The Nixon Shock

In August 1971, President Richard Nixon acknowledged the demise of the Bretton Woods system. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The "gold window" was closed.

In order to maintain the Bretton Woods system the US had to:

a) run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars. With more US dollars in the system the citizens began to speculate, thinking that the US Dollar was overvalued. This meant that the US had less gold as people starting converting the US dollars to gold and taking it offshore. With less gold in the country there was even more speculation that the US Dollar was overvalued.

b) run a balance of payments current account surplus to maintain confidence in the US Dollar.

Obviously, the US was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time.

Implication in 2008 meltdown

In the wake of the Financial crisis of 2007-2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System.

It is clear, at least to me, that today we have the mother of all tensions between national monetary policy and global monetary policy. The Triffin paradox is in full bloom! The dollar is exhibiting its contradictory nature in view of the world. As Costata asked in a recent comment: Are the US external creditors and issuers of the currencies affected by these policies going to stand for this?

Meanwhile, as the dollar (mis)management was busily becoming complacent, a new competitor emerged. On January 1, 2002, euro notes and coins were introduced to twelve nations as a new medium of exchange. On January 18, 2002 it was announced that the Charlemagne Prize, which is normally given to people the likes of queens, presidents and Popes, would be awarded to a thing, the new euro. During his acceptance speech, President of the ECB, the late Dr. Willem F. Duisenberg said this about the euro:
The euro is the first currency that has not only severed its link to gold, but also its link to the nation-state.

My hope is that I have now armed you with what you need to understand the meaning of this powerful statement. The euro solved dollar flaw #1, the Triffin dilemma, by severing its link to the nation-state, and dollar flaw #2, trying to be as good as gold, by severing its link to gold. It did the latter through the Eurosystem quarterly mark to market reserve policy. And let's take a quick look at the results thus far:

Tuesday, January 1, 2002 - ***"E-Day" Launch of euro notes***
(with reserves of about 12,500 tonnes of gold)
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 ***
Thursday, October 14, 2010 - *** GOLD ABOVE $1375 ***

Please think back to what the rise in gold during the 1970's did to the dollar and the international monetary system. It panicked European central bankers to the extent that they confronted Paul Volcker in October 1979 at an IMF meeting in Belgrade, Yugoslavia with "stern recommendations" that something drastic had to be done immediately to stop the dollar's fall. The fear among the European central bankers at the meeting was that the global financial system was on the verge of collapse.

Now compare that to today. As the gold price rises, the euro's monetary reserve assets rise in both value and confidence. They know that even if the dollar collapses today, the gold portion of their reserves will more than compensate for the loss of dollar-denominated assets. And they also know that today, unlike in 1979, there is an alternative currency of sufficient size and scope to pick up the global financial slack. No need to panic like 1979.

I'm sure that right about now some of the noobs (and a few regulars) are scratching their heads thinking, "why is a gold bug like FOFOA praising the euro? It's just another fiat currency, isn't it?"

First of all, I'm not a gold bug. Second, my praise has nothing to do with Europe's Socialist infrastructure or its politics, which are a mess. As ANOTHER said, Europe's politics are "a side show," easily subservient to the monetary structure which evolves on long-line cycles. Politicians like to pretend things can change on short cycles, with their help. But the euro has been in the works since 1962. And to those that believe short-line politics will break countries like Greece away from the euro, all I can offer is "time will reveal its long-line nature… in time."

Third, I share with Aristotle the following A-HA moment which he described here:
In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. Going in, I was a charter member of the Goldhearts club, and I emerged even more excited about the prospects of Gold than before.

We need a fiat currency like the euro that structurally supports Freegold in order for gold to perform its highest and best role in the international monetary and financial system. The alternative is global economic chaos upon the denouement of the dollar. This is why I praise the euro.

And here we are today. The U.S. dollar has built up 88 years' or so worth of global "network value" that is now being challenged by network operator complacency and conflict of interest, as well as a new competitor that has eliminated the dollar's two fundamental flaws.

So here's the dilemma. What do you do if your use of the dollar in so many ways is the most important to the dollar's global network value? If you abandon it you will be hurt. Yet if you stick with the dollar you will be hurt badly in the end. So how do you minimize your own cost of switching currencies?

I have a reading assignment for all of you. It comes courtesy of the ECB and it should spark a lively discussion in the comments here. Perhaps it will even help add some network value to this blog.

This is paper #77 from the ECB's "Occasional Paper Series." It is titled:


You can download the paper here:

The following excerpts are offered as a teaser and not a substitution for reading the whole thing. The actual paper is only 16 pages of reading even though the pdf is 33 pages long. Here are a few excerpts:

A recurring theme in recent years in the debate on the international role of currencies has been the possibility of pricing oil in euro.

The traditional economic literature provides ample reasons why oil is invoiced in one single currency around the globe. Specifically… the US dollar.

Despite the strong case for the use of one vehicle currency in the oil trade, the analysis of this paper suggests that the introduction of a new currency in the crude oil market is possible.

The country with the largest weight among the oil exporting nations is Saudi Arabia. It has the world’s largest proven petroleum reserves (one-quarter of the total) and some of the lowest production costs, and is the largest producer and net exporter of oil (see Appendix, Table 1). As of May 2005, owing to the recent rapid increase in demand for petroleum, Saudi Arabia is the only country with any surplus production capacity: 900-1,400 thousand barrels per day, or some 13% of total capacity (EIA, 2005b). This enormous capacity has allowed Saudi Arabia to play the role of “swing” producer.

Until a few years ago, oil earnings were deposited in international banks in US dollars. However, since 2002, OPEC countries have increasingly deposited their oil wealth in euro-denominated accounts (12% in the third quarter of 2001, against 25% in the second quarter of 2004) at the expense of US dollar-denominated accounts (75% in the third quarter of 2001, against 61.5% in the second quarter of 2004). These observations support the view that the oil exporting countries, as well as some oil importing countries, such as those within the euro area or in its vicinity, could potentially be willing to invoice or settle their oil contracts in euro or in another currency other than the US dollar. The next section discusses current practices as regards price setting in the oil market.

Why is crude oil predominantly invoiced in one currency? The next section attempts to answer this question.

Network effects arise when the utility a consumer derives from a particular good is dependent upon the number of other individuals also consuming that good. The network property of a good has the following four implications for the market for that good. First, a minimum level of agents using the good (critical mass) is necessary for the initial adoption of a network good. Second, the demand for network commodities is associated with a bandwagon effect, i.e. the more individuals use the good, the more incentive there will be for other individuals to use it as well. Third, network effects may give rise to multiple and unstable equilibria related to the interplay of information, expectations and coordination. Finally, there are two problems linked to network goods, which may result in market failures: excess inertia, i.e. resistance by individuals to using a “superior” network commodity, and excess momentum, i.e. a rush by individuals to an “inferior” network good. Treating money as a network good is a recent development in economics and has led to interesting results concerning the origin of money, fiat currency and monetary integration.

This section develops a model that captures network effects in the oil market, extending the models developed by Stenkula (2003) and Oomes (2003). The market consists of many buyers (B) and sellers (S) of crude oil. While the oil producers are sellers in this game, they have an incentive to invoice their oil contracts in the currency with which they will pay for their (non-oil) imports of goods and services from the rest of the world. In short, we will call these (non-oil) goods and services food.

Similarly, the rest of the world are buyers of oil and sellers of food. Both parties aim to minimize foreign exchange risk and costs associated with the use of a specific currency for trade. In an environment where buyers and sellers are matched randomly and are subject to cash-in-advance constraints, both types of agents may choose between two currencies, i.e. euro (e) or US dollars (d), as the invoicing currency for their contracts. Each contract is fully invoiced in a single currency. In addition, the price of each contract is assumed to be constant and normalised to one. At time t, the sellers sell oil to the buyers, while at time t + 1, the buyers of oil sell food to the oil sellers. Hence, all agents try to anticipate the currency they will need for purchases in the next period.

Depending on whether or not the currency they accept for payment for oil is the same as the currency they use for their imports, the oil producers (S) may incur three types of cost, related to the three functions of money – medium of exchange, unit of account and store of value.14

14 Note that, although for the remainder of the paper we refer to oil exporting countries, the analysis for oil companies is similar: they are either buyers or sellers of oil, or both; and they too incur costs when they invoice oil in one currency and have to record profits and pay taxes and dividends in another.

The theoretical literature on trade invoicing explains the almost universal use of the US dollar in international trade in crude oil by means of the fact that petroleum is a homogeneous good traded in organized exchanges. Apart from serving as a medium of exchange, the US dollar fulfills the function of a unit of account by providing price transparency in the oil market. Thirdly, the macroeconomic stability of the United States and the depth of the US financial markets explain the role of the US dollar as a store of value and the low liquidity costs associated with holding the currency.

Please discuss.


Levon wears his war wound like a crown
He calls his child Jesus
`Cause he likes the name
And he sends him to the finest school in town

Levon, Levon likes his money
He makes a lot they say
Spends his days counting
In a garage by the motorway

He was born a pauper to a pawn on a Christmas day
When the New York Times said God is dead
And the war's begun
Alvin Tostig has a son today

And he shall be Levon
And he shall be a good man
And he shall be Levon
In tradition with the family plan
And he shall be Levon
And he shall be a good man
He shall be Levon

Levon sells cartoon balloons in town
His family business thrives
Jesus, he blows up balloons all day
Sits on the porch swing watching them fly

And Jesus, he wants to go to Venus
Leaving Levon far behind
Take a balloon and go sailing
While Levon, Levon slowly dies

He was born a pauper to a pawn on a Christmas day
When the New York Times said God is dead
And the war's begun
Alvin Tostig has a son today

And he shall be Levon
And he shall be a good man
And he shall be Levon
In tradition with the family plan
And he shall be Levon
And he shall be a good man
He shall be Levon


Stolid said...

So which one came first? The US gov's desire to prevent inflation (which the deficits should be causing) or world demand for US dollars? Is there a possibility that foreigners will be using US dollars when it's on the verge of collapse?

costata said...


Crystal clear (I hope). Thank you.


The evidence strongly suggests that the USG wants inflation. The threat they are making to the rest of the world is deflation. (See that article FOFOA linked, in this post, along with my question.)

With one notable exception (Euro), if the rest of the currency issuers around the world passively accept the latest default by the USG their currencies will climb to record highs against the US$.

In order to lower the exchange rate of their own currencies the conventional response is to either buy US$ or simply issue more of their own currencies. In effect the end result is the same. More currency is issued and high domestic inflation is the risk.

Observe the impact of all of this excess liquidity on the prices of essential commodities.

This quote is from an otherwise pedestrian piece from Bloomberg:

"The ECB’s buying already differs from other quantitative-easing policies because the central bank mops up the resulting liquidity, meaning the net effect on the money supply is neutral."

Now look at the cross rates on most of the other currency pairs apart from the US$ pairs in those currencies. They are relatively stable.

In sum the rest of the world has to attempt to disengage from the US$ for the purpose of pricing trade and/or conducting bi-lateral trade. Any other course of action is economic suicide. At present the USG/Fed is insisting that the rest of us (non-US dollar countries) accept their deal and commit economic suicide.

If other countries choose to attempt to disengage some US dollars are coming home (US$ = around 60% of world trade and foreign currency reserves). There are more than enough out there to give the USA a dose of hyper-inflation. The current Federal Reserve policies are already inflationary. The "foundation" is laid.

Physical gold is a safe haven outside of the fiat currencies while each of our (non-dollar country) governments make their policy choices.

Texan said...

The euro is the mark. Without Germany, there would be no euro. With Germany, there is a diluted mark called, "the euro". Once Merkel succeeds in implementing a default mechanism for the PIGS, what really is left of "the euro"? Germany and France, and to a much lesser degree, Benelux and, sort of, Italy.

My view is that you are ascribing the wrong "stabilizer" to the euro. It is not gold, it is the mark. It is the eye-popping productivity and seeming political pragmatism ( relatively speaking of course) of Germany.

No doubt Germany and the core WANTED a currency to challenge the USD. But they probably never ever imagined competitive devaluation as a responsible action, or ever imagined ZIRP. See their finance minister's angry comments that QE2 is just "currency manipulation".

So now they are sitting there watching the Swiss get annihilated with massive "credibility inflation" in the CHF, and the EUR, despite the increasing noise over PIGS, is rock solid bid under 1.40. Not good for German exports.

But they are caught, because if they jettison the PIGS, or
leave the euro, or "backstop with gold", or do anything BUT competitively devalue also, then the euro will rise and rise and choke off their industries. See Japan and how desperate they are getting, now saying their own version of QE will be to buy EVERYTHING.

Of course, one the euro goes "all in" on it's own version of QE, then it's no better than the USD, is it? For transactional purposes, one would want to hold it about as long as they would USD. And if the USD goes hyper, well, I imagine we will see the euro simply disintegrate also.

Texan said...

Costata, the Fed is trying to force savers wherever they may be to spend. That is all. One of the ways they are trying to that is to devalue the currency. Another is ZIRP.

They absolutely do not want the USD reserve status to be damaged, however.

costata said...

Hi Texan,

"...the Fed is trying to force savers wherever they may be to spend. That is all." (My emphasis)

If you are right then IMHO they should be careful what they wish for. If the Fed persuades the savers of US dollars to spend them en masse what would you expect that to produce?

"They absolutely do not want the USD reserve status to be damaged, however."

What they want and what they get may be poles apart.

Anonymous said...

Quietly, quietly, laying the groundwork for removing the oil backing from the USD.

I wonder how much currency manipulation etc is playing havoc with the transaction costs of purchasing oil.

Talk of a two currency system is about a means to get a foot in the door.

Soon enough.. we can get by without the USD.

Paul I said...

Interesting paper FOFOA. The key take away for me was the increasing trend for OPEC countries to convert revenues to Euros.

One could argue that the currency in which oil is priced and transacted, is less important than the currency (or commodity) oil revenues are converted to. Once the store of value aspect of a currency is compromised, it becomes increasingly a transaction only holding, a hot potato. Oil dollar revenues are exchanged ASAP, either for consumable import goods (defined as food in the paper), or for non-consumable wealth holdings; gold as we know, and now increasingly Euros.

What does this mean for the country with the exorbitant privilege? They can still (for now) print dollars for oil, but they can no longer expect those dollars to be hoarded. They will come “right back at you”, since ultimately if no other country is saving them, the final destination is the US. These dollars returning home will not just be those freshly printed, but an increasing quantity of those saved previously. Countries holding dollars may already be discounting them, as the following article proposes.

All other things be equal, inflation will be in dollar prices only. Once this takes hold, it becomes runaway. The US will be forced to print more dollars to pay for inflating essential imports (oil) thereby producing more inflation, and the rest of the world will play hot potato faster and faster, buying and selling dollars as quickly as possible to retain value. In this respect, a global dollar hyperinflation is already underway, and it’s already completely beyond the USA’s ability to stop it.

I believe this scenario is known as the inevitable outcome by all big players, and the game now is to maximize remaining dollar value. This is the real reason for capital controls now being introduced. It’s not really about export competitiveness; it’s about stopping a flood of devaluing dollars being used to buy up national assets. They can’t tell it like it is, as this would cause a stampede out of dollars by small holders, before remaining value can be captured.

One thing I wonder about is why the US is debasing at such a rate. Partly it has no choice due to the deficit, and due to the deflating shadow banking sector. Is this the only reason though? Is there another reason it makes sense for the US to blow up the world’s reserve currency as fast as possible? To default on its debt? To force China to de-peg? Those are the widespread views. But in a full on financial war like we have now, nothing is as it seems. So I’m still wondering if there isn’t more to it.

dojufitz said...


i take it you are in Australia?
So am I.....Melbourne.
What do you think of Martin Armstrong's call that the Aussie dollar may go 2 to 1 against the US $?

I may be wrong but i thought i noticed that while reading his currency article.

dojufitz said...


btw i was wearing my FOFOA baseball cap the other day and while i was buying a bottle of wine at the bottle shop the guy serving ask me 'What's that stand for'? I told him all about the blog and he said 'I check it he had an interest in Gold'.....

costata said...


Yes, I'm in Australia. My response to your question about Armstrong's prediction is - Yes and No. I will post an explanation as soon as I can.


costata said...


Thank you for that link. Very, very interesting analysis.

I just finished reading "The Largest Heist In History" as well. It helped me to more fully understand how the Australian banks dodged the first salvo of bullets two years ago despite having no formal reserve requirements.

Paul I said...

Hi Costata

Yes, Greg's story is quite an eye opener, isn't it? It just shows how divorced from reality banks have become. Did you see the CEO of Barclays is still arguing with him that a loan to deposit ratio of over 1 doesn't matter? Incredible.

costata said...


Yes, I saw that reference to Barclays. Sadly it doesn't surprise me as much as it should. A lot of bankers don't understand banking. Cogs in a wheel.


BTW which photo is the self portrait? I'm betting on the Halloween shot but the Dilemma photo must be a candidate too I suppose. It was a tug-of-war for me between the opposable thumb issue and the inability to see the footrest for the knees.

Texan said...


What the Fed wants and what they get may be poles apart...agreed!

Even Bill Gross - Bill Gross!! - called it a ponzi in his last missive.

The horses are all eyeing the barn door now.....

Paul, I think your first two explanations for the debasing are the right ones. The scale of the problem is monumental. When you add direct government spending and the second order spending that receives that, I think you are looking at close to 50% of GDP. After tax private income is extremely difficult to come by now. So the debasing is to maintain the only economic engine left - the government.

Tyrone said...

So the debasing is to maintain the only economic engine left - the government.

Anyone that has the means... LOOT!

Anonymous said...

Wont it be much much better for the world if the oil producing nations come up with a currency say crudler and back it up with a fixed proportion of oil ? or floating if you wish ?

Tom said...

In reference to the Triffin Dilemma, the Euro definitely got rid of flaw #2, the severance of its link to gold. However, I fail to see how it has severed its link to the nation-state. Instead of being linked to just one nation-state (USA) it is now linked to several (the 16 eurozone members). Unless I'm missing something, the Euro will still suffer from flaw #1. Although, 16 members is an improvement from 1.

Desperado said...


The Euro has always been planned by the EU elite as the national currency of the federal republic of Europe. The forced acceptance of the "Lisbon Treaty" by 300 million Europeans after they rejected TEC (constitution) shows how much disdain the EU elite have for the wishes of the people and the naked display of their greed for power. Another's claim that Europe's politics were a "side show" just illustrates how irrelevant and out dated his writings can be. The national governments, whose citizen's still consider sovereign, are a problem for the EMU and the European elite. The ECB was always and will always be a tool used by this EU elite to seize sovereignty and force the subservience of the people of Europe to this elite. Claiming that somehow the ECB is supranational and above this fray is as disingenuous as Goering claiming that he was just following orders.

EU makes a fresh grab for control of our budgets

"...European Commission to be given surveillance powers to monitor the budgets of all EU members states.
Brussels will also be given powers to issue swingeing fines against countries which are deemed to be borrowing too much money.
It had been thought that the new powers would apply exclusively to countries that are members of the single currency. But Mr Van Rompuy’s conclusions say that the measures will apply to ‘the EU and the euro area’.
Mr Van Rompuy also suggests that ministers should sidestep calls for a new treaty and try to force through the new measures using existing powers under the Lisbon Treaty.

Then we have the new EU budget talks:

Your EU budget deal was no victory, Tories tell Cameron... as £5.8bn army of Euro diplomats is revealed

"The findings come amid startling new evidence of untrammelled EU largesse.

Its new diplomatic service will have a massive annual budget of £5.8billion and an army of 7,000 ambassadors and officials dispersed across 137 embassies, it emerged.

The expansion is part of a controversial attempt to ‘promote’ the EU abroad.

For reasons that are unclear, Europe will have 46 diplomats posted on the holiday island of Barbados, for example.

The tiny Pacific island of Vanuatu will get six EU diplomats. The biggest mission, with 132 staff, will be in Turkey, which is being lined up to join the EU.

Forty-nine staff will be posted to the obscure African nation of Burkina Faso, 39 to the Indian Ocean holiday island of Mauritius and 57 to Vietnam.

The EU elite are following Rahm Emmanuals dictum: "never let a crisis go to waste".

At the core, your bias against national currencies seems to be a bias against nation states. Look, I agree 100% that neither the dollar, nor any other national currency, should be used as "the" world's reserve currency is bad for all parties, especially the chinese serfs earning a pittance in order to support the aspirations and greed for power of their communist leaders. But to think that the Euro, even with its marked to market gold reserves, is any better suited is at a minimum an indirect support of statism. Gold, revalued or not, would make a far better medium because governments cannot use a monopoly on its production to enslave the populace like the federal government has in the US and the EU elite would love to accomplish in Europe. Gold is freedom, the Euro is slavery.

Happy Trails,


Tom said...

This is what I was trying to get at. Thanks for elaborating.

Tom said...

A currency that is not limited in supply will not be free from Flaw #1. In order for a currency such as the USD or Euro to become scarce the supply has to be regulated. As long as an entity has the power to regulate it's supply, it will be regulated in that entity's best interest. Ie. The Euro will be used to suit the interests of the Eurozone. The Euro is nothing special, just another currency that will suffer the same fate as the USD.

simpleminded said...

Hi everybody,

Is my first comment in this blog, so, let me undertstand: while Euro and the Euro-Gold-Price is quite stable why are so many Europeans investing in Gold ?
Is the Euro JUST "another currency", or something more adaptable to a "market to market gold reserve" system ?
So, investing in gold in the Eoro-Zone could be an error ?

Desperado said...

@costata, part of the problem is that China has pegged their currency to the dollar. US currency debasement also ratchets their exchange rates down which also hammers all the other non-pegged export surplus countries. However these other countries, like Japan, are also to blame for playing their mercantalist games with non monetary trade tarrifs.

@Paul, the chinese-currency-risk article was very interesting, it was something I always understood in the sense that clearly the Chinese have excess dollars they are trying to unload. As you say, by dumping those dollars they are potentially leading the world to a hyper inflation. On the other hand, since their currency is pegged to the dollar, they also devalue their currency to the same extent that they devalue the dollar every time they overpay for some resource. This is a "Schwanzbeisser".

From the ECB document:

"The results show that there will be a switch to parallel invoicing in both currencies when two conditions are met: first, oil exporters expect that a certain minimum number of other oil exporters will also start using the new currency; and second, the information costs associated with quoting oil contracts in two currencies are low."

Before 1933 many contracts were also expressed in terms of dollars and gold (Roosevelt unconstitutionally invalidated all these clauses). Why couldn't oil be priced in both gold oz's and dollars? Or gold and Euro's?

"Both parties aim to minimise foreign exchange risk and costs associated with the use of a specific currency for trade."

This need for hedging and derivatives to hedge currency risk in oil transactions is probably one of the reason for the explosion in financial services in the last couple of decades. They have also been doing the same thing with gold.

S said...


Your comments about capital controls are captured eloquently by HSBC in todasys FT Alphaville where in house econs said essentially that QE is not a one way street and people ought to start paying attension to QT or quant tightening. I have been saying for a long while that the thing to watch is cross border m&a. Look at the dogfight in Canada re BHP over stategic asset sales to friendly Aussy. Look at India telling the US there will be no waiver of liability for selling nuke parts etc. Dollar printing and overvaluation (stocks viewd as currency proxy) is as much about using the cap markets to exploit the advantage which innures to US multinationals. Witness the move years ago by the europeans for "national champions" - this was merely a response to combating the dollr clearcutting in some regards.

As for Lisbon and the recent blowing out of spreads in Ireland (and rumored revenue shortfall in greece) one wonders if the multilaterals are exacting some retirbution whilst using the country as the leverage point to herd the cats. The divergence of the Euro is something to watch in this regard.

The GCC was well along until the disagreements, one being the location of the central bank. (note part about Cheney in Oman in 2005/06)

Then there was the news that Iran has converted 15% or so of its reserves to gold. The defense buildup in the region and the strident calls coming on the heals of the growing "Yemen" threat and no calls for more troops/UAVs into the region.

Take note of the US Africom command in Dijbouti across the red sea strait to Yemen and on up through UAE/Oman to Quatar is one long US "string of pearls" ending at the mother of all oil fields. Throw in a new American abcked Somali president and you have a chokehold on the indian ocean. Wasnt it the Israelis who bombed the convoys in Sudan? After all where is Bandar Bush after those reported coup rumors a few months ago - he hasnt been seen in 2 years?

S said...

Link to HSBC comments on the QE being a 2 way street vs. the myopia of people like Martin Wolf proclaiming the only thing left is for the EMs to discuss their terms of surrender to the printing press.

Anonymous said...


don't expect assistance here unless you understand FX, economy etc.
Go read yourself Another/FOA philosophy even if it's over a decade old. If you don't understand what is all about, well, it's your problem. Better go to yahoo.

Of course you don't need gold when having euros! All paper gold will burn!

Unknown said...

"But to think that the Euro, even with its marked to market gold reserves, is any better suited is at a minimum an indirect support of statism. Gold, revalued or not, would make a far better medium because governments cannot use a monopoly on its production to enslave the populace like the federal government has in the US and the EU elite would love to accomplish in Europe. Gold is freedom, the Euro is slavery."

IMHO I get the feeling that the current monetary system's paradigm is so deeply rooted on everyone's mind that is going to make the Freegold's paradigm transition a bit more complicated than just the continuous repetition of it's concept and can even imagine FOFOA's frustration.

I'll try to express my Freegold's paradigm shift (FOFOA please correct me if something is wrong in my appreciation):
Any currency under the Freegold system can float freely and would hold true only as a mean of exchange and unit of account for the holding government and any other business entity or individual doing business with it. In other words it would be a fiat currency or paper currency that may devalue or even appreciate all depending on the country's trade balance, deficit and/or printing. Hence Aristotle A-HA moment: "In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. Going in, I was a charter member of the Goldhearts club, and I emerged even more excited about the prospects of Gold than before."

So the store of value would be specifically reserved for GOLD, unless you want to hold fiat money and expose your self to that currency manipulation or deterioration over time. This should address this question:

"Is the Euro JUST "another currency", or something more adaptable to a "market to market gold reserve" system ?
So, investing in gold in the Eoro-Zone could be an error ?"

Yes, the Euro is just another currency, but one with a free floating gold reserve asset in it's books marked-to-market giving it some footing, and as we have been able to see for this last few of years it has depreciated against USD, but at the same time it's gold reserves have appreciated for the benefit of the saver. So NO, investing in gold in the Eurozone is not an error! On the contrary that's precisely what makes Freegold all that valuable and interesting, but for that every country should set it's currency to a free floating gold exchange policy along with a gold reserve backstop against any run or loss of faith that may lead to any inflationary spiral or even worse an hyperinflationary event. And that sets the main difference between the USD and the Euro or any other currency adopting Freegold!

Texan said...


The point is the countries now WANT a run on their currency. They WANT debasement. I doubt this was anticipated by the architects of the euro.

As for the euro being "backstopped by gold"', wake me when the gold is actually allowed to leave the vaults. I view the euro as the cynical endpoint of fiat currency, it is in fact backed by absolutely nothing. Not even a nation state. If one of the major core countries ever defects, it's done.

Derrick said...

I'm a bit lost on this point:

"run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars."

Why must dollars flow out of America to carry on with the status quo at the time?

Why can't gold holders just sell their gold for dollars and the two quanitties switch hands amongst buyers and sellers? I don't understand why new dollars must be created (thus forcing them to engage in a trade deficit).

Angel Eyes said...


FOFOA is pointing out that the Euro will survive the transition, not that it should be used as a store of monetary value. It is a massive piece of circumstantial evidence pointing to Freegold, for those capable of rational consideration of facts, without pre-existing biases.
If you have value you wish to hold (and you are not adverse to seeing it grow with no further input from you) buy and hold physical gold. Period.

Some commenters remain blinded to the simple mechanics of the Euro currency by their feelings regarding European politics. No doubt they will reply vociferously below.

Convert excess currency of any nationality to gold while the opportunity remains, and hold on. Everyone will require some cash and liquid tangible assets with which to defend (keep from being forced to barter/spend any of) their gold through the consolidation.

Gold will never again be a monetary medium of exchange.
Post it on the back of your toilet door :)
DO NOT continue to think of physical gold in this fashion. It is the purest monetary store of value, the wealth of nations crystallized. We shrimps are fortunate indeed to have the present opportunity to fallow in the footsteps of giants, thanks to A/FOA/FOFOA (& Aristotle).

Desperado said...


IMO the Euro is slavery not because it is a fiat currency, but because it is a tool that has/is/will be used by the EU elite to acquire an ever increasing degree of control over the continent. Just look at the Fed, the ECB sure does. The EU elite's plan is just a slow bleeding of freedoms and local sovereignty until the people of Europe can no longer envisage a Europe without the "mother EU" just like Americans can no longer imagine being a Texan (or any other state resident) having precedence over being a US citizen.

If you could ask any member of the Army of Virginia they had complete clarity on this issue. Right now Sarkozy and Cameron are working on merging the French and British militaries: David Cameron hails 'new chapter' in defence co-operation. They will both be guaranteed a plum job in the EU bureaucracy when they leave office. This is why it is essential that the EU keeps growing: patronage. All you have to do is look at Obama in action. Only a growing welfare government can provide the jobs necessary to feed the professional left.

"A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."

At this point in time, what we need is well regulated militias to protect us from the the elites around the world. Gold as money and store of wealth along with a strong local militia works fine for me as long as the ruling elite are corrupting, distorting and controlling government on all levels.

Unknown said...

Also from TX., I don't defend the Euro, actually I don't think any political developments on EU will change the Freegold concept at all, even if any or some countries rescind from the union, whichever remain using the Euro or any other named currency it will continue rewards of being in a Freegold system as it is in the best interest of any such countries for its citizens to hold some physical gold and sustain a freemarket exchange rate thru convertability and that demand would INCREASE its price slowing the flow. And that's the main idea, everyone wins, it's a WIN-WIN situation, the goverment increases its assets value in books, the saver protects its wealth and the country as a whole reassures a stable currency, even after probably a little shake. And that is makes it SO incredible and the reason why many of us are convinced advocates of this new system, which by the way FOFOA has showed us it'll arrive in a natural way, as logical result from the decoupling of the gold standard and the so manipulated and soon to collapse paper gold market.

@FOFOA: Is it feasible that any given country can adopt the Freegold standard with other than gold assets in its balance sheet, like only oil, etc?

Texan said...


I am saying the freegold itself makes a country inherently less competitive because it's currency is perceived as "strong".

Countries don't need or want international cash flowing in to hold time deposits at 0 or 1%, they want JOBS. They need to make and sell stuff. The "winner", short term at least, is the country that debases the most.

This is the end game for all fiat, as "wealth"desperately seeks to hold value, value which no country can afford to pay over to the saver (in the form of a stable currency) because it makes their own country's products too expensive. See Toyota, they are getting crushed.

Will the euro survive the transition? Probably. So will a lot of currencies. But I wouldn't. Want to hold currency, or much anyway, going into this.

Unknown said...


I agree, but even under Freegold, wouldn't it be possible to debase the currency and render it more competitive? Just maybe? I don't know...

FOFOA said...

Victor M and Texan,

"I am saying the freegold itself makes a country inherently less competitive because it's currency is perceived as "strong"."

"...under Freegold, wouldn't it be possible to debase the currency and render it more competitive? Just maybe? I don't know..."

Freegold IMPROVES the options for any currency zone, in either direction, weak currency or strong currency. The current system subordinates a zone's choice of monetary policy to the monetary policies of its trading partners.

Randy’s Comment: Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.

WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.

FOFOA said...


I hear you on your objections to the leftist elite in Europe. But you must understand that the path to the euro was not a product of the left. It was a product of the conservative right. The road to the euro began in 1962 as a means to avoid future wars in Europe as well as to create an alternative to the dollar and the Bretton Woods system. Two noble goals. As ANOTHER called it, a return to the "Old World Order."

Question to Another from MK: ** It seems that both you and your friend believe that the world is splitting up into currency/trading blocks -- much as the world did for both World Wars. There has been much discussion around the world about the imposition of a NEW WORLD ORDER and international one world government. Simultaneously, we see another, opposing force at work -- regionalism, nationalism, even tribalism. What do you make of this? Is the Euro a child of the forces of the New World Order, or the forces of regionalism/nationalism/tribalism? **

ANOTHER's reply: I would say, "Old World Order" to return. To understand/explain better: "A very easy way to view this "order", would be to simply say that the American Experience is reaching the end! As we know, world war two left Europe and the world economy destroyed.

And here's Jim Rickards on the euro:

Now the history of this is very significant. The euro system, and Greece in particular, those are not Wall Street piñata. I know traders like to bang them around, you know the spreads widen and then the spreads come in. There are trading opportunities there. But this is taken much more seriously by the Europeans. I mean you go all the way back to the Counter-Reformation in the late 16th century which was extremely bloody. And then the Thirty Years' War which was devastating. And then the Seven Years' War and the Napoleonic Wars, the Franco-Prussian War, World War One, World War Two... this is one catastrophe after another! And Europe literally destroyed itself and exhausted itself in fighting all these wars. And finally after WWII they said enough! We're going to pursue unification. It's the only way to keep from fighting each other.


FOFOA said...

Now, political unification has had modest success. Military and foreign policy unification has really had no success at all. But the crown jewel of European unification is their monetary system, the euro and the European Central Bank. So that's the pinnacle of their world historical efforts to unify the continent. They're not going to give that away lightly. I mean, they view it in a much broader historical context than Wall Street and Americans. And so it's of the utmost importance to them. And they're going to do everything they can to preserve it. And that's one reason, along with the gold, why I have confidence that Greece will not default.

I realize that you view the euro as a tool of the leftist elite. But it is not. The $IMFS is their tool. With that gone the euro will automatically revert to Freegold. The euro was designed for Freegold, which will set back the leftist creep that you despair over. And there is nothing they can do about it. This is a long-line "managed" evolution with massive inertia.

Also, I noticed that arguments popped up here in the comments on all sides of the "flaw #1" issue. Someone said the euro is basically the mark. Someone else said it is actually a national currency for 16 nations. And someone else said that not being a national currency makes it worthless. These are all common arguments.

This is something I was going to get into later, but the fact is that the Triffin dilemma is neither a universal truth nor a truly fundamental flaw. It is true for our system. But it is not necessarily true for all systems. Flaw #2 is really the only truly fundamental flaw, and it is the underlying fundamental element that causes the Triffin dilemma.

So those of you who said the euro fixed flaw #2 but not flaw #1, please think about this. And I will write more on it later.


Lemon Thrower said...

FOFOA, first-time poster here. I have told dozens of people about your blog.

This was a great post but I disagree to an extent.

The Euro clearly was created to capture the European network effect among other things. It has succeeded in doing that. But its network effect largely stops there. Why?

Why don’t arabs who buy ‘food’ from the EU sell their oil priced in Euros to these same Europeans? Realize their EU customers first must swap into dollars to buy oil, and the Arabs then must swap at least some of those dollars to buy goods from the EU. It would be a lot easier to not swap into dollars in the first place, at least in part.

No, there is something else going on. In the same way that an unseen planet affected the orbits of the known planets and told astronomers there was a force acting on those planets that was unseen, the fact that the Arabs won’t sell oil to Europeans priced in Euros, even though they buy many goods priced in Euros from Europeans, suggests there is another force that is unseen.

This could be a secret agreement to sell oil in dollars plus gold, it could be the vast military of the U.S., etc. It is not simply the network effect of the U.S. dollar as your post suggests.

Also, I do not share your admiration for the Euro. I understand your point about the gold reserves self-adjusting in Euros. But the dollar could do this if they wanted to. But the dollar masters don’t want it to. That would display too clearly the dilution in the purchasing power of the dollar as a result of government. Right now, this does not matter so much to the Euro masters because the Euro is in increasing demand as an offset to the dollar. But fundamentally, the Euro is not any better than the dollar. Whether it is a better store of value has nothing to do with the accounting gimmick of marking their gold to market but rather how much gold stands behind their paper currency, whether it really is there, and how many units of paper currency are created (which really depends on the EU economy, or Germany as someone else pointed out, relative to the restraint shown by the EU governments). Those factors will determine the extent to which it will be a good store of value, not their accounting. And as good as any of those factors might get, it will not be better than Freegold.

Gresham’s law means people will shun Euros in favor of real gold.

Murphy’s law says that even if the Euro is the winner, its governments will print as many as the US government has.

I also have to agree with Texan that there is no guarantee that there is any gold at all behind your Euros, let alone a nation state. As Doug Casey says, the dollar is an I.O.U. nothing, but the Euro is a “Who” owes you nothing.

Lemon Thrower said...
This comment has been removed by the author.
Paul I said...

Ahhhh FOFOA you beat me to it!

Texan, Victor

A freegold currency is made neither "strong" nor "weak" by freegold, it is made "measurable" and "fungible" against gold, and consequently all other freegold currencies.

Foreign reserves and personal savings held in gold will make commercial decisions regarding how much and what type of risk for return would be purchased. The level and duration of risk/return required would determine which currency (e.g which national or regional investment environment) would be purchased. If the balance of risk versus expected real rate of return was acceptable, it would make sense to invest in that region via that region's currency.

"Strength" and "weakness" are really just measures of risk and return, and an investment decision would depend on the investors risk profile and gonad size.

One of the main problems with the current system is that saver nations are forced to accept the inherent risk/return set by debtor nations, with no alternative. Freegold is that alternative, and will be/is being demanded by saver nations themselves. That's why it is seen as inevitable.

What this has to do with EU defence policies, or the Army of Virgia, I have no idea.

Michael H said...

@ Lemon Thrower:

Iraq began selling oil directly for Euros in 2000.,9171,998512,00.html

They seem to have run into a fairly visible force.

Another describes oil-for-gold deal with the Saudis. John Perkin's book "Confessions of an Economic Hit Man" gives a different account of the Saudi-US connection which broadly agrees with Another's description (although I don't believe it mentions gold).

You ask why the Euro would be a better store of value than the Dollar. But the whole Freegold concept is to separate the store-of-value role from the medium-of-exchange/unit-of-account monetary roles.

The Euro does not need to be a store of value. That role goes to gold, especially on longer timelines. What the Euro needs is widespread usage demand. This is the network effect that FOFOA is writing about here.

As you point out, the Euro's network effect is limited to the continent. But the fact that it exists means that, should the Dollar run into an existential crisis, the Europeans will not need to abase themselves to the US to prop up the dollar, to save their own economies. They can now let the dollar die.

The same is true for the rest of the world -- they can forsake the dollar in favor of the Euro, as a medium of exchange. Then they can store their wealth in gold.

Indenture said...

simpleminded & all other readers who have yet to post:

Of course you can "expect assistance here". There are no dumb questions. Some of us have been reading FOFOA for a very long time and forget that once we were raising our hand for the first time. Yes there are many articles/posts/essays to read from 'The Masters' to help you along the way but, speaking only for myself, a shy reader who long ago understood that the people who post here on this blog are some of the most informed and helpful members of any online community, I say ask away!

I find it is the answers that help stimulate us all.

Thanks FOFOA and may QEII be quick and painless:)

Indenture said...

oh... and simpleminded:

Buy some physical gold with Euros or Dollars or whatever the seller will take for it NOW. And then you can read at your leisure. You will thank FOFOA later.

costata said...

Hi dojufitz,

For everyone else this is off-topic on your recent discussions, so you may want to skip reading it.

I'm fulfilling an undertaking to dojufitz to give my opinion about a prediction by Martin Armstrong about the AUS$ vs US$.

So mon amis, will the AUS$ buy two US$ at some point in the next few years? I think it is entirely possible. I can see it happening as a result of a revaluation of each country's "assets and liabilities".

At the same time, a currency exchange rate is merely a ratio. The AUS$ could, at some point, buy twice as much gold as the US$. Of course that would have no impact on the gold price in AUS$. Gold could be at any AUS$ price level and merely twice as expensive in US$ at that time.


100% agree on all points in those two comments.


FOFOA said...

Hello Derrick,

You asked: "I'm a bit lost on this point:

"run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars."

Why must dollars flow out of America to carry on with the status quo at the time?

Why can't gold holders just sell their gold for dollars and the two quanitties switch hands amongst buyers and sellers? I don't understand why new dollars must be created (thus forcing them to engage in a trade deficit).

From 1933 until 1971 the US dollar outside of the United States had value from its being equal to 1/35th of an ounce of gold. In fact, dollars outside the U.S. were more valuable than dollars inside. They purchased more real goods than internal "fiat 33" dollars because they were "golden."

But the U.S. Treasury had most of the world's monetary gold. At the peak of Bretton Woods the U.S. had about 22,000 tonnes while all the other central banks only held about 8,000 tonnes combined.

Can you imagine (hypothetically) perfectly balanced trade, (no deficit or surplus)? That would mean a perfectly equal value of real goods flowing in and out of the U.S. No net gold flow in either direction would exist because the flow of real goods in either direction is perfectly balanced by the flow of goods in the other direction. Gold flows to balance (supplement) the flow of real goods. If you don't produce enough goods you ship some gold as well. Foreign central banks collect the excess dollars in their zone (when foreign exporters exchange them at the bank) and then those central banks either hold those dollars in reserve or cash them in for gold to balance their zone's trade surplus.

If the U.S. ran a trade surplus, if it moved from this (hypothetical) perfect balance into surplus territory, that would mean more real goods value flowing OUT of the U.S. than in. It would mean the U.S. was like China, making stuff for the rest of the world. All external dollars would be used to purchase this excess of U.S. exports abroad and the CB's would not accumulate ANY dollars. In fact, they would face a SHORTAGE of dollars (shortage of liquidity) and a DEMAND for dollars as people went into banks to BUY dollars to purchase U.S. exports.

So the foreign CB's would then have to buy more dollars from the U.S. with their meager gold stocks, $35 for every ounce of gold they shipped to the U.S. Treasury. Now remember, the U.S. already had more than 70% of the world's "official" gold. So how long do you think Bretton Woods would have lasted under this scenario? Until the U.S. had ALL the gold? Or would the U.S. trading partners have forced a revaluation of the gold so that it wouldn't run out so fast? And a revaluation of gold would have meant a DEVALUATION of the dollar!

So, in order to keep the dollar valued at 1/35th of an ounce of gold, to prevent a dollar devaluation, the U.S. had to run a trade deficit, so that more real goods flowed INTO the U.S. than out, and the outflow deficit could be supplemented by shipping gold to the foreign CB's. This is what Wikipedia means by, "run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars." Of course this ended in 1971 for obvious reasons.


FOFOA said...

But today, the U.S. still runs its deficit, shipping U.S. Treasury debt now instead of gold. Apparently Treasury debt never runs out, unlike gold. Therefore it never gets revalued upward like gold does. Instead it gets devalued downward once it exceeds a level that can be reasonably returned at present real goods prices.

The interesting thing about Freegold is that when gold floats in price to its fiat currency, it never runs out either. Kinda like Treasury debt, only without systemic shocks every few decades.

You see, the government IS the deficit for any currency zone. Governments spend money and import lots of stuff like oil and airplanes, but they don't create any export goods. So a currency zone with a really big government (read: deficit) that runs a really big trade surplus (read: China) must be keeping its citizens in poverty.

On the other hand, a currency zone that MUST run a trade deficit in order to keep its currency valuable as the global reserve currency can grow both a really big government AND keep its population living large. Strangely, this continued for the U.S. even after 1971. How could this be?

The reason it continued is that the shocks of the 1970's gave the world a glimpse of what a global economic failure might look like. So right around 1979 the European CB's decided to speed up the process of creating a backup system (the euro) to avoid future global economic failure. And in order to do so, they had to support the U.S. dollar in its reserve currency role until their backup was brought online. And since gold was no longer being shipped from the U.S. Treasury, these European CB's agreed to buy U.S. Treasury debt in lieu of gold, at least until they had their new backup system up and running.

This process was expected to take about 10 years, but it took twice that long, from 1979 until 1999. And while they knew it was quite wasteful of their local zone's economic efforts to support the dollar by buying paper promises, they made the judgment that this was better than the alternative: a dollar collapse without a backup system in place.

And by the time the euro finally rolled out, the Chinese had picked up the Treasury debt accumulation role, and the dollar's paper gold market had blossomed into its majestic fullness. Which brings us to the present.

Today the dollar's last two support structures, the Chinese fascination with official U.S. paper promises and the public's willingness to surrender physical gold in exchange for paper gold promises, appear to be contracting. Can they contract to zero smoothly? Or will we get a "shock" out of the blue? Did the U.S. gold stockpile contract to zero smoothly? Or did we get a Nixon shock out of the blue?


costata said...

Hi All,

Forgive me for not directing these comments directly to the posters who raised the issues I'm touching on, there were several references to many of them.

1. Exports - there is no hard evidence to support the argument that a low exchange rate = export success AND a healthy economy. The Japanese went from 360:1 with the US$ to around 80:1 during their boom years. For every exported item there are some imported inputs e.g. energy commodities.

2. The US$ as the core of the $IMFS is influencing the policy stance of every other currency issuer either directly or indirectly. IMO it is confusing to talk about "competitive currency debasement". No one can ignore US policy. Others must respond if they can.

3. If you had to list the 10 most important things that you need to understand about the Euro Freegold design I think this might be No. 1:

"The Euro is the medium of exchange and gold is the store of value".

Second on the list might be "The Euro is not backed by gold and they have no intention to back it with gold unless they are forced to by 'war'."

A/FOA said it is for "war" without specifying AFAICS what they meant by war.

4. Gold is held as the primary asset reserve of the ECB Eurosystem CBs. It is not immobile. They have bought and sold since the system was set up. Their gold isn't locked away like the US reserves. They are "Freegold ready" at all times.

Anonymous said...

I think that the claim that the euro has severed it's link to a nation state is more of rhetoric.

The concept of a nation is based on perception, the east, especially the Islamic east does not share the understanding of the word 'nation state' with it's western counterparts.

For the Muslim world the Euro is not a supranational currency, the SDR's are not supranational either coz from their point of view the Euro belongs to the 'people of Europe' just like they define the entire Muslim world as 'one nation' they define other parts as such too.

The Muslim leaders may drink the euro just like they drank the dollar but there will always be resistance among the people, as they will never look at the Euro as supranational.

Gabriel said...

A lot of the comments here seem to miss the point entirely, about freegold.
FOFOA, please confirm:
Freegold will not set you free from the current economical system. You will still buy cars and houses and food in currency. Freegold is not a change of reality. Only the mere recognition that on top of currency, a store of wealth is necessary. In a sense it is already upon us: oil is bought in gold, almost everyone can purchase gold freely (not yet in US...), and CBs have it in reserve and count it M2M. But the people don't know it yet (network effect not yet swinging), therefore it can still be manipulated.

But the recognition is unavoidable, just as gravity. When this happen, it will be instantaneous. No transition time. More, the event that will trigger it is unpredictable, and there isn't anything governments and policy makers can do to avoid. They can only precipitate it, purposely or not. For you the recognition is important because you can prepare from it.

Now, back to currency: were the Dollar NOT the reserve currency, would anyone today want to hold it? no, for a zillion of reasons.
Its reserve function is why the day of reckoning (freegold) is so dangerous for the Dollar and US in general. It allowed them a fraudulous gold market, a fraudulous reserve, and a fraudulous currency. However, this same reserve function will share the curse of reckoning with the rest of the world, bringing the banking system to a total dismantelement.

The Euro is everything the Dollar is not:
1) a currency designed only to be a medium of exchange, with reserves and fiscal policy to give it enough credibility.
2) a free gold market. You can buy directly from the ECB vaults

Next: is the Euro going to survive the earthquake?

Anonymous said...

I have absolutely no doubt in mind, that if things play out the way we think, then Euro will survive the earthquake, the giants will save the euro.

Gabriel said...


Here I concentrate on some details of the Euro regime

First, the economical and political environment of the Euro group is secondary to the currency. The currency will never fall, despite the large amount of pundits predicting it.
Greece can default, people can go to the streets, the Euro is here to stay. People outside of the Euro region do not understand the psychological impact, and the state of mind of europeans.

Second, I do believe that in the Euro group there are contingency plans for when the banks will fall. The billing and clearing system is a debit one, and not a credit one. This has large implications in how the system is run, and how could it be salvaged, were the banks to fail. As well, the most popular banks are 'not for profits' banks, i.e. the Postal bank. In france, virtually every household has a checking account at the Post.

Third, the fiscal policy of Europe is coherent with itself. Consistency allows faith in the system. Gold can be added, it doesnt change the function of currency. This is in contrast with the US, where there are mountains of Dollars, just waiting to be dumped.
So you will have store of value, a well as means of transactions, as you have it now. Gold coexisting with Euro.

Now, come to Europe and wait for the day of reckoning.

Lemon Thrower said...

@ Michael H

what you mention I am aware of. We do not disagree.

I’m addressing the suggestion of FOFOA that the Euro is or will somehow be superior to the dollar. I am very skeptical of that. It’s the same thing as far as I can tell.

I also do not expect the Euro to work without being a store of value. We agree its not a store of value because its not limited in quantity – the EU can print as many as they like. If its not a store of value, then it’s a hot potato and Gresham’s law says it will be shunned. It might be forced on a nation via a legal tender law, as is the dollar, but it won’t be used much beyond Europe.

Freegold to me is the result of the failure of paper money, I don’t see a grand design to move us there. I see the governments of the world going there kicking and screaming.

@FOFOA, revaluing gold in terms of a floating paper currency is not a panacea. It just underscores the declining value of the paper currency relative to gold. It’s a reminder to all to shun the paper and take the gold.

I do not see why the Euro will survive if the dollar does not.

I do not see the governments in EU rushing to Freegold. To me, Freegold (if I am using FOFOA’s term correctly) is the system the world had before govts issued unrestrained paper currencies. Govts found that quite limiting and to return to that system would limit their power greatly. The whole concept of a transactional currency other than the dollar which is not a store of value seems to rely on the suspension of Gresham’s law. The dollar has avoided Gresham’s law due to fiat tender laws, manipulation of data, military threat, etc., and yet we all fear it could come crashing down at any moment. I do not see how the Euro architects will pull off a similar feat.

FOFOA said...

Hello Lemon Thrower,

You are throwing around Gresham's law as if you understand it. Would you mind explaining your version of Gresham's law to us?


Michael H said...

@ Lemon Thrower:

1. I second FOFOA's question.

2. "I also do not expect the Euro to work without being a store of value." Then we do not agree. The whole point is for the Euro to work without being a store of value; to work alongside of gold as the store of value.

3. "I see the governments of the world going there (freegold) kicking and screaming."

Yes, that is why we are not at freegold now. A freegold system would remove the 'extraordinary privilege' of dollar printing, that allows large budget and trade deficits for the US.

But the current system is ending whether the politicians want it to or not. It cannot be continued. And so the question becomes: what next?

The default is financial chaos. The alternative is freegold. Not as good for the politicians as the current system, but it beats being out on the street.

4. "I do not see why the Euro will survive if the dollar does not."

Because the dollar has been overprinted to fill the 'store of value' role, and when the realization comes that it cannot fulfill that role then the dollar will be dumped.

The Euro has not been printed as a store of value (at least nearly to the same degree) and so it does not have the same 'anvil' hanging overhead.

5. "To me, Freegold (if I am using FOFOA’s term correctly) is the system the world had before govts issued unrestrained paper currencies."

We have never had a freegold system.

Gabriel said...


"We have never had a freegold system"
Right! Maybe that is why it is so difficult to comprehend.
The previous systems didn't work because they couldnt accommodate an expansion of real wealth or debt. The freegold system can.

"The Euro has not been printed as a store of value (at least nearly to the same degree) and so it does not have the same 'anvil' hanging overhead."

to expand: I would not think only the Euro will survive, but The major point is that the Euro was designed to survive. The Dollar in its current form cannot survive. All the 'value' the Dollar currently hold will be suddenly transfered to Gold, like a sponge absorbs water. The sponge is the same (same gold, more value), the water is gone (no value for Dollar). That is the defined onset of freegold.

FOFOA, do you agree with these (and my posts aboves) assessments?

Indenture said...

Perhaps some are having trouble with the concept of 'transactional currency' vs. 'savings in gold'. Lemon Thrower said, "I also do not expect the Euro to work without being a store of value." I had to stop there because in Freegold 'No currency is used as a store of value or, as some call it, Savings'. I fully expect the Euro to work without being a "store of value" because the physical note, the piece of paper with ink on it, is used to buy goods and services. It is a transactional representation of worth. Why is the Fiat worth something? Because you can exchange it for Gold.

I believe the easiest way to look at this situation is to use the long term approach, something Westerners have a difficulty doing. If we use the term "store of value" then we are talking about a long period of time so ask yourself, "What would you rather have under your mattress, fiat or gold?"
The answer to this question is how people have stored their value for thousands of years.

(simpleminded: I've been working on this for years and I'm still learning and making mistakes:)

Edwardo said...

It was called The Army of Northern Virginia not The Army of Virginia.

Casper said...


After going through the "HOF" archives again in search of answer why there wouldn't be any gold lending in Freegold environment - Aristotle argumented this with Gresham's law and also prohibition of institutional lending of gold. I find the latter somewhat problematic because that interferes with "free market" doctrine. Can you explain/wright your thoughts on this matter?

I can fully appreciate what Gresham would mean for gold as »money, store of value« and currency as »transactional medium« but that evolves through time, sometimes lots of time... Can you imagine a different scenario to the abrupt ending of COMEX, LBMA and subsequent revaluation of gold?

Lemon Thrower said...

what was the system called during roman times, before paper money, when gold coins (as well as silver and copper coins) were exchanged for goods? that seems an awful lot like Freegold to me.

I may be using the term Freegold slightly different than FOFOA does becuase I don't fully understand all the nuances he ascribes to it. but that was gold that was traded freely unencumbered by government rules, until artificial gold to silver exchange rates and coin debasement was created.

Gresham's law is simply the idea that good money is horded and inferior money shunned. Most americans and frankly most citizens throughout the world assume paper money is as good or better than paper money. we on this blog trade paper money for gold as quickly as we can. we shun the paper money and hoard the gold. knowing americans did this with silver coins after 1964 when silver was removed from new coins. if you debase the coins, people will keep the good coins and spend the inferior coins - the hot potatoes.

I don't understand how an accounting gimmick makes the euro equal to gold. there are 2 fatal flaws to the euro relative to gold. first, there is no limit on the number of new euros that can be created. second, even if there was a limit, you do not have a right to exchange euro for gold.

And Y said...

"If its not a store of value, then it’s a hot potato and Gresham’s law says it will be shunned." - Lemon Thrower

That's entirely appropriate for a transactional currency.

Indenture said...

Everyone knows FOFOA loves silver (his other secret web site expounds the pure domination of the tiny metal) so this should come as no surprise. The long timeline that brought us to this point, the patience and perhaps at moments, glacial movements of the precious metals priced in Dollars or Euros or cow dung if that's what people want to trade, this epic journey is nearly over. Something, somewhere is going to break. Somehow we all know it or we wouldn't be here, following a Master.

Casper's "abrupt ending" is exactly what I see happening and I believe it will snap in FOFOA's favorite... Silver! Freegold is inevitable but there must be a catalyst, something to nudge the system over the edge and the massive short positions held by JP Morgan and HSBC in the silver market is the crack. Now of course it could be massive fraud by the Big Banks/Foreclosuregate/Mortgage Backed Securities/Credit Default Swaps/Insolvency, or a corrective DOW drop, or how many scenarios can we picture that by itself could be manageable but when interconnected with the tangle of securities floating around the globe would cause a trickle effect sudden POP. And that is the question, correct? Something will POP, and Freegold will be the conclusion, but we just don't know what will cause the momentum shift. But we do know that during the time in between the sudden economic fall and the organic establishment of Freegold you can stand tall because you listened to FOFOA.

Or you can sink from inaction. Life gives us choices.

Gabriel said...


1) It would make sense to read again FOFOA posts.

2) Under freegold, the medium of exchange is not gold, but reqular (expectedly fiat) currency. Gold is not money, in the sense it was under hard currency, nor in the sense Dollar is today.
Remember that, this is NOT an advocation to return to the gold standard. This is merely the recognition that fiat cannot store your value effectively. It is however effective in allowing the movement of goods and the elaboration of credit.

3) Euro is NOT equal to Gold. stop bringing this lemon. Euro is a fiat currency. But you can ask why Euro would survive on a longer term than Dollar. This question is answered within this post and comments, as well as the unraveling news in the last few years.

4) I think you misunderstood Gresham's law. Forget it, it is not relevent to this discussion.

"most citizens throughout the world assume paper money is as good or better than paper money"
nice one :-)

Desperado said...

Hello FOFOA,

Although I certainly do view the left as being a very strong proponent of the EU, I certainly don't give them a monopoly. Just like in the US they are just one of many pigs at the trough. There are all kinds of rent seekers working for bigger, more powerful government that can grant them bigger, more powerful benefits. Just look at Washington DC, currently the biggest boom town in the US. There are also conservative lobbyists and politicians fighting for an ever bigger piece of the shrinking pie. It has turned into one massive world of patronage because it has become increasingly difficult to be successful anywhere on the planet if you don't have some kind of advantage due to proximity or influence in government.

The beneficiaries of this patronage are the new aristocracy, and the titles rapidly become hereditary. You quote Jim Rickards who lists all the European conflicts and then states that the EU was formed to prevent this. I beg to differ, this was what the ruling elite wanted, the same ruling elite that had caused all those wars. The Russian serfs didn't start mobilizing because the Austrian peasants were preparing to attack the Serbian farmers in August, 1914. It was the ruling classes, the aristocracy, that went to war to decide who would rule the serfs! After the destruction of Europe in WWII, the ruling elite decided to find another way to divvy up the wealth and power produced by the working classes, and that was the EU. Then Rickards goes on to talk about how "they are not going to give that [the ECB] away lightly". Why doesn't he try to tell that to majority of Germans who want the Deutschmark back and the Turks sent back home! I have always been suspicious of Rickards ever since I heard him carrying on about global warming. He is a smooth talking lawyer to boot, and at this point in my life I have had more than my fill of smooth talking paid liars.

All this does have an important bearing on the significance and legitimacy of the Euro. If the ECB and the Euro had any kind of history of working to restrain the growth and seizure of power being performed by the EU elite, then perhaps I would be less concerned about your and Anothers faith in the Euro and by connection in Freegold. You have stated that a fiat currency backed by a floating gold reserve would work to restrain government growth and is constant whittleing away at our freedoms. I really want to believe in this, but I also have eyes and can see what really goes on. Even with freegold, governments will cheat and print fiat and borrow fiat from the future and make fiat derivatives and play all kinds of games to hide their counterfeiting. Freegold will not stop this any more than it will stop patronage and power greed, certainly not in a government as big and as opaque as the EU or the USA.


Desperado said...


Now to flaw #2, trying to be as good as gold. You seem to imply here that there is something wrong with a "hard money". I would say that there is something far more wrong with large and rapid swings in money supply and swings from inflation to deflation and back again, but that there is nothing wrong with hard money in itself. The Latin Monetary Union and the other gold backed currencies of the west worked very well IMO. The collapse of France due to John Law had taught the world a hard lesson and for 100 years until 1914 to a large degree the world benefited from sound, hard money. The ruling classes took the west off the gold standard to fight their wars, but the trend towards softer money that they could debase and counterfeit was already in place, witness the Feds foundation in 1913. Once the elite had started their currency debasements, the move from the hard money pole to the looming hyperinflationary collapse began. I found this piece on the rapid breakdown of the gold standard in 1931 strangely reminiscent of what is happening with our current currency debasements:

The suspension of the Gold Standard in Great Britain and its effect on the countries of Europe

"Britain’s suspension of gold payments on the 20th September was followed by Danzig’s decision to abandon sterling standard for the gold standard on the 21st September 1931… On the 22nd September Denmark prohibited gold exports. For some time Denmark had suffered a loss of foreign capital, and during September, gold and foreign balances held at the Nationalbanken i Kjobenhavn fell by £1.2 millions. Bearing in mind that over 55% of Denmark’s total exports are to England, this step was perhaps only to be expected. On the 27th September, Norway and Sweden decided to suspend the gold standard. As the British market absorbs 25% of Sweden’s and 26½% of Norway’s total exports, and closely linked as these Scandinavian countries are, it is not unnatural that such a step was taken.[...]. The suspension by the Scandinavians led to increasing difficulties in Finland, since Finland exports the same kinds of goods. Confidence in Finland’s ability to maintain the gold value was shaken and foreign balances reduced, leading to suspension on the 12th October..."

Some here think that somehow freegold will allow governments to have it both ways, the ability to debase the currency all the while having a guarantee against hyperinflation through the floating gold reserves. I think that all debasement is merely another form of patronage, or put another way, favoring the debtor at the cost of the saver.

Finally, just so y'all don't think I am a complete pessimist, I am a frequent reader of The Daily Bell, which continually makes the case that the internet is changing everything. The dailybell claims that the internet is as fundamentally transformational as Gutenbergs printing press because it prevents the ruling elite from keeping the truth from slipping out. I tend to agree with this assessment and I think that we need to break down these elite power formations like the EU and the USA and let free and instant information free us from their grip over our lives. It is my hope that freegold supports the internet in this process.

Lemon Thrower said...

Gabriel, thanks for your response to the extent you provided one.

I disagree with you when you say gold is not money. Gold is money. currency is a money substitute, as are digits.

I think the problems with dollar are exposing the problems with all fiat currencies. Just as dollars are increasingly hot potatoes today, so will an unrestrained paper euro. In other words, if the dollar dies, the Euro becomes the dollar.

I have to agree with Desperado. Governments will print print print, it is the source of their power. You can't have it both ways. this is obvious to most, and this is why Europeans are buying gold too.

i guess i am just skeptical that you can have a purely transactional currency. we basically have that now with the dollar, and as the dollar's problems become more and more manifest, it makes a substitute transactional currency such as the Euro less likely.

for example, lets say the u.s. collapses and all of its military is melted for scrap. the mideast starts selling oil priced in euros. OK, the Euro now has a bigger network, but the Euro just becomes the dollar. And I'm selling my Euros as fast as I as sell dollars and am buying gold. People in the ME will do the same. The price of gold in Euros will eventually rise sharply. If its 30% backed by gold now, yes i understand the accounting gimmick will mean that it will continue to be backed by gold at the same rate as fast as they can mark to market. But golds rise in euros means the value of the euro falls.

Indenture said...

Lemon Thrower: "I don't understand how an accounting gimmick makes the euro equal to gold." Why not ask yourself what makes the Seussian DocTor equal to gold, Seussian being a small country within outer Mongolia and the DocTor being their fiat currency (which is actually only a bundle of twigs of certain diameter, length and made from a tree that only grows on the top of the tallest mountain in Seussian). The Seussians are perfectly happy with their currency and (the big AND) they use Gold as a store of value. The Seussian Government has it's own store of Gold and there are a defined number of bundles of twigs chasing the defined ounces of Gold. For the Seussians there is no problem. Each bundle of twigs is 'worth' a certain amount of gold and can be spent accordingly within the borders of Seussian because everyone knows the exchange rate between a DocTor and Gold.

"there are 2 fatal flaws to the euro relative to gold. first, there is no limit on the number of new euros that can be created." Of course there is no limit. The Seussians can wrap as many bundles of twigs as they want (the government owns the mountain and protects the secret growing method for the DocTor Trees so at any time, when the Seussia Government needs to pay it's bills, if it's a little short it can wrap a few more bundles of twigs and insert then into the economy by purchasing something or paying a debt). There is nothing to stop them except for the fact that there are now more bundles of twigs per ounce of Gold so the 'value' of the Suessian currency is lowered. Who wants a devaluing currency? (The United States excluded)

"second, even if there was a limit, you do not have a right to exchange euro for gold." The word "right" as in "right to exchange" is interesting. Any one want to touch that one? :)

Martijn said...


The euro is the mark. Without Germany, there would be no euro. With Germany, there is a diluted mark called, "the euro".

I am waiting your explanation as to why Germany joined the euro in the first place if the mark was so wonderful.

Secondly I did you read the text about how a currency derives its value from its use?

Would that make the mark any different from the euro?

Anonymous said...

"The euro as Ersatzgold? Joachim Fels says it is not at all obvious that the ECB would really use these tools to resist a major appreciation of the euro, if it happened. If (a big if) this appreciation occurred because the US was seen by markets as actively trying to debase its currency in an attempt to avoid deflation and recession, the ECB might well choose to offer investors who flee from the reserve currency a new home. True, the price to pay for becoming a reserve currency is a significant loss in external competitiveness and a current account deficit reflecting the capital inflows. Yet, the benefits of offering investors a form of Ersatzgold would include higher asset prices and permanently lower interest rates, which would help especially highly indebted governments. "

This is from

Federal Reserve to unleash QE2 and fund the US deficit in coming months
By Michael Hennigan

Michael H said...

@ Desperado:

"You have stated that a fiat currency backed by a floating gold reserve would work to restrain government growth and is constant whittleing away at our freedoms. I really want to believe in this, but I also have eyes and can see what really goes on. "

I think we agree on this point. Remember that Another said "if you don't like our current monetary system, you'll hate the next one!"

Reading between the lines of Another's writing, the freegold concept is not meant to benefit us shrimps. It is meant for the benefit of the elites. Currently the elites benefit tremendously from the dollar system, but the dollar is ending. If they don't come up with a replacement then they will lose their privilege!

And so they devise the freegold concept, so that the worst of the abuses of the dollar are cured -- those caused by the use of paper to store value -- while maintaining some (reduced) privilege of money creation. Reduced privilege is better than no privilege.

The elites are not left-wing or right-wing. Their defining characteristic is wealth and power and the propagation of same. They are behind the scenes, behind all major political parties and all mainstream news outlets.

Michael H said...

@ Lemon Thrower:

...if the dollar dies, the Euro becomes the dollar. "

I strongly disagree. If the dollar dies, NOTHING can become the dollar, because the confidence shock to having the world reserve currency disappear is too drastic for it to be overcome. Just like the John Law debacle affected money for decades of not centuries, so will the demise of the dollar affect the financial world.

"we basically have that (purely transactional currency) now with the dollar"

No, we do not. The dollar derives much of its current use as a store of value, so it is not purely transactional.

You will not sell all your paper currency for gold, because you will need the currency to buy daily necessities. You will only exchange your surplus savings into gold, for long-term holding.

That process of trading surplus dollar savings for gold is what will destroy the dollar, given the overhang of dollars serving as stores of value.

The same process applied to the Euro will not destroy the Euro, because of the dollar reserves and because it has not been overprinted to the same degree.

Michael H said...

BTW Desperado,

Regarding freegold being set up to benefit the elites, I am not making a value judgment. Whether we see it as good or bad is immaterial. All we shrimps can do is prepare.

S said...


Could you comment on the seemingly tidalwave of comentary coming out of German officials regarding burden sharing in the case of a default. Finance Min out this am saying speculators should know the ECB wasnt contrived to bail them out. As Ireland teeters on the brink...

Gold taken down hard in due course this am in front of the Fed

oldinvestor said...

“Funny” quote from Casey Research.

"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title."

Lemon Thrower said...


thank you for your response.

the dollar today is not purely transactional, but for most of us on this blog it is and for others it is becoming increasingly so. if it weren't for the u.s. military and the trauma of a race to the exits, it would have become a purely transactional currency.

so my view is that even if the dollar is eliminated, the Euro is no better. and the things that cause the end of the dollar will cast doubt on the euro. remember, after John Law, no one in any country wanted paper money. many countries went to a gold standard. so i don't see the mechanism for how the euro will thrive in such an enviroment.

freegold, rather than reinforcing the euro, seems to me to reinforce the doubt about the euro by being a constant reminder of how the fiat currency is losing value. so the currency becomes a hot potato (Greshams law). so this is what i mean by the euro becomes the dollar.

people will just deal in gold or its equivalent rather than the euro. if i own oil in the ME, why price in euro when i can price in gold. whose military is going to stop me? the Chinses?

Martijn said...

@Michael H

Reading between the lines of Another's writing, the freegold concept is not meant to benefit us shrimps. It is meant for the benefit of the elites. Currently the elites benefit tremendously from the dollar system, but the dollar is ending. If they don't come up with a replacement then they will lose their privilege!

I did not read that into it. I did not even read about the distinction (elite vs shrimps) you mention.

I read about the international monetary system and the changing role of gold in it, in a relatively objective way.

Also, if the dollar is there principally to benefit elites (and not to facilitate e.g. world trade), I wonder what your ideal international monetary and financial system would look like.

littlepeople said...

As we speak, the dollar is more than a transactional currency, since we can still use it to buy gold--it is preceived by many to have tradeable value. Since so many people trade their labor for these dollars, they also trust that those dollars have a value beyond transactions.

Freegold means the dollar will ONLY be seen as a transactional currency--according to Fekete, gold will not be for sale at any fiat price.

Freegold also means (to me, anyway)that the forces holding gold (and silver) back will be vanished. Meaning all paper gold will become worthless. Paper gold is the reason we can still buy physical gold at these ridiculously low, current prices. Paper gold is a saviour to those who have not yet transacted their dollars, yen, euros, or yuan for physical gold and silver, but "mean to do so."

Time is running out. Those who argue (against) freegold but don't have any better cover their bets, and soon.

Freegold will not be a panacea, and cause the world to become eden. But it will protect wealth for those who prepare for whatever new monetary system exists alongside it. My opinions only.

Paul I said...

Great News everyone!

Nice Mr Bernanke has issued all physical gold holders another $900,000,000,000!

There may be a slight delay in the transfer of funds, but I'm sure it won't be too long before every ounce of gold is worth an extra $140. (So we're up to about $55,140 now).

Best Regards

Hot Potato Thrower

Unknown said...


You have to read this.

Do you remember the conspiracy theory about OITC?

Unknown said...

And here is a blogger writing about it.

Unknown said...

You can also watch the recording of the speech of the Lord, he begins at 2:27.44.

Scisco said...

My imagination is limited but how would it be possible for gold to have no price in fiat currency and for the currency to still function. If dollars cannot buy gold then all items that could buy gold; be it commodities, services, what have you, would also have no price in dollars. For example, lets suppose that oil could be traded for gold. If one could buy oil with fiat then you have a fiat price of gold via oil. The other part is that gold must be tradeable with something. If it not, then it becomes worthless. Now it is possible that fiat becomes untradeable for anything but I am assuming that is not the intent of the original statement because then why limit the conversion only to gold.

Texan said...

Martijn, who cares why Germany joined the euro? I'm sure there a lot of reasons, probably first and foremost "guilt", or their own form of hamstringing themselves. It doesnt matter why, because it is. Look up the GDP numbers by country and get back to me on whether they are relevant or not to the "EURO".

As for the concept of "transactional currency"', here is the reality. Stuff goes up, and stuff goes down. If it's going up, people want more, if it's going down, they want less. And somewhere in between if it isn't moving at all. Strip away
the notion of currency as something other than stuff, and it will all be very clear.

But in case it still isn't, even after Gentle Ben's promise
today to print the USD into oblivion, let me spell it out.
Gold is going up, fiat is going down. And the euro is fiat

And if it STILL isn't clear, just look at gold priced in euros since it's inception. Or any currency for that matter. Now look at oil priced in gold over the same time period. Exactly.

That is Gresham's Law, ladies and gentlemen. Fiat debases, gold abides.

FOFOA said...

Hello Lemon Thrower,

I think you may be confusing yourself by using the word "shun":

"Gresham’s law means people will shun Euros in favor of real gold."

Gresham's law actually says that bad money drives good money out of circulation.

So to "shun" the euro would be to drive it INTO circulation using your statement. Restating your line: "Gresham’s law means people will circulate or spend Euros and save real gold." This is Freegold.

In other words, the bad money circulates and the good money goes into the sock drawer. Or, bad money becomes the medium of exchange and good money becomes the store of value.

Even more specifically, Gresham's law states that bad money drives good money out of circulation **if their exchange rate is fixed by law**.

This was a big problem in the gold standards of the past where the banking system operated with gold as the fractional reserve. This meant that the money in circulation had to be a specific multiple of the reserves in the banking system, "limiting the quantity of money," which you claim makes money a store of value. Yet when Gresham's law kicked in it was the bank reserves – not the bank notes – that would make their way out of the banking system and into sock drawers.

This Gresham's law gold hoarding may even have been the primary cause of the Great Depression. Here is an abstract from an academic paper written by Doug Irwin a couple months ago:

Did France cause the Great Depression?

The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33.

Kinda cool for the gold bugs when their gold was forced up in value but not exactly a good argument for a fixed exchange rate between gold and transactional currency unless you enjoy depressions.

Incidentally, this paper makes the case that when gold is money it can transmit inflation or deflation into commodities and consumer price levels while it (gold) remains stable in "price". By inference if it is not money it can absorb both inflation or deflation in the sense that a shock absorber in a car cushions the ride.


FOFOA said...

In this way the paper provides further evidence that gold must be de-monetized to function in its best and highest value role, as a store of value and a reserve asset. The paper makes a case that gold simply cannot perform successfully in either role when it is money without undesirable side effects.

But what about a pure gold coin standard, with no paper or electronic money? You mentioned the Roman monetary system, Lemon Thrower:

" what was the system called during roman times, before paper money, when gold coins (as well as silver and copper coins) were exchanged for goods? that seems an awful lot like Freegold to me."

Actually, it was nothing like Freegold. Precisely the opposite in fact. When the Roman rulers coined gold they actually assigned a value much HIGHER than gold's commodity value! This may sound pretty neat to a lemming gold bug, but not once you understand the huge seignorage value surreptitiously confiscated from the people by the Roman rulers in doing so.

That official Roman "stamp of approval" put on gold coins made them more valuable than gold bullion in the same way that the Fed makes cotton pulp more valuable with its legal tender "stamp of approval." Here's an excerpt from Robert Mundell, Nobel prize winner for his pioneering work in monetary dynamics, also dubbed "Father of the euro":

Many of the early empires used gold as reserves for their banking systems with exchanges being effected by means of clay notes and seals convertible – at least nominally – into one or both of the precious metals.

The introduction of overvalued coinage provided a strong economic motive for the cultivation of a mystique. From its very beginning, probably in Lydia in the 7th century B.C., coinage was overvalued; one could say that was its very purpose. The earliest coins of the Lydian kings were made of electrum (from the Greek word meaning amber), an alloy of gold and silver.

We mustn't be misled by the textbook fiction that coins were first struck to guarantee the weight, and therefore the value, of the earliest coins… The conventional wisdom that these Oriental despots stamped the coins to confirm their weight and thus provide a convenience for their subjects, is sheer nonsense. The stamp meant that the coins passed ad talum – by their face value – equal to 1/3 of a stater (the word meant "standard").

The earliest function of coinage was therefore profit. Coinage not only helped to market the electrum found in the Patroclus but the markup on them generated a substantial profit, helping these kings to achieve their dynasty's ambition of extending the Lydian Empire throughout Asia Minor. Accepted at face value as if they had a high gold content, the Lydian staters started out with a high proportion of gold but got progressively smaller, increasing the markup and the revenue for the fiscal authorities.

Coins cannot of course remain overvalued in a free market. Gyges and his successors were no libertarians. Overvalued coinage implies artificial scarcity, a monopoly and government control. To sell their coins and create the mystique, a full panoply of devices was called upon. Religious symbols helped to reinforce the mystique. Whether the symbol was called Marduk, Baal, Osiris, Zeus, Athena or Apollo, or Jupiter or Juno, or St. John the Baptist, its purpose was the same; the latter symbol made the florin the most famous coin of the Middle Ages. The gods changed but the principles stayed the same! Just look at the Masonic hocus-pocus that still remains on our dollar bills! "In God We Trust" introduced on our dollar bills in 1862 when their gold backing was dropped.


FOFOA said...

So you see, Lemon Thrower, in even a pure gold coin standard the currency administrator still gets his surreptitious piece of the action. And as Mundell said, these coins cannot remain overvalued in a free market. That is because they are shunned, as you would say, in favor of a better store of value, perhaps fine oil or silk.

This "shunning" of overvalued gold coins sends them into circulation in increasing velocity, which lowers their relative value. This forces the ruler to issue new coins with less gold content. It also encourages coin clipping and many other forms of monetary debasement, both official and unofficial.

And, of course, it ultimately leads to this and this. Those links are two graphs of the collapse of the Roman monetary system in waterfall fashion due to the debasement of Roman coins, 1,275 years before Sir Thomas Gresham was even glimmer in Sir Richard Gresham's eye.

You see, it is the best and highest use of gold to be a reserve asset apart from the circulating currency, with a price that floats in that currency. This allows for something like the Gresham effect, while at the same time, diffusing its always calamitous end result.

Fiat currency has plenty enough value to serve as a short term store of value, for as long as most people hold the actual currency itself rather than the length of time people now hold bonds denominated in transactional currency. The latter is the problem, not the former. Freegold is not a perpetual state of currency hyperinflation. In fact, it will be the opposite. It will be much more stable than today because of the balancing mechanism of an alternative store of value. And if you need to see value in a purely symbolic fiat currency for yourself, simply track down a new homeowner who toils each workday to pay off his mortgage.

And Texan, "Gold is going up, fiat is going down. And the euro is fiat"

Yes, of course. But the $IMFS **system** will die while the euro Freegold **system** will survive. Oil will become cheap in euros when the $IMFS dies because **the euro system** supports the free FLOW of physical gold anywhere, priced in euro. Such a flow is not supported by the $IMFS. Yes, you can buy as much gold as you want at today's $ price. But you are not a Saudi billionaire.


Texan said...

FOFOA, a Saudi billionaire can buy as much gold as he wants in USD now. Come on. Just look at PHYS. Sprott has accumulated plenty in physical. the problem for the Saudis or anyone, is that gold in a vault is just gold in a vault. Sort of like oil in the ground.... Ithink Buffet said something like that. Of course, he's no Saudi billionaire either......

Point being, gold is only an insurance policy for them also (else why pump, the oil is infinitely more valuable than the gold). They buy producing assets.

They are fully aware that the euro is no more "backed by gold" than the USD. The euro is not convertible. The Saudis know this.

All fiat is backed by production. It is effectively a sort of equity in production. Countries that produce must constantly debase their currency in order to keep producing, except for resource countries. So the euro will debase, as it has these past 10 years. You showed the
rise of gold in USD, how about in euros?

And the Saudis, and the Chinese, and Buffett, will buy hard assets, both gold and production: ports, oil, gas, railroads, potash, farms in brazil, minerals in Peru, etc.

The "giants" have so much "transactional currency" flowing out there every orifice that sterilizing it with "anything" is becoming quite the challenge. Isn't this the diarrhea you predicted?

You think they are going to park in euros?? Or sell oil " cheap" in euros? Or hoof euros for more than the nanosecond it takes for them to buy a forest in Romania or something?

It's all monopoly money now! Ie, GAME ON. They know

FOFOA said...

Hello Texan,

"a Saudi billionaire can buy as much gold as he wants in USD now. Come on."
"the oil is infinitely more valuable than the gold"

The giants (like Saudi billionaires) cannot buy as much physical as they want without moving the price or even breaking the paper markets that set the price at which they would like to accumulate. Perhaps some people would just have to be a giant to understand this concept. But if you attempt to move your (giant) wealth at its present $-value into any hard item you quickly find the price of that item rising and ultimately you fail at your attempt to transfer present value. This is why they accumulate off-market whenever possible, quietly, and as ANOTHER told us, at much higher prices. Funny you should point to Sprott who was turned away by the IMF after it announced it was selling.

Also, Sprott, being a public fund, would have to be treated like the window dressing at the COMEX.

ANOTHER and FOA told us the biggest leverage to be gained in the transition away from the dollar as the global standard was in physical gold. And the biggest leverage in physical gold would be versus oil.

Now the gold:oil ratio is virtually the same today as it was when ANOTHER was writing. So if we carry his numbers forward to today we can calculate the leverage to be gained from holding euro versus physical gold. This is significant not to you and me, but to the giants who cannot possibly convert their entire wealth into gold. But they can convert some into gold and other hard assets, and the rest into euro, the right mix of which would optimize their leverage riding out this transition.

(Note in the paper above that the Saudis doubled, from 12% to 25%, the amount of their wealth held in euro-denominated accounts from 2001 to Q2 2004. Wonder what it is now.)

The gold:oil ratio today is about 16:1. If we average the gold:oil ratio from 1997 – 2001 while ANOTHER was writing, it comes out to 16.4:1, virtually the same as today. After the transition ANOTHER said it would go to around 1,000:1 while gold would rise around 30:1 in PPP currency terms.

Today you could buy a Supertanker full of oil for $292,000,000. And if you park that oil through the transition you will still have a Supertanker full of oil. That's 1:1 leverage. Or you could buy gold today as a proxy for that Supertanker full of oil. By ANOTHER's numbers you would need to buy 3,500 ounces of gold today ($4,749,500) and hold it through the transition and then exchange if for a Supertanker of oil.

That's a 98% discount on the oil if you buy the proxy today and hold it through the transition. That's also 62:1 leverage achieved buying physical gold today.

What about euro? If gold moves 30:1 against the euro then you still get more than 2:1 leverage on oil holding euros through the transition simply because the euro system will survive the transition. That's two times today's purchasing power, in real terms.

Compare that with holding dollar assets through a dollar collapse. Not only will you not have any leverage, but you will likely lose at least 90% of your purchasing power held in those assets. That's negative 10:1 leverage achieved through the transition.

Now you are surely thinking that it makes no sense for the price of oil in euro to drop 50% as the dollar IMFS implodes. But that is only because you are mired in the Western way of valuing everything in today's dollar terms. Most everyone thinks that at least the value ratios between all items today are correct. But they are not.


FOFOA said...

Decades of government meddling and systemic malinvestment have left very few value ratios as they would be in a free market. The West in aggregate has actually been paying far too high a price for oil for the last 30 years when you figure that all those thousands of tonnes of gold accumulated at $400 an ounce from the West will explode in value on Saudi sand rather than in Western hands.

ANOTHER said, "If the current price of oil doesn't change soon we will no doubt run out of gold." He was talking about the price of oil – in real terms – falling, not rising.

You are, of course, free to reject all of the above and everything else ANOTHER wrote as well. And as long as you go for the physical gold, what you believe will not matter. A rising tide of physical gold will lift all ships, even Supertankers.

Date: Sat Mar 07 1998 13:19

A Noble Purpose, This Oil For Gold

In a very real "currency sense", oil will be devalued in terms of gold. As one makes a currency weaker by increasing the money units per ounce of gold. Oil will become very cheap in gold, as the amount of gold paid per barrel will fall dramatically as compared to today's ratio.

Date: Sat Apr 18 1998 22:01

The partial backing of the Euro with gold is a recent thing. It was to be only 5% with the understanding that most "European" oil buys would be settled in Euro. The oil alone would give the Euro "reserve status". Now the BIS has worked to bring a possible "80%" of all world buys settled in Euro if 15% to 30% gold is held. This will bring the end of US$ holdings to act as reserves! In this way, the dollar price of gold would go to "no end"! This would further allow the Euro to become "top gun" as the US would even be forced to buy Euros to buy oil!


Many say, how to defend Euro without much currency reserves? If gold go to many thousands US, what will be used to bid for Euro as defense? I say, these persons will find a problem on their computer screens! You see, the Euro will start as "nothing", no holdings of size, anywhere! The dollar is held as reserves as "the stars in heaven"! It is to say, "the dollar will bid for the Euro", not "the Euro will bid for the dollar"! All currencies will "flow into the Euro for trade". But, if the Euro becomes so strong, how to compete in world trade? It will be the price of oil that will make the "trading field" level! The soaring US$ price of gold will make even a 10% Euro reserve be as 100% today, in USD! Oil will become, very, very cheap in Euros and allow that economy to do well! Many other countries will see this and also want to join the new "world reserve currency" that has become "the new world oil currency"!

The politics of the ECB? It is as a "side show"? We watch this new market, yes?

FOA (04/23/01; 20:30:04MT - msg#67)

If you follow our lead, we will not change your mind about anything. Rather, you will have the "luxury" of seeing things in a different context from the usual Western Gold Bug fixation. With that perception becoming part of your "Total" overall understanding, as events occur, you may choose to interpret their impact differently.


littlepeople said...


You said, "My imagination is limited but how would it be possible for gold to have no price in fiat currency and for the currency to still function. If dollars cannot buy gold then all items that could buy gold; be it commodities, services, what have you, would also have no price in dollars."

Fekete was saying that gold will no longer be for sale--it will go into hiding, as those with the gold see no value in fiat. Silver may do the same. Other rare commodities may do so as well. Until such a thing as Freegold allows fair valuation.

You see, the thousands of tons of gold and silver that have been sold by the bullion banks does not exist, except as "promises to deliver" if someone who bought paper gold requires it.

JPM and HSBC have sold paper gold and silver out the ying-yang in a desperate attempt to control their rise in price. The CFTC (at least one commissioner) has finally blown the whistle, and lawsuits alleging manipulation and fraud have been filed against them for silver market shenanigans.

Silver is the most heavily manipulated physical item currently known to exist. The concentrated, naked short position held by JPM and maybe one other entity exceeds that of any other traded commodity, including gold, though gold is also highly manipulated, as we know. Ted Butler has been saying and showing this for decades, as the CFTC has acted like the three monkeys (see no evil, hear no evil, speak no evil). It now (finally) has become almost common knowledge in circles such as ours here.

So, this paper manipulation appears to be very near an end. The ETFs (GLD and SLV) also appear to be involved in the manipulation, as diluters of physical demand. When paper shorts are unable to deliver, the governments will step in and allow the shorts to pay in fiat. The shorts will not be "burned" as so many assume--it is the longs who will be paid in fiat--just prior to the one-time revaluation in physical gold and silver.

Sometime after this revaluation happens (during this revaluation period is when gold and silver will not be for sale), Freegold will manifest at some price level that wipes away debt, so the financial world can function again. There will again be a price for gold in fiat--much higher than current, and freely floating as opposed to fixed, as in a gold standard.

This is my interpretation of freegold, and what is almost a given to happen.

FOFOA said...

Hello Gabriel,

"FOFOA, do you agree with these (and my posts aboves) assessments?"

It is difficult for me to answer your question because it is not a simple yes or no, far from it. You clearly grasp some of the visible effects of Freegold better than most. I cannot say I agree with your descriptions word for word. But reading between the lines I can see your meaning, and it is on target. Do not stop!

The key here is to never think you have it figured out. Freegold has infinite resolution. The deeper you dig, the more you find. This is how you know it is real!


FOFOA said...


I should also add that answering questions like you are doing is probably the best way to expand your own understanding. It forces you to think things through and look things up. It is a wonderful feedback system whereby the teacher often learns more than the student. So keep it up!


Lemon Thrower said...


thanks for your response. As for Gresham's law, i understand it as you do. Gold will not circulate.

Here is what I fail to grasp about your vision of Freegold tied to the Euro.

1. How does the Euro system support the free flow of gold priced in Euros. I don't see any gold moving today. What is different about Euros from dollars besides marking to market.

2. if the dollar collapses, as you predict, why do you think the Euro will survive? After John Law's house of cards came crumbling down, paper money was not very popular for perhaps a century or more.

3. why do you think the dollar will fall before the Euro? As I see things, this is like the old joke of the 2 campers who meet a bear. one puts on his running shoes. the other says, why are you doing that, you can't outrun a bear? the first replies, I don't have to outrun the bear, i just have to out run you.

The dollar need only survive longer than the Euro due to the network advantages in your blog post. In that race, the dollar has 2 advantages over the Euro. Uncle Sam, unlike Ireland, Greece, Iceland, Spain, Portugal, etc., can print new dollars to prevent a default. Second, Uncle Sam has a military threat that the Euro masters do not have.

Desperado said...


That paper about France causing the depression was quite interesting. It seems like the exact opposite of what is happening now with QEII where the Fed, unrestrained by anything, is just pumping liquidity into an economy that is already like a saturated sponge. But in actuality it was a direct result of the same cause, currency devaluations, in order to gain trade advantage and balance accounts. France, having been raped twice by Germany in one lifetime undervalued the Franc, while Britain, ruler of the seas, overvalued hers in order to replenish the states coffers and then she put those surpluses into gold. Today we also have competitive devaluations and CB gold "hoarding" going on too. It is also interesting that France under DeGaul tried to do it again 35 years later, after her third raping by Germany, but also showing just how fickle and reckless nation states can be.

If France and the US had soaked up 60% of the worlds gold by 1931 causing a collapse in the money supply, then couldn't something similar happen after freegold if say, China and the House of Saud continued demanding gold (or simply continually buying gold) for their current account surpluses? Over years they would suck the gold out of the rest of the world until they had the majority of it, thereby invalidating the network effect of gold being distributed around the world. This would cause the same problems as France's gold hoarding did in the 1930's and the 1960's, even in a world of freegold.

But this also shows that gold's relationship to power, and control of the flow of gold is critical. The LBMA and Comex are in the US and Britain, who between them have controlled the seas and the air since Napoleon. Kaiser Bill tried to break this Anglo-American monopoly and started the armaments race a build a navy to compete for control of the seas. His goal was to be able to move his empires goods, and gold, unmolested by the Brits who at various times had choked off most countries of the world from critical resources, and gold.

So now the Chinese are expanding their navy and are challenging the Americans for control of Space. The oil, gold, and most commodity markets are still mostly run in London and New York due to this Anglo-American control of oceans and air and space. By all appearances the Comex and LBMA are going to collapse, and where will price discovery take place? The BRIC's will not simply take their losses and allow these markets to be re-established under control of the same group of hucksters. So the BRICs will challenge this hegemony like the Germans did. Where will price discovery occur then, in Dubai under the influence and watchful eye of Iran? Hong Kong? Frankfurt?


Desperado said...

... continued

From the paper: "If one extends the sample past 1924, however, the coefficient on gold drops precipitously. This reflects that fact that the changes in world gold reserves were no longer getting translated into world prices. This reflects the start of the malfunctioning of the interwar gold standard...
The monetary gold stock grew 18 percent between 1928 and 1933, a compound annual rate of 3.4 percent. Despite the concerns about an insufficient supply of gold, there was no apparent shortage of monetary gold during this period. As a result, world prices would have been forecasted to rise about 15 percent over this five year period. Instead, world prices fell 42 percent between 1928 and 1932."

Apparently the gold standard was already breaking down after the depression 1924 and the Weimar hyperinflation. I don't think there has been a real gold market with real price discovery since. Where and how would this market work after Comex/LBMA?

A few threads ago you wrote: "However, if the Fed were to announce a FLOATING price starting at $20,000, it would get some gold at the beginning, but a lot less than you would think. Gold is fungible which means its price is imputed globally, and today, instantly. The BIS or the ECB could do this easily. The Fed could not. "

You think the BIS or ECB would be allowed by the BRIC's to determine the world wide floating gold price? Russia and China are not very worried about an EU army, navy or airforce. Or would each currency block CB in effect set the gold price for their respective markets, leading to gold pegged exchange rates just as in 1931?



costata said...

Lemon Thrower,

You answer your own questions in that last comment. As an exercise, I suggest you frame some arguments against the position you have adopted using your own comment as the starting point.

Unknown said...

I may be the Slow Sophmore again, but I think I may have finally gotten a glimmer of the meaning behind the fractal/Mandelbrot posts! (I did say I was slow!)

FOFOA said:
Freegold has infinite resolution. The deeper you dig, the more you find. This is how you know it is real!

It's this quality of continuing to hang together the more closely I look at it that makes Freegold theory so fascinating. For me the gold trail started out as intuitive, almost instinctual, and saturating myself in the history, politics, and economic theory that makes "where we are now" make sense has been a slow uphill battle.

Only now that I have read some things more than a dozen times am I starting to separate vital truth from lies, propaganda, and just plain mistaken assumptions in this vital area of inquiry. FOFOA, this blog has been an essential tool in helping me get this far -- and I'm sure that the next layer of understanding will be even more profound.

Once again, my thanks to everyone in the community that keeps the network value of this blog positive!

Martijn said...

A while back there was this article on game theory and central bank gold buying.

Perhaps there is more in it.

We know (expect) that the dollar is set to decline and that dollar debts will not be performing all too well as a reserve in the future.

We also know (expect) that gold will.

However, if a central bank buys to much gold at once, the gold door will shut (like in the 80s).

The central banks that already own gold would not mind that, as it would solve their dollar problem.

But many central banks would mind (financial) power balances changing too much.

Especially large dollar holders with much economic power (like China) would oppose to turning from a dollar-holding based powerhouse to a more marginal gold owner.

For a (the) new gold-based (euro) system to be as broadly accepted as possible (and for the transition towards it to be as smooth as possible), the gold holdings of the important/influential/powerful CBs need to somewhat reflect the balance that the current dollar system provides.

One way to do so is by redistributing gold, another way would be to swap/change some dollar (-denominated debt) for euro's. Hence perhaps the paper gold claims that (according to A/FOA) will be 'honored' not in gold but in euro's.
And most likely this was also the reason for some Euro countries to sell some of their gold prior to the Euro.

The most accompanying remarks (e.g. the Netherlands and Switzerland I believe) was that they 'wanted to bring their gold holdings more in line with others' or something like that.

This re-balancing is most likely still going on behind the screen today.

And it’s probably why the BIS has been buying this past year while the IMF was selling.

The IMF seems to be selling almost exclusively to the Indian Ocean area (Bangladesh, Mauritius etc.).

Most likely supporting India, the supposed competitor of China (which has ties with Europe) in the East.

A/FOA also said that the US made the gamble that Japan would dominate Asia, but lost, as China turned out to be the key to the region.

So the transition might still be in progress with a lot more happening behind the screen than we see.

Michael H said...

@ Martijn:

Just to clarify, when I say 'reading between the lines', I'm inserting my own opinions. I am not trying to imply that I know Another's thoughts that he left unsaid. You are right that his writing is objective.

Which aspect of the dollar's function is 'principal', I cannot say. You are right that it also serves as a lubricant of world trade. But, through the power of credit creation, the dollar allows financial interests to siphon real wealth from those that produce it, through a few keystrokes.

Martijn said...


Fair enough.

Which aspect of the dollar's function is 'principal', I cannot say. You are right that it also serves as a lubricant of world trade.

We like to color the world to understand it better, preferably in black and white.

However, unfortunately reality is a bit more complicated, and so we should be very careful about the prisms we choose.

The fact that the dollar might do one thing ('siphon wealth away from its producers') does not necessarily make that its only, let alone primary function.

The dollar does have a somewhat perverse influence on the economic world these days as you say, but that does not make that influence the primary drive for its creation back in the days.

There was a problem (international trade facilitation) that needed to be solved, and they did so by means of the dollar (Bretton Woods).

And yes, those that implemented 'the solution' also made sure they took benefit from it. I don't deem that so absurd.

And with the Euro the same will happen.

But do you really expect anyone bringing a solution to anything to get out of it being worse off?

If so, why?

Michael H said...


I agree that the dollar system was not initially created to syphon wealth off. But, the 'syphoning' has grown more extreme, especially since 1971.

You are right that it is not absurd for those who create the system, to profit from it. But that doesn't mean that the system will benefit the wider population in general.

Same with the Euro; I agree that it is not unreasonable for the Euro to be designed to benefit the European elites. Otherwise, they wouldn't bother with it. But that doesn't mean that the Euro will benefit the 'common people' of the US, or of other countries, or even of Europe.

Mainly, I was attempting to address Desperado's statements regarding the Euro. My understanding of his view (and, Desperado, feel free to correct me) is that freegold will not be allowed by the elites, because the elites will not want to give up their current power.

I'm trying to point out that, far from giving up their power, freegold is the best option they have for holding on to as much of their power as they can retain, after the dollar ends.

I also recognize the limitations of talking about 'the elites' as if it is a defined group. In fact, I cannot give a specific definition of who the elites are. I only use the term for lack of a better one.

Martijn said...

Same with the Euro; I agree that it is not unreasonable for the Euro to be designed to benefit the European elites. Otherwise, they wouldn't bother with it. But that doesn't mean that the Euro will benefit the 'common people' of the US, or of other countries, or even of Europe.

Well, currently the USD still runs the show, which is not in the best interest of other 'elites', including European ones.

Hence it is likely to improve their position if they manage to get out from underneath USD-hegemony by creating their own currency.

However, for that currency to be accepted (as broadly as the USD) it has to be 'better' than the dollar.

Therefore the kicker of free-gold was added. And yes, this will (as counter-intuitively as it might seem to you) reduce their (the elites') benefit from it, but even then the new situation still is better than working for a dollar that is printed by the oversees 'elite'.

Unless off course we hold the position that 'the elite' is omnipotent, god-like and everywhere.

Personally I do find it however more realistic to suppose some form of competition even between the elites.

A bit similar to what happens with lions in nature: they eat most of the other animals, but occasionally also have to fight each other for territory.

Desperado said...

@Michael H,

I think that the Euro is part of a bigger plan by the EU elites, those guys who really call all the shots, to work to keep and enhance that privilege. I don't think receiving the "gift" of the Euro from these elites is worth the cost of admission for the plebes. Now there is nothing that I, a Swiss, can do but to resist it and try to prevent it from enslaving me the same way it does the rest of Europe. I certainly have plenty of concerns about Switzerland alone.

Currently the world has a farce for a gold market. The worlds monetary and financial system is very precarious. There are numerous thug regimes trying to position themselves to be able to fill any power vacuum left by a collapsing Pax Americana. A nuclear arms race is just starting to heat up in the middle east. I think an awful lot of things would have to go right before the world can make a peaceful transformation to a freegold.

You say: "far from giving up their power, freegold is the best option they have for holding on to as much of their power as they can retain, after the dollar ends."

Does this apply to Putin? The House of Saud? Iran? Syria? Chavez? I certainly don't have the answers on this score, but I fear that they have ambitions that transcend freegold.

Martijn said...

Pax Americana

Hehe, that's one way of looking at it.

The question is: could it possibly this 'Pax Americana' (decades of CIA involvement in South-America and the Middle-East, the unfounded Iraq-war etc.) that created People like Chavez, Ahmadinejad, Putin and their ambitions?

I am not saying it is possible to be friends with everyone when 'in the lead', but America sure wasn't.

Desperado said...

Martijn, you and I would probably never agree on the significance of Pax Americana, but I have a quick question: Do you think 9/11 was an inside job?

Michael H said...

@ Lemon Thrower:

You might find FOA'S series on 'the gold of troy' of interest:

starting with post
FOA (1/25/2001; 16:28:50MT - msg#56)
The Gold Of Troy!

In that series, FOA discusses the role of gold as a trade-able wealth commodity in ancient times.

@ Texan,

PHYS current holdings at

Sprott has accumulated $1B in physical gold. A nice sum, to be sure, representing 25.5 tonnes of gold. But I don't think it has been easy for him to accumulate that much physical, and the quantities are still only a fraction of what the 'giants' have in dollar-denominated assets.

"Point being, gold is only an insurance policy for them also (else why pump, the oil is infinitely more valuable than the gold). They buy producing assets."

Oil is only valuable if it is used, and if it is used it is used up. Oil is like a drug -- it has to flow to create dependence.

Gold is not only an insurance policy. It is a means of converting the transient wealth of oil into a more permanent form.

"And the Saudis, and the Chinese, and Buffett, will buy hard assets, both gold and production: ports, oil, gas, railroads, potash, farms in brazil, minerals in Peru, etc. "

They are trying, but they are facing political opposition from governments, especially the US and Canada.

Indenture said...

Perhaps this will answer questions about the Euro and a currency's ability to purchase Gold.

"Gold is part of the new economic order"

Indenture said...
This comment has been removed by the author.
Martijn said...

On the condition that it stays a quick question:

Do you think 9/11 was an inside job?

I find the official story hard to believe. I also think that America invading Iraq after Saddam started trading oil in Euros was quite helpful in maintaining the $-oil-standard. So basically I don't buy the official story. What unofficial story is the right explanation I can only guess.

Desperado said...


A very interesting article that is full of pearls:

- It makes no distinction between the Euro and the dollar. As far as SCO is concerned, they are one and the same.
- It completely treats "the west" as the enemy, not just the US.
- The fact that the "lingua franca" is Russian and Chinese is another clear message for the rest of the world.

I found the following excerpts to be of interest:

"The message is clear: the long-term success and stability of the SCO will be based on sound money, or at least money more sound than the fiat currencies of the West. And this being so, it makes sense to place a lower value on trade with the West, because the West pays for goods by just printing the money. "

Wow. Finally they have tipped their hand. China and the her satellites (the SCO) have been waging a surreptitious war against the west since Nixon opened China. Whooda thunk.

The crucial difference is the SCO does not seek long-term political unification, but the co-ordination of common security and economic development. This means that laws will continue to be decided at national level, so the over-regulation and central bureaucracy that emasculates business in the EU and America should be avoided.

The SCO’s structure is therefore less political and more flexible. This is how China will co-exist with India, India with Pakistan and Russia with her former stans. It is intended to defuse the border disputes of the past by allowing common interests to overtake them. The SCO will represent about half the world’s population, the largest grouping imaginable, making Europe and America look like two-bit players.

Looks like the national governments of the smaller SCO member states don't trust the larger SCO members. Too bad the smaller EU countries weren't as suspicious of the motives of the elites of Germany and France and their ability to bribe local politicians.

Time will tell; but the attractions of a supranational SCO seem certain to include a sounder currency than the dollar, euro, pound or yen; if only because all SCO parties are accumulating gold.

As I said in a previous post, the SCO is not going to stand by and watch gold price discovery move from London to Frankfurt.

Unknown said...

Jim Rickards on EU:
...We're going to pursue unification. It's the only way to keep from fighting each other.

I quite agree with Desperado:

Rickards speaks like a politician and he is peddling the very same arguments that Sarkozy and peers use to defend the Anglo-American project.

See how "A Wall-street banker deprived the Europeans countries of their sovereignty".
Sorry, but only available for now in French or German.

Desperado said...

@Martijn, you say "I find the official story hard to believe.". I say Occam's Razor. I say "I find the conspiracy theorist's story even harder to believe.".

Lets leave it at that.

Assuming that the US hyperinflates, the Comex collapses, and that the Euro survives, do you think that gold price discovery will move to the EU and that the Euro will take over the role of "reserve currency"?

Martijn said...


Sometimes it helps to realize that we do not know everything, do not need to paint the world black and white all the time and do not always need to choose.

But feel free to feel safe in your believes.

Assuming that the US hyperinflates, the Comex collapses, and that the Euro survives, do you think that gold price discovery will move to the EU and that the Euro will take over the role of "reserve currency"?

That would depend on the euro's survival and on the actions of the other players (China, Russia, Arabia, to name a few).

I would however give it a fair chance, and a better one then the dollar remaining reserve currency.

We do however need to factor in the altruistic moves of the US maintaining peace in the world and liberating us from all nasty dictators the US rumors to posses weapons of mass destruction, especially the ones holding an oil well in the backyard.

Indenture said...

Not if China & Russia have anything to do with it!

Martijn said...

Not if China & Russia have anything to do with it!

Well, they do have a 'shared enemy' in the dollar, so who knows. They might even support the euro for now.

Paul I said...

"Assuming that the US hyperinflates, the Comex collapses, and that the Euro survives, do you think that gold price discovery will move to the EU and that the Euro will take over the role of 'reserve currency'?"

Ummm, aren't we all saying that gold becomes the reserve? Or have I missed the point?

I would imagine that gold price discovery would be "everywhere and nowhere" for a while. What emerges from that is speculation, but that's always fun so here goes;

Emergency government in US needing essential imports (oil) would scramble to put in place regional "agreements" with supplier nations, based on subtle threat of force and minimum hard asset purchases. (Gold carrot & Military stick).

All other oil supplying nations would face a similar position. If they haven't already negotiated gold/hard asset based supply contracts with neighbourhood bullies, they soon will. Pretty obvious that's what SCO is all about.

Those countries with neither oil, gold nor bully like tendencies, will have some explaining to do to their countryfolk I would imagine.

This is probably what the emergence of freegold will actually look like. It's more the disappearance of pretence than a major change to the way the game is played. The end of the phony war.

Personally I think the Euro survives, but in the same way the Franc survived previously. A bit tattered and shell shocked, and missing a few zeros. It'll probably be found wandering through Brussels, dazed but still defiant.

costata said...


The definitive comment on all fiat currencies post-Freegold:

"A bit tattered and shell shocked, and missing a few zeros. It'll probably be found wandering through ... (insert name of city), dazed but still defiant."


FOFOA said...

Hello Lemon Thrower,

"After John Law's house of cards came crumbling down, paper money was not very popular for perhaps a century or more."

This is not quite true. Paper money was circulating in both Europe and America during the intervening years between John Law's debacle in France in 1720 and the introduction of the French paper assignat in 1789, only 69 years later.

I think you will be surprised to find that this cycle of easy money followed by hard money followed by easy money is more common and frequent than you thought. Please read my post, The Debtors and the Savers. It is on this topic and it even covers John Law.

Coincidentally, it was 77 years after John Law's Mississippi Company paper bubble collapsed that both the assignat and the mandat fully collapsed. And today we are 77 years past the dollar's 70% devaluation in 1933.


Desperado said...

@Paul, you wrote:

"I would imagine that gold price discovery would be "everywhere and nowhere" for a while."

As FOFOA wrote, gold price is also dependent on the network effect. If price discovery is "everywhere and nowhere" then by implication the network effect will have broken down and gold will be used as just another item to barter, with its value to the acquiring party uncertain. In this situation, I find it hard to believe that someone will trade $50,0000 in goods (at current value) for a 1 oz gold coin.

I think that by sheer mass the largest and most liquid market will become the price discoverer. The ability to transport gold from this market to smaller ancillary markets will largely determine the difference in various markets in the price of gold. We can see that today with gold prices in Vietnam having varying premiums due to changes in government policy. Currently, one can insure and ship gold by UPS or DHL for a small marginal cost. In the case of a breakdown in global trade or regional or world war, this would not be possible and the gold market would fragment.

This is why I wonder whether we wouldn't have several markets with fixed prices in each major regional currency.

Fofoa, (or anyone else) would you care to jump in here? Did Another or Foa write about this?

costata said...


Serious question, do you ever think before you post?

You wrote:
"As FOFOA wrote, gold price is also dependent on the network effect. If price discovery is "everywhere and nowhere" then by implication the network effect will have broken down and gold will be used as just another item to barter, with its value to the acquiring party uncertain."

In that one paragraph you disclose:
You don't understand FOFOA.
You don't read the A/FOA archives.
You don't understand network effects.
You don't understand barter.
You don't understand value.

What do you "understand" aside from your own beliefs and firmly held convictions?

Anonymous said...
This comment has been removed by the author.
Anonymous said...


a nce piece of history. Exactly what happens today if I get it right (but first I wait for Costata's confirmation).

Anonymous said...

martinj said "Well, they do have a 'shared enemy' in the dollar, so who knows. They might even support the euro for now. "

Prolly not, living within the $IMF world has taught them more than once, the perils of using some other groups especially a rival groups currency as a reserve currency, so I think they may, if with the SCO think that the time is ripe, may just pull the rug from below the Euro too ?


Dave Narby said...

Remember when FOFOA reminded us that the debt would be preserved at all cost, even to the extent of buying it outright for cash, and dumping it on your front lawn?

I guess great minds run in the same gutter!

Desperado said...

@Costada, do you only know how to snark, or are you just incapable of backing up your snark with substance?

Martijn said...


Prolly not, living within the $IMF world has taught them more than once, the perils of using some other groups especially a rival groups currency as a reserve currency, so I think they may, if with the SCO think that the time is ripe, may just pull the rug from below the Euro too ?

Off course they could, in time. However, one could wonder what has more weight for them: antipathy against the dollar they share with e.g. Europe and Russia, or their (potential) own ambitious on in the reserve-currency realm.

In order to get a currency to be accepted for international trade, acceptance by foreign countries is rather important. Hence, should China choose to set up their own world-trade-currency they would have to get Europa and/or the US on board.

At this moment that might prove to be a rather big challenge and until they succeed in doing so they'll have to do with the dollar, which - needless to say - is being inflated with increased speed as we speak. One could see a bit of a dilemma in that.

Given that the euro has this special policy regarding gold reserves (treating it as an independent reserve besides - other - currencies), the euro is a bit more transparent then the dollar, and therefore possible a better choice for world trade. Besides the euro offers gold as a reserve instead of the printed paper Bernanke offers.

Hence, if I were the Chinese I'd go with the Euro.

Did you notice Hu Jintao visiting France this weekend? Or the Chinese stating to be willing to buy Portugese and Greek debt?

Martijn said...

Remember when FOFOA reminded us that the debt would be preserved at all cost, even to the extent of buying it outright for cash, and dumping it on your front lawn?

FOFOA rightly did so, as did A and FOA.

The reason for doing so is the introduction of the Euro as an alternative to the dollar.

With this alternative - the euro - in place, a collapse of dollar-denominated debt would scare investors away from purchasing additional dollar debt and even cause a drastic sell-off (à la Lehman) which might on the short term drive up the dollar, but in the longer run totally drive it from its reserve-status.

Gabriel said...

Thank you FOFOA for your encouraging comments.

FOA on the Euro:

FOA (02/09/01; msg#59 and #60)

That the ECB has started cashing in all it's interest on dollar reserves points to a new direction in currency warfare. In addition, their marking gold to market is a prerequisite to following the Fed's new inflation stance by scoring the dollar against the Euro gold price once the paper gold markets fail.

Now we have yet to see it fail, despite strong evidence of fraudulent manipulations, and despite ever stronger evidence of the failure of Dollar. Ultimately this is not surprising, and the Dollar value of gold rising slowly provides a strong support for the paper market.

Here again, FOA correctly described the future trend:
after EMU, dollar paper gold prices would slowly climb as physical demand impacted the paper marketplace. (...)From the time of the Washington Agreement until it's end the dollar paper gold world will be allowed to do the equivalent of a currency inflation. No nation or government CB will now stand in the way. You see, the only way the physical deliveries can be completed is for the market place to have it's way. In doing so, by continuing to short the market in a piling on stance, liquidity will remain for delivery.

What an insightful mind!

But, what he didn't imagine, was the perpetual extension of the agreement and the underlying politics. That the giants would use military brutality and instigate a reign of fear. Everything is permitted, no boundary is untouchable. And so, the system lived for another decade.

Maybe we can now look at the unfolding events in the US, and the FEDs' actions with this new light: The only tool left to avoid a total and instantaneous extinction of the system, is to ensure a slow enough rise in price of paper gold, and try to control an inflationary environment, in contrast to hyperinflation.

But FOA saw this as well:
the mass of this transition will not begin until the US has clearly embarked on a slowdown. And that slowdown (...) will, this time, force the fed to fight it with a super inflationary buyout of anything and everything that defaults . Right down to your shoe laces. This, my friends is the inflation dynamic unleashed once a currency is removed from reserve status.

This was written in 2001. what an Oracle!

That leads me to the main question:
What's next?

Piripi said...


"What's next?"

Try this.

Jenn said...

@Friend of FOFOA

Welcome. What an interesting event this is to have you post here.

I must admit your presence makes me concerned FOFOA might have other business to attend to.


PS. Tyrone -- I think you missed the reveal thyself cue on this one.

Tyrone said...

FreeGold shall be revealed another day.


Anonymous said...

On June 28, 1978, Federal Reserve Board Member Henry C. Wallich addressed the graduating class at Fordham University. "Inflation," he informed the graduates, "is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged."

Read more:

Desperado said...

Tsk, tsk, costada.

For the last several threads you have been ankle biting me like some rabid dachshund, waiting for the right moment to pounce and bite, and then scurrying back into the dark recesses of the internet to repeat the entire attack again. What specifically is so wrong with my statement about "everywhere and nowhere" that got you so unbridled that you said these things:

"do you ever think before you post? You don't ...understand FOFOA... read the A/FOA archives... understand network effects... understand barter or value. What do you "understand" aside from your own beliefs and firmly held convictions?"

Now those are some pretty serious charges, but you refuse to stand behind even one. I know next to nothing about about Fofoa, how can I "understand" him? And "value", isn't that rather subjective? Barter? I don't understand barter? give me a break.

But the accusation of "not reading the A/FOA archives" reveals your true nature. This is one more dirty tactic of the left, so evident in the recent US midterms where the left vilified Palin and O'donnell as ignoramuses, where tea partyers were portrayed as ignorant bigots, where Kerry and Obama slandered the voters as being ignorant and not appreciating the great things that the left were doing for them. These slanders are just like the ones you have made about me, on numerous occasions. One also sees it so clearly with the ongoing leftist temper tantrum over global warming, where "deniers" are portrayed as stupid, where "denier" scientists are denied a hearing, where grievous attempts to rig the science by the left are finally exposed and then ignored by their media and their rent seeking cronies. Meanwhile the left continually refuses to allow any civil debate to take place, choosing instead to hide behind their "academic laurels" such as having "read the A/FOA archives". Whoopy doo costada. Well done, you claim to have read the archives and think that that makes you a high priest of freegold, able to brandish your freegold power in your personal inquisition, to then go hide in the dark recesses of the internet like a scoundrel.

That the rest of us are forced to live in a world where these tactics, completely devoid of honor and respectability, are tolerated is due largely to the failure of the west to make the communists to face up to their sins. These people murdered hundreds of millions over the last century, and yet they are still tolerated in governments around the world, and their tactics permeate all the way into this blog. This trail of murder and deceit follows the communists all the way back to their founding. The KGB still run Russia, and Mao's heirs rule China. Both have a long history of accusing their opposition of "incorrect thinking", just like you do me. Then they banish these "incorrect thinkers" to the gulag, just like you would me, costata. Bravo! Lenin, Trotsky and Stalin would be proud of your tactics.

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