Friday, December 31, 2010

Happy New Year!

Year of the RPG

That's Rocket Propelled Gold, or as Robert Zoellick, president of the World Bank suggests, Reference Point Gold. Same outcome either way.

The Year in Musical Review

As some of you may have noticed, I often put a song at the end of my posts. Generally it is both a song that I like, and one that in some way relates to the post. And now I present a few memories from what I consider to be the musical highlights of the past year. Enjoy!

From I can feel it coming... on Jan. 5, 2010, here's Phil Collins in a great live version of his 1981 song 'In the Air Tonight':

From Greece is the Word on Feb. 12, here's the opening of the 1978 movie 'Grease':

From my little allegory titled The Dukes of Wetton on May 6, here's a very sexy Jessica Simpson reviving Nancy Sinatra's 1966 hit song 'These Boots Are Made for Walkin':

From The Old Hyperinflation Question on June 9, here's Alanis Morissette singing, "but this is not allowed, you're uninvited" in 'Uninvited':

From Confiscation Anatomy – Part 2 on Aug. 13, here's The Mighty Mighty Bosstones asking, "Have you ever had the odds stacked up so high, you need a strength most don't possess?" in 'The Impression That I Get':

From Just Another Hyperinflation Post - Part 3 on Sept. 13, here's a rockin' version of Phil Collins' 'In the Air Tonight' from the Miami Vice soundtrack, performed by the Miami-based metal band Nonpoint, set to a montage of hyperinflation-related pictures:

 From One Tin Soldier on Oct. 13, here's the song 'One Tin Soldier' from the 1971 film 'Billy Jack':

From Happy Halloween, here's Danny Elfman of Oingo Boingo singing "We Close Our Eyes (and another year has come and gone)," a great song from the Boingo Farewell concert which I attended:

From Dilemma 2 – Homeless Dollars on Nov. 5, here's Joss Stone looking oh so sexy singing Dusty Springfield's classic 'Son of a Preacher Man' at the UK Music Hall of Fame:

And last but not least, here's a video from Priceless, way back in Sept. 2008. As yet, this video is my unrivaled favorite on this blog:

Bonus Video: The video above, 'Take a Load Off Fannie' was created by the same guy that made the "Quantitative Easing Explained" video that I posted here. At the time I put it up it only had a couple thousand views. It's the one that introduced the very funny term, "The Ben Bernank," and it has since gone viral with over 3.8 million views. Because of that video, Omid Malekan has made a few TV appearances on CNBC, etc. He is a creative and talented guy, and he now has a music video version of Quantitative Easing Explained. Enjoy!

Happy New Year to all of you and all the best in 2011... year of the RPG we like to call Freegold!


Tuesday, December 28, 2010

Windmills, Paper Tigers, Straw Men and Fallacious Fallacies

The essence of a straw man argument is the superficial misrepresentation of statements taken out of context. And here, frankly, there is a lot of context. This is one of the reasons I do not actively promote, submit or publish my posts anywhere but here.

There are a few spotlight sites that link or repost articles of their choosing, and I have granted permission to anyone who has asked. I also have not objected to those who don't ask, like Zero Hedge. But I do not put them out there myself because I believe my writing is something that you, the reader, should come here to read because you want to. It is not the type of writing that should be placed in front of your face.

I'm not out there tilting at windmills. When was the last time you saw me write "End the Fed," or "support this bill," or "support this movement," et cetera. Never? That's right, never. And that is because I am simply reporting on the choices the free market has already made – developments that may not be so obvious to the interested parties in our various "hard money tribes."

My argument is that the choice of gold over silver is a free market choice that has already been made (silverbugs notwithstanding). Mr. Market always wins in the end and the CBs are aware of this, and they have already prepared for it to be so. The direction (up) and the medium (gold) are already baked into the monetary cake. The only unknowns that remain are magnitude and timing. And the problems with today's monetary system and the global financial crisis can all be plausibly explained through the context presented in this blog.

I had to laugh at all the people who described my Focal Point post as too long, long-winded or verbose. Obviously they haven't read much FOFOA, and therefore have little context in which to understand my meaning. Yet at the same time, they felt it was a threat, a paper tiger that needed to be slain, a straw man that needed to be put down.

But can you see the difference in what I put out there? I don't sell my words. I have no advertising so I am not beholden to anyone else who has something to sell. I do not try to place my words in front of people who did not make the conscious choice to read it. I do not advocate any action that will affect or coerce someone else (like busting a commodity market).

The only action I advocate is personal action, like purchasing power preservation. I also advocate the personal action of expanding your understanding beyond the standard dogma you find everywhere else, which I suppose makes me quite unique.

Now let's quickly run through Mish's "FOFOA Fallacies." I'll try to keep the incomprehensible babbling less verbose and conflated in this one, so as not to waste too much of your valuable time.

FOFOA Fallacy #1: "So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

Mish says, "No we don’t." Then he quotes Murray Rothbard and sums it up with, "The key point above is that an increase in money supply confers no overall economic benefit. Over time, money simply buys less and less."

"Tolbiny" offers the following excellent rebuttal:

Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time- there is a basic minimum amount of money that is needed for something to even function as money. Take the quote that Mish uses from Rothbard and compare it to FOFOAs quote.

Rothbard Quote:
Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

FOFOA Quote:
"So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

There is no contradiction between the two. Mish is interpreting FOFOA as saying that we need money in UNLIMITED amounts, but FOFOA clearly says we need it in UNRESTRICTED amounts. The difference here is clear- for FOFOA the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy. This does not mean that expanding or contracting causes more economic growth, but that it allows for economic growth.

In my post I addressed "two simple, but seemingly, apparently impossible-to-comprehend concepts." The first was the splitting of the concept of "money" into separate units for separate roles. And in the medium of exchange role, I did use the term "unrestricted." But I also clarified it in this way: "Unrestricted by artificial constraints." A fixed, unilateral gold standard is an artificial constraint. A floating multilateral "gold standard" is a natural, free market constraint that allows for currency flexibility while, at the same time, exposing the exchange value (in gold) of a currency to the judgment of the marketplace.

FOFOA Fallacy #2: "Gold used as money represents debt."

Mish: "The statement is preposterous unless one allows the lending out of more gold than exists. That practice is clearly fraudulent."

Here, Mish misunderstood my meaning, which I clarified in my follow-up piece posted three days before Mish posted my "fallacies":
"Someone else said that I had money all wrong because I wrote that gold is debt. Perhaps I should have said that gold is "a credit" for future goods and services instead of using the loaded word "debt." (But, actually, I did that on purpose.)"

Again, "Tolbiny" sums it up well:

Mish again has no idea of FOFOAs point. Any money has to be "debt based" as FOFOA is using the concept. When I accept money as payment for a good I am only doing so with the expectation that I will be able to trade that money for something else in the future. This functions in the same way as debt does. I give you X and after time T has passed I expect to get Y in return. Savings is a deferment of consumption, but when you give your deferred goods to someone else and they are consumed by the 2nd party more goods have to be produced in order for you to enjoy your savings in the future. That is the debt part of money.

Had Mish understood my point, he would have noticed that he already posted a rebuttal under "FOFOA Fallacy #1," the Rothbard quote:

Murray Rothbard: "[Money] is not a useless token only good for exchanging. It is not a “claim on society”. It is not a guarantee of a fixed price level. It is simply a commodity."

I should probably parse this Rothbard quote in defense of my statement because even though Mish didn't use it in that context, it still fits. But first, here's a thought from Friedrich A. Hayek posted on the Mises Institute website:

"The gold standard is a mechanism which was intended and for a long time did successfully force governments to control the quantity of the money in an appropriate manner so as to keep its value equal with that of gold. But there are many historical instances which prove that it is certainly possible, if it is in the self-interest of the issuer, to control the quantity even of a token money in such a manner as to keep its value constant.
"I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value, provided both the issuer and the public understand that the demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind.
"I have no doubt, and I believe that most economists agree with me on that particular point, that it is technically possible so to control the value of any token money which is used in competition with other token monies as to fulfill the promise to keep its value stable."

An interesting thought from Hayek: A medium of exchange whose value comes from its ability to serve as a medium of exchange, independent of any backing or direct convertibility. Essentially a "useless token only good for exchanging." This is one half of Freegold, or "Reference Point Gold," by the way.

Now let's take a closer look at Mish's Rothbard quote and see if there is really any contradiction between it and "FOFOA Fallacy #2: Gold used as money represents debt."

FOFOA clarifying: "…gold is "a credit" for future goods and services…"

Rothbard: "[Money] is not a useless token only good for exchanging. It is not a “claim on society”. It is not a guarantee of a fixed price level. It is simply a commodity."

I am in full agreement with Murray given the chance to expand on his statement a little. Money should not be a useless token only good for exchanging if that same money is to carry the dual roles of currency and savings. Yet today it is. Money is not a fixed value claim on society. Of course not. It is a floating, "marked to market" claim. As is gold in the store of value and wealth reserve role.

Purchasing gold confers no economic or necessary benefit to you in the present, other than storing your deferred consumption for the future. It is a way to pass your earned claim (debt to you) into the future, even through generations. Calling this a fallacy is simply fallacious.

And while the word "commodity," when used along with "money," is often assumed to mean "a physical product of agriculture or mining," the more appropriate meaning here is "something of use, advantage, or profit." In the medium of exchange role, this can be anything, even, as Hayek says, "a token money."

FOFOA Fallacy #3: "Gold and only gold will fill the monetary store of value role. Not gold and silver. Not precious metals. Just gold."

Mish: "Like FOFOA I believe gold is money. However, unlike FOFOA I think money is whatever the free market says it is. The problem is, we do not have a free market we only have government decree mandating the use of dollars, Pounds, Yen, Renmimbi, Euros, and Francs as money."

Mish's handicap here is that he is not familiar with the body of my work that describes how the monetary roles historically came together and are now separating. The store of value role is always a free market choice while the medium of exchange is presently (and usually) issued under monopoly control. The monopoly's goal is to gain your confidence in the store of value role as well, but this is failing today after decades of excess.

Referring back to my Gold is Money series from 2009, here is the modern concept of money:

Now let's compare this to that Eurosystem report:

Notice that everything is reported in euro, even gold, and even dollar-denominated claims ("foreign currency") are reported in their euro-denominated value. So euro is the monetary unit of account on this form. The right side of the balance sheet represents the base of the medium of exchange within the Eurosystem. It includes euro notes as well as other liabilities of the central bank. And the left side represents both the de facto monetary store of value (claims denominated in foreign reserve currencies) as well as the alternative preferred store of value (gold).

The interesting thing about gold on this side of the balance sheet is that, not only is it not at risk from the (mis)management of foreign economies and currencies, but as those other stores of value fail, the gold portion is rising in value to keep the balance sheet full. This is the magic of a marked to market floating monetary store of value.

All the activist toy soldiers that want silver to become the monetary store of value "because the powers that be don't have any" are completely missing the big picture. TPTB don't have any because Mr. Market, that is those Giants with serious amounts of wealth to store, already selected gold in this role. The prominent presence of gold on the Eurosystem balance sheet is not TPTB forcing a store of value on the market. It is the exact opposite! As I have said many times, the store of value role cannot be dictated, decreed or legislated.

The prominent presence of gold on the balance sheets of the modern Central Banks is the CBs front running the market! Freegold (or "Reference Point Gold") is an unfolding market force creation. Mish says, "unlike FOFOA I think money is whatever the free market says it is." That's not "unlike" me. It is simply misunderstanding me. Gold IS the market choice. And the real market for this "store of value" is the Giants with "value to store." Luckily we shrimps can tag along for the ride. But we can no more override this market choice than we can crash the Treasury market by dumping our stockpile.

Alright, that's enough Mish. Now let's take a look at Trace Mayer, J.D. who followed Mish out of the gate slaying paper tigers and sodomizing a straw man or two of his own.

First of all, I'm not quite sure if Trace actually read my post, or if he is merely judging it based on hearsay evidence. For one thing, Trace seems to have latched onto Mish's misinterpretation of the word "unrestricted," apparently taking it to mean "unlimited" and thereby projecting me as a Chartalist. I had to laugh at that one, and I hope you did too. I guess Trace missed my comments to Greg, our resident MMT acolyte.

Anyway, Trace goes on and on reaming the 'FOFOA Chartalism' straw man:

"First, it should be noted that Greenspan implicitly admits the faulty argument behind Chartalism."

"This is the same reason Chartalism is philosophically flawed."

"A proper valuation set by whom, the State? Chartalist!"

"There is a reason Chapter One of my book The Great Credit Contraction is titled Word Games. In that chapter, I present the two competing theories of money, market versus Chartalism…"

Okay, now that Trace's poor scarecrow won't be walking right for a week, here's a little newsflash about FOFOA. Trace claims to present the two competing theories of money, market versus Chartalism. Well I, Another and FOA present ..... Option 3 - fiat currency that is dynamically priced though a floating (physical only) gold exchange rate in a free market.

More evidence that Trace either didn't read my post or was misrepresenting what he read (a bit of a faux pas for a lawyer) was this statement:

"But these individual preferences expressed through human and being revealed through the silver price does not constitute evidence of silver being overvalued as FOFOA asserts."

I can't seem to find my assertion that silver is overvalued. At least not in my post. Perhaps it is this:
To be honest, I really don't know if silver is overvalued or undervalued today at $30/ounce.

The context there was a discussion of the impact of paper markets on the value of industrial commodities. I argued that these commodities can be overvalued or undervalued. Or maybe it was this:
You see, silver needs its price propped up (huh? why?) while gold appears to need its price suppressed (see: The London Gold Pool).

The context there was a discussion of the history of bimetallism. Not quite as assertive as Trace made it sound, is it?

In fact, my position is that silver will rise just fine against a falling dollar. In fact, it may gain a little additional levitation over other commodities due to the lingering monetary sentimentality put forth by Trace and others. But it will also be limited by the economy. Where it will not follow gold is through the change in both market and function that will deliver a real, non-inflation-adjusted massive one-time return. The Freegold reset as the gold market turns physical and the gold function becomes the monetary store of value par excellence. A free market Giant event being front run by the Central Banks and a few small physical gold advocates.

Trace would probably have no idea what I'm talking about, since it doesn't seem like he has read much FOFOA. Well, if he, or any of you are interested, you should probably start here and here.

On the Regression Theorem, Trace quoted this exchange:

Congressman Ron Paul: So it is hard to manage something you cannot define.

Dr. Greenspan: It is not possible to manage something you cannot define.

The implication is that the dollar's value cannot be managed if it cannot be defined (as a quantity of gold and/or silver presumably). Obviously you cannot define anything in a vacuum. You cannot define an ounce of gold as an ounce of gold, or a dollar as a dollar. Self-reference does not make for a good definition. But to define one thing as a fixed quantity of another creates a different problem, described by Gresham's law. However, to define one thing as its floating market value in something else, why, that's just a revolutionary concept! Isn't it?

Actually, it is an emergent, market-driven concept that has been unfolding since around the time Nixon closed the gold window, give or take a decade. And it is so extraordinary in its sweeping ramifications that it requires a whole new paradigm to understand. From Bob Murphy's article linked by Trace:

""People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday... Thus the expected future purchasing power of money explains its current purchasing power."

Obviously this view assumes a dual role for money, store of value and medium of exchange (unit of account is implicit). But what is actually playing out today is something quite different. Trace frames the issue of money in terms of two models, "market versus Chartalism." "Aristotle" describes Trace's perspective as a pendulum with "gold money idealists" on one side and "easy money idealists" on the other. And he calls Freegold the "perfect bottom." But he also points out that it is the most pragmatic and realistic point in an arc between two opposing idealisms, Trace's "market versus Chartalism." Read the entire description in my post, The Value of Gold.

In order to dive into this extraordinary new paradigm, we should probably shed some baggage. Here are a few bullet points to consider:

1. Freegold is a Floating Physical Gold Exchange Rate system for dynamically valuing fiat currencies. It is a floating reference value, not a fixed exchange rate "gold standard." In the new IMFS, currency pairs will be a function of the relative price of physical gold trading within their legal tender zones, rather than the race to the bottom with no benchmark as it is today.

2. "Money" is a dead, meaningless concept. If you want to use it, then define it. Circulating Currency has a concrete meaning. There are other terms that will suffice for other components of the "money" supply eg. Bank Credit E-currency (for the digital deposit created credits), reserve assets for the store of value, etc.

3. The term Precious Metals needs to go. There is gold and there are industrial metals. Sure there are high value industrial metals and there are low value metals but they are all commodities and we are way beyond commodity money. If the use of a metal in jewelry makes it "precious" then advocates for this term need to make their case.

4. The gold standard, bimetallism etc. are all topics for the history books. If you want them back then you need to explain how you plan to rehabilitate these terms for mainstream consumption and resurrect the dead systems that they describe.

Finally, if you would like to view this paradigm properly, you must have a clear understanding of the natural human factions at play. These factions are "the easy money camp" and "the hard money camp." Or as I like to call them, The Debtors and the Savers. This may not seem like much, but it is a nuance that most all of my critics have wrong.

Please read the linked post. Government, commercial banks and central banks are the ménage à trois at the center of any IMFS, but they are not all in the same camp. In the correct paradigm, the government, the politicians and Wall Street (commercial bankers) are all in the Debtor's camp, while the Central Banks are in the Saver's camp along with the Giants.

But Freegold is not as simple as a one-camp solution. As I've said many times, Central Bankers are a different breed. They are not like commercial bankers or politicians. Hate them if you feel you must, but collectively they do think big picture and long term. And Freegold is an accommodation of BOTH camps! That's because it is the recognition and official CB front running of Mr. Market's eventual win.

This is just one small example of how the "Debtors v. Savers" factional paradigm differs from the "Bankers v. the rest of us" that drives all of these hard money guys into tilting at windmills. Or from the "haves v. the have-nots" paradigm that has infected the water supply in the easy money camp. It is a small difference, but a world apart.

Today we have arrived at the end of a long period in which the debtors have reaped immense amounts of real world goods from the savers. They have done so by issuing paper debt in exchange for real goods. Most of my critics confuse who the debtors and the savers actually are. They think "the American people" have been screwed over by the bankers for so long and now is the time to take it all back. What they don't realize is that "the American people" and "the bankers" (the commercial bankers) are in the same camp. So is the government. They are all "Debtors."

And as this pendulum swings, they should be (we all should be) very happy for the acceptance of Freegold by the Giants, the CBs, and the Savers. But my critics can't even see this paradigm, because they are stuck in a bad one. And their bad paradigm leads them to tilting at windmills like "buy silver, crash JPM," "end the fed," "the Kucinich easy money bill," "buy silver because TPTB only have gold," "the end of fiat is coming," "the euro is no different than the dollar," etc., etc...

What is actually coming down the tracks with the inertia of a massive locomotive pulling the Freegold party train is what Robert Zoellick has been hinting at publicly, completely misunderstood by gold bugs and Chartalists alike. It is gold used internationally in a new monetary role, not seen in prior history. It is the next step in the evolution of the concept of money.

Gold is to become the floating, free market reference point for fiat currencies of all stripes. And to do this, it will shed the albatross that is its parity relationship with paper promises of gold from private institutions that are backed by more paper promises of gold from other private institutions in a perpetual loop of paper promises. This paper promise loop/"market" is not a stable benchmark, and it will have to go.

So now you have a choice. You can hop on the party train and buy some physical gold before the journey is complete. Or you can join the ranks of toy soldiers standing strong against the unstoppable force of time. The choice is yours.


Toy Commander: "It wasn't my intention to mislead you
It never should have been this way
What can I say
It's true, I did extend the invitation
I never knew how long you'd stay

When you hear temptation call
It's your heart that takes, takes the fall
Won't you come out and play with me

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers

It's getting hard to wake up in the morning
My head is spinning constantly
How can it be?
How could I be so blind to this addiction?
If I don't stop, the next one's gonna be me

Only emptiness remains
It replaces all, all the pain
Won't you come out and play with me

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers

We never win

Only emptiness remains
It replaces all, all the pain
Won't you come out and play with me

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers"

Monday, December 20, 2010

Kicking the Hornets' Nest

As someone here wrote in the comments, it sure seems like I kicked the hornet's nest on Friday. That wasn't my intention. Clearly the post was a message to "my readers," that is, to those with a little more background on the esoteric nature of this blog and the foundation on which it builds (i.e., the writings of Another and FOA). But it was a pleasant surprise for me to feel all the warmth and love in the superb comments over at ZH. Some of the silverbugs even posted thoughtful counterpoints to my post, like this one from the author of the ZH piece I quoted.

Perhaps this little episode will dispel the notion that Freegold can be distilled into an easily digestible pill for mass consumption. Of course that's not to say it is not accessible. It is accessible to anyone and everyone with the time and inclination to put in the effort. Just start here:

FOA's The Gold Trail

A more complete list can be found at the bottom of Freegold in the Proper Perspective.

The point is not which metal is going to give you a better return on your investment at any given time in the future or the past. The point is, given a choice between silver and gold, which physical metal should you buy now… today? And this is where Freegold comes in. Because the more you learn about Freegold, the more you will want to buy physical gold only. Dismiss this notion if you want. I don't care. I'm here to help those that want help understanding Freegold.

If you are here reading this blog, then you deserve to know my position on silver in the midst of all this silver hype. That's why I wrote the post.

In our Freegold future, gold will not provide a yield or a return. Instead, it will protect the purchasing power you have earned through hard effort. The idea of a risk free yield is an illusion propagated by the $IMFS.

A real yield can only come from risk taken in the pursuit of economic expansion. The "risk free yields" of today may well be nominally risk free in today's system, but that risk of nominal loss has been replaced with currency risk, the risk of value loss. The risk that your "lines in the sand" might become worth less, or even worthless. And just when nominal yields are reaching their nadir of zero, currency risk is reaching its apex. It is a systemic conundrum.

The purpose of a nominally "risk free" yield in the $IMFS is to try to keep up with inflation. Inflation is always with us, even when it is disguised by the financial system. It is the storage of value in dollar denominated paper assets that disguises the inflation. This slows dollar velocity and masks the systematic expansion. In other words, the Chinese letting their wealth reserves "lie very still" in dollar bonds gives the dollar value.

In Freegold, gold will simply float on the currency and represent the expansion or contraction of the economy. Scepticus was correct that after the Freegold transition, if the economy contracts because of an aging population, or simply from too many Lazy Bens, then gold's purchasing power at that time will fall. It will track the economy, not the currency. It will float on the currency, unlike anything today. But it will also perform better than any supposedly risk free paper investments today as well.

The problem today is that, like Chen on the beach, the Chinese are accumulating a whole lot of worthless "lines in the sand" that they know can never be spent. These lines hold perceived value as long as you don't spend them, but they lose value as soon as you do. And in the case of "non-floating" bonds that accumulate even more of the same thing, the "lines in the sand," the math is simply untenable. And what makes the situation even worse is that these lines are only legal tender in one place, on Ben's beach. So clearly, the necessary hyper-devaluation of Ben's lines will wipe out the stored value of all your past efforts.

On the other hand, in a real world with hundreds of Bens and Chens and millions of people (both lazy and not) behind each money, the floating gold solution works quite well. It can be spent anywhere. It doesn't lose value with the issue of more lines, because it is not denominated in lines like bonds are, but instead it floats and rises priced in that currency. And all the competing Bens will find that they can control the exchange value of their currency with gold. Selling gold will raise the value of your currency, and buying gold will lower it. And because all currencies will be judged relative to their gold price, even if Ben has no more official gold to sell, gold can still be purchased with his currency from other sources at the floating price of gold in that currency, which will be a reflection of management of the currency relative to the domestic economy behind it.

If this works for you, you can think of it as a multilateral floating gold standard. And in this gold standard, the money printer doesn't even need a hoard of gold if he has a strong economy and a well managed currency. Without those, you'd probably want some gold.

Okay, I have to post this video, because Davincij has me laughing hysterically. I watched this at least three times. Every time he laughs, I laugh. I just can't help it. I love this guy! He obviously doesn't get the point of my post, but he sure is fun to watch...

Here's the thing about silver and Freegold. If you really think about it, Freegold is the pure embodiment of Gresham's law. The masses are never going to demand silver money, only the modern Silverites are. The masses always want easy money. And that's because the masses use money mostly to pay expenses and service debt (in case you haven't noticed). And also, if you haven't noticed, there is a big overlap between the silver movement and the various easy money movements like Bill Still and The Secret of Oz.

But the easy money camp has a newer and better easy money in fiat currency today. Silver was out of that job a long time ago. Perhaps that is why it re-trained and found a new job in industry. I doubt that silver will voluntarily go back on "benefits" to please the silverbugs. It may not feel inclined to "lie very still" under a bridge drinking moonshine.

In Gresham's law there is good money and bad money. There are two moneys, not three. Good and bad, not good, so-so, and bad. The bad money drives the good money out of circulation. In other words, the bad money circulates (and becomes the medium of exchange) and the good money lies very still (becoming the store of value). Look at this latest Eurosystem quarterly report again:

You see, the international monetary and financial system (the IMFS) is in transition today. It is transitioning from the old $IMFS into the new IMFS. And through this transition gold is going to replace dollar assets as the monetary reserve asset, and in so doing, will recapitalize the failing system of today. This is the esoteric part, where you need to put in a little effort to understand why I say this with such confidence. Without that effort you will most likely dismiss my words when I say that gold's value will soar during this transition and deliver a one-time gain to physical gold holders in a sort of "punctuated equilibrium."

This means that one day gold is cruising along with its known relationship/ratio to things like silver, oil and bread, and then the next day (or over a brief, one-time period) it gaps up ~40x and then reestablishes a new equilibrium with the aforementioned commodities. And the gain of this transition is only afforded to the physical quantities of gold in the world, which is why the chain of paper promises (of gold) floating throughout the financial system is so dangerous.

Yes, silver will run with inflation just like all physical assets. But it will not have the additional boost of being the new system's official reserve asset. This probably doesn't seem so significant to the silverbugs, but then again, most of you who have taken the time to understand Freegold now call yourselves ex-silverbugs.

The majority of the silverbug articles I read today seem to boil down to the "scarcity = value" argument. This is a weak argument because stock stability is much more important in a monetary metal than scarcity. And stock instability is definitely NOT a plus for a monetary store of value. It is pretty good, however, for the volatility where JPM makes outrageous profits churning, front running and sheering the traders. But it's not what makes for a monetary paradigm shift.

Someone wrote, "Is silver money? I have a bag of 1964 coins that says it is." Good point. But as I said in the post, silver's commodity value overran its monetary face value that year and it has run (just like a commodity) with inflation ever since. Does that make it money? Not in the sense that I am talking about, which is the role of global reserve asset par excellence riding out a systemic phase transition.

Someone else said that I had money all wrong because I wrote that gold is debt. Perhaps I should have said that gold is "a credit" for future goods and services instead of using the loaded word "debt." (But, actually, I did that on purpose.)

All of these are fine arguments. But they are also all completely missing the point of the post.

Yes I still have some physical silver. But I am a seller today and have been for a year now. And I was only a buyer before I discovered the wonderful archives linked above. And for the record, I am not playing the GSR. And I won't sell ALL of my silver. I plan to keep a little bit of it. And if I didn't have any silver, I would probably buy an amount equal in weight to my gold position, as Desperado said in his comment. That means, if I had 100 ounces of gold, I'd also buy 100 ounces of silver. But that's just me (and Desperado).

Randy Strauss, who has been the sitemaster and an active forum participant at since the very beginning, is probably the finest Freegold observer there is (other than a couple of great guys that stopped posting back in 2001). He doesn't write much anymore, but what little he does write is worth following every day. It can be found here following the notation RS View.

He has been on the trail for about 10 years longer than I have. And when the systemic phase transition didn't happen as expected (and thank goodness it didn’t, otherwise I wouldn't be here nor would I have any gold), he started looking for signs in the international monetary realm as to any kind of a sweeping plan. And he found the signs he was looking for! Much has been evolving in the IMFS over the last decade. The signs are everywhere! (I think Costata has been working up a list.)

Anyway, starting around 2005, many international policy stirrings gave Randy every indication that 2010 was to be the targeted year for assertively rolling forth the Freegold paradigm. But the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" – one does not dare rock the boat (if there remains any choice in the matter) when the financial waters have become so turbulent and choppy.

As for a new timeframe, Randy is seeing good indications of a mid-2013 benchmark. Of course he is also cognizant, as are the central bankers, that any number of potential and unplanned events could force the transition at literally any moment. Luckily, for the most part, things are already in place. Which begs the question, is your gold already in place? And with this background, here is Randy's week ending post from last Friday.

[News & Views -- main page]

The beginning of the End of Dollar Hegemony

by Randall Forsyth
Friday December 17, 2010 (Barron’s) — When the monetary history of the year coming to an end is written decades from now, the headlines of European debt crisis and Federal Reserve’s adoption of QE2 may turn out to be mere footnotes to the bigger story: 2010 could be a watershed marking the beginning of the end of the dollar-based, Western-centric monetary system.

… This year, the idea of reform was advanced by World Bank President Robert Zoellick, who proposed in a widely read and commented-upon Financial Times op-ed piece “a cooperative monetary system that reflects emerging economic conditions.” That would include the dollar, the euro, the yen, the pound and the renminbi — plus gold “as an international reference point of market expectations about inflation, deflation and future currency values.”

Zoellick’s November commentary followed the outbreak of the so-called “currency wars,” as Brazil’s finance minister dubbed the tensions in the foreign-exchange markets resulting from Fed’s liquidity expansion through the purchase of $600 billion of Treasury securities, dubbed QE2, for the second phase of quantitative easing. The downward pressure on the dollar from the surfeit of greenbacks was viewed by finance officials abroad from Asia to Europe as well as Latin America as tantamount to a competitive devaluation to boost the U.S. economy while beggaring its neighbors.

… Dissatisfied with the options of the dollar or the euro, the ascendant economic powers are essentially cutting out these middlemen. Just Wednesday, Micex, Russia’s largest securities exchange, began trading in the ruble vs. the Chinese renminbi. It was largely symbolic given the volume traded was equal to about $700,000. More importantly, Russia and China have agreed to settle their bilateral trade of about $50 billion in their respective currencies.

That means Chinese importers don’t need to obtain dollars to buy oil from Russia. Nor does Russia need greenbacks to buy Chinese goods.

[RS Note: Think about this for a good long while...]

… Because the rest of the world uses the dollar for transactions and a store of value, the U.S. has been able to take advantage of that. Indeed, the greenback is America’s most successful export.

So, Americans get the goods, allowing us to consume more than we produce, simply because the rest of the world wants our paper. …… American ingenuity produced triple-A mortgage-backed out of subprime loans, which dollar holders around the globe eagerly scooped up.

These foreign dollar holders are funneling their funds into Treasury securities, effectively funding the U.S. budget deficit. But they’re not doing it as willingly as before.

… None of this suggests that the dollar is about to be toppled from its perch as the premier global currency in 2011. Strains in the original Bretton Woods system were evident long before President Nixon abrogated the promise to redeem dollars for gold at $35 an ounce for foreign monetary authorities on Aug. 15, 1971. Even then, the floating exchange-rate system didn’t come into being fully until 1973.

… How long this process goes on depends on the availability of alternatives to the dollar.

… The demand for dollars from the rest of the world has been of inestimable benefit to the U.S. economy. It quite simply allows Americans to consume more than they produce and save less than they invest; in other words, to live beyond our means. The dollar’s dominance will not be toppled in 2011 but will wane over the coming decade and beyond. And America will have to start picking up the tab for what had been a free lunch.


RS View: For the wealth-preservation minded individual, the important question centers upon this comment made in the article: “How long this process goes on depends on the availability of alternatives to the dollar.”

Frankly, the answer is surprisingly simple, and the preparatory timeline is surprisingly short.

As evidenced in the commentary about the new trade arrangements between Russia and China, it should be obvious and intuitive that bilateral trade between any two given countries could be similarly invoiced in their respective currencies. The timeline is effectively zero given that these currencies already exist and are in local use. At issue, mostly, is the simple matter of breaking with mere tradition — the habit of invoicing/contracting in this third party currency, the dollar. Given the suitable functionality of most national currencies for the invoicing/payment of their bilateral trade, there is no need for the world to spend time and effort conjuring up a new supra-national currency unit to replace the dollar as a universal invoicing agent.

With invoicing/payment alternatives ready and waiting, the only other aspect of usage in the dollar’s international role is that as a reserve currency — that is, as a store of value.

Store of value is a significant element because at the end of any given trade cycle (monthly or annually for example) a nation actively trading with its international peers as described above will inevitably end up with a net position in various foreign currencies. It becomes a matter of national importance to consolidate those paper positions into a more reliable form that is not dependent upon the fiscal policies and monetary management skills of your international trading partners. It is the form of asset chosen for this consolidation of the net position that embodies the “store of value” function from one trade cycle to the next and beyond.

But as this article points out [see the article link to read more than the few excerpts above], “Since 1973, the dollar has been unanchored and has been anything but a stable store of value.” Gold, on the other hand, serves this role uniquely well because it resists the degrees of artificial inflation and depreciation commonly afflicting national currencies driven by naturally self-centric national management.

The central banks of the world, throughout their long history, have more or less developed the requisite infrastructure and ample experience in the fine art and science of gold storage and allocation transfer. Therefore, not only is an alternative to the dollar available for the store of value role, it is readily available with no significant timeline to accommodate the practice. To be sure, many central banks have already in place the mark-to-market accounting structure to accommodate (and benefit from) the significant upward revaluation of gold reserves as would be expected to occur through the dollar-to-gold transition.

Various policy signs over the past several years had indeed pointed toward 2010 to be the watershed point in the international monetary transition, but the depth of the current commercial banking crisis likely argued strongly for a delay under the thought that calmer waters would facilitate a better transition. As such, the existing infrastructure and policy is largely in place at the present time, so a timeline for this store of value transition can be every bit as short as that for invoicing — essentially, no time needed for flipping the switch.

But in light of the current crisis and some of the policy efforts underway to restore calm to the commercial markets, it looks to me that the new timeline for significant transitions is mid-2013 consistent with the current policy talks driving the permanent European Stability Mechanism to that timeframe, but with that said, it could be set into motion at any given moment between now and then, and between your breakfast one day and breakfast the next. Hence, it is best that you work to actively establish your desired gold position without undue delay, and then with peace of mind you can turn your full attention to the business of living your life as it was meant to be. Spending significantly further time obsessing over currencies and investments is a fool’s errand.


The bottom line is that silver could do anything short term. The essence of the message here is that silver is not gold's trusty sidekick or heir apparent. The silver price could go up or down, but silver is not part of the Freegold transition. Only time will prove this one way or another. In the interim, here's some more music.


Friday, December 17, 2010

Focal Point: Gold

In game theory, a focal point (also called Schelling point) is a solution that people will tend to use in the absence of communication, because it seems natural, special or relevant to them. The concept was introduced by the Nobel Prize winning American economist Thomas Schelling in his book The Strategy of Conflict (1960). In this book (at p. 57), Schelling describes "focal point[s] for each person’s expectation of what the other expects him to expect to be expected to do." This type of focal point later was named after Schelling.

Consider a simple example: two people unable to communicate with each other are each shown a panel of four squares and asked to select one; if and only if they both select the same one, they will each receive a prize. Three of the squares are blue and one is red. Assuming they each know nothing about the other player, but that they each do want to win the prize, then they will, reasonably, both choose the red square. Of course, the red square is not in a sense a better square; they could win by both choosing any square. And it is the "right" square to select only if a player can be sure that the other player has selected it; but by hypothesis neither can. It is the most salient, the most notable square, though, and lacking any other one most people will choose it, and this will in fact (often) work.

Schelling himself illustrated this concept with the following problem: Tomorrow you have to meet a stranger in NYC. Where and when do you meet them? This is a Coordination game, where any place in time in the city could be an equilibrium solution. Schelling asked a group of students this question, and found the most common answer was "noon at (the information booth at) Grand Central Station." There is nothing that makes "Grand Central Station" a location with a higher payoff (you could just as easily meet someone at a bar, or the public library reading room), but its tradition as a meeting place raises its salience, and therefore makes it a natural "focal point." [1]

Salience: the state or quality of an item that stands out relative to neighboring items.

There are two simple, but seemingly, apparently impossible-to-comprehend concepts. The first concept is why money not only can be split into separate units for separate roles, one as the store of value and the other to be used as a medium of exchange and unit of account, but why it absolutely must and WILL split at this point in the long evolution of the money concept. This means no fixed gold standard, or any system that attempts to combine these units/roles into one, making easy money "less easy" and hard money "less hard." And by "must" I do not mean that we must do this, I mean that it is happening today whether we recognize it or not.

And the second concept, once the first is understood, is how and why gold and only gold will fill the monetary store of value role. Not gold and silver. Not precious metals. Just gold. People often ask why I don't mention silver. They assume that when I say gold I really must mean gold and silver, or precious metals. So let me be clear. When I say gold, I mean gold and only gold.

Money's most vital function in our modern world is lubricating commerce, or more specifically, keeping the essential supply lines flowing – supply lines that bring goods and services to where they are needed. Without it we would be reduced to a barter economy, eternally facing the intractable "double coincidence of wants." This is the problem whereby you must coincidentally find someone that not only wants what you have to trade, but also, coincidentally, has what you want in return. And in the modern world of near-infinite division of labor, this would be a disaster. [2]

So we need money, and lots of it. In fact, we need money in unrestricted amounts! (I'll bet you are surprised to see me write this!) Yes, I said it, we need unrestricted money in order to fulfill this most vital function in our modern society – lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.

Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.

For this reason, the money used as a store of value must be something completely separate and different from the medium of exchange. It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. You may be starting to encounter my thrust. Expand… and expand. Unrestricted by artificial constraints.

Compare this concept to a gold standard in which you fix the value of gold to the dollar at, say, $5,000 per ounce. The assumption is that this is where the price of gold will stay for a long time, if you manage the system properly. So what is the result? You artificially constrain the expansion of the medium of exchange fiat currency while also restricting the value expansion of the store of value. You are locking the two together. Do you think this works and makes sense?

I said we need unrestricted money in order to ensure the lubrication of the vital supply lines in our modern world. This is it. This is what really matters. If we have a major monetary and financial breakdown, what do you think will be the worst consequence? Do you grow all of your own food? Do you make – or know someone who does – all of your own stuff? How long could you survive without any stores? Do you trust your government to be sufficiently prepared to take care of you with no supply lines flowing?

Have you ever stretched a rubber band until it breaks? You can feel the resistance grow gradually and observe the smooth thinning of the band until finally it loses its continuity and the two parts snap back stinging your fingers. A tiny observer of this exercise, perhaps a flea resting on your thumb (or an economist), one who doesn't really understand rubber bands, might swear that it could be stretched forever. The smooth change in the stretching rubber gives little warning of the abrupt (sometimes painful) deformation that is coming.

This is where we are today. The dollar standard is like a stretched rubber band. It has been stretched and stretched, but it cannot provide the unrestricted money that we need today. They think it can. And that's why they are spewing it out in quantitative easy money boatloads. But it's not the right money. As I said above, we need the right money in order to perform this seemingly impossible task.

That resistance you feel is the artificial restraint built into the dollar system. It appears to be infinitely expandable, but it is not. It is just like the rubber band. Oh sure, you can print all the dollars you can imagine, to infinity and beyond! But it won't work. It won't do the most vital job, beyond a certain point. And yes, we are beyond that point.

I want you to imagine a tiny micro economy. Just two guys stranded on a tiny island. Let's call the guys Ben and Chen. They have divided the island in half and each owns his half. They each have a tree which bears fruit and three tools for fishing, a spear, a net and a fishing pole. For a while they both fished often. Fish were the main trade item between Ben and Chen. Sometimes Ben would take a vacation from fishing and Chen would provide him with fish to eat. Other times Chen would take a break.

But after a while Ben got lazy, and Chen got tired of giving Ben free fish to eat. At first they used sea shells as money to keep track of how many fish Ben owed Chen. Then they switched to leaves from the tree. Finally they just broke a stick off the tree and drew little lines in the sand. If Chen gave Ben a fish, Ben drew (issued) a line in the sand on Chen's side of the island. There were only two of them, so it was easy to avoid cheating.

These lines sort of became Chen's bank account. Each one represented the debt of one fish that Ben owed to Chen. But after a while they started adding up, and Chen worried that he would never get that many fish back from Lazy Ben. So Chen cut a deal with Ben. Chen said he would keep accepting lines drawn in the sand for fish, but he wanted to be able to use them to purchase some of Ben's other stuff (since Ben didn't like to fish).

At first he used them to purchase fruit from Ben's tree. But after a while the pile of fruit just rotted on Chen's beach. Next he started purchasing Ben's tools. First the spear, then the net and lastly the fishing pole. But at this point Chen realized that Ben would NEVER be able to repay those fish without his fishing tools. So Chen rented them back to Lazy Ben.

Of course Ben was still lazy, and now he owed rent on top of the fish he already owed. The lines in the sand grew even more rapidly as lines were added to pay for rent even when Chen hadn't given Ben a fish. Then Ben had a great idea. Why even go through the charade of selling the fishing pole and then renting it? Ben could just sell Chen some "special lines" which had a "yield." For ten one-fish lines, Chen could buy a special "bond" that would mature into 11 lines in a year's time. They tried this for a while, but all that happened were more lines in the sand. So many lines! Nowhere to walk. Chen's "bank account" was taking up all of his real estate!

Finally Chen had had enough. He called Ben over and said, "Okay, since you refuse to fish for yourself, let alone to pay me back, I want to use these lines to buy some of your gold coins." Oh, did I mention that Ben had a treasure chest of gold coins that had washed ashore? Of course these gold coins were the last thing that Chen wanted, because what good are gold coins on a tiny island with only two inhabitants?

But actually, they turned out to be an excellent record of the debt Lazy Ben owed to Chen the fisherman. You see, at first, Chen bought half of Ben's gold with the lines he had already accumulated, transferring his "bank account" over to Ben's side of the island and consolidating his "wealth" into gold. It worked out to 100 lines for one gold coin, or 100 fish per ounce.

But after a while, Ben realized that he was running out of gold. He knew it would only be a short matter of time until he ran out, so he closed the gold window. And once again, Chen started accumulating lines and special yielding "bond" lines. Finally, they agreed that the value of the gold coins had to be raised higher than 100 fish per ounce. Ben suggested 500/oz., but Chen saw the short-sighted flaw in his thinking. So Chen said that the value of ounces should float against the number of lines issued by Ben. This way, Ben would never run out of gold, and his lines would always and forever be exchangeable for gold coins. Finally, a sustainable accounting system!

Now I do realize the glaring flaws in this analogy I cobbled together. So spare me the critique. It is far, FAR from perfect. But it does help with a few good observations.

First, the lines in the sand and the gold coins are both money on this island. One is the medium of exchange/unit of account and the other is the store of value. The store of value is quoted at any given time in units of lines, but its value floats, it is not fixed, so it never runs out. This method of accounting forces Lazy Ben to part with something more substantial than simply issuing more lines via line-yielding "special bond lines."

In this case it was the accounting of transactions between a consumer and a producer. But it works just as well between any two actors with unequal levels of production and consumption. Some people just produce more while others can't stop consuming. I'm sure you know a few of each type.

Also, notice that gold coins and lines in the sand both represent the debt owed from Ben to Chen. And with gold, Chen can wait forever to be paid back (which, on this island, is quite likely). The gold doesn't spoil, and Chen's possession of it doesn't interfere with Ben's ability to fish or eat fruit. But notice also that the more lines in the sand that Ben issues, the more the value of the gold (representing a debt of fish) rises. So the longer Ben runs his trade deficit, the more debt he owes for each ounce of gold that Chen holds.

This is not so dissimilar to the special bond lines, with a few notable differences. The bond values are not only quoted in lines, they are also denominated in lines. So the principle amount paid for the bonds drops in value as more lines are issued to lubricate the vital trade. To counteract this "inflation," interest is paid by drawing more lines without the reciprocal delivery of fresh fish. But these additional "free" lines also dilute the value of lines, which leads ultimately to infinity (or zero value) in a loop that feeds back on itself.

The more fish Chen supplies to Ben, the more lines he receives, the more bonds he buys, and the more lines he receives in service to interest. Eventually Chen will be receiving two lines for each fish, one for the fish and one for the interest. And then three, and then four. And so on. Wouldn't you rather just have one gold coin that floats in value? I know Chen would.

Another observation is that the medium of exchange on our island devolved into the most insignificant and easy to produce item. A simple notation in Chen's "account." Is that so different from what we have today? And Ben could issue them with ease as long as Chen let him. Once Chen had so many lines, he wasn't about to just abandon the system, was he? Wipe the (beach) slate clean? No, Chen wanted to get something for his lines. Something compact that didn't interfere with Ben's ability to work off his debt should he ever decide to do so. Something durable. Something physical from Ben's side of the island. Something… anything other than those damn-stupid lines!

I hope that this little analogy helps you visualize the separation of monetary roles, because those talking about a new gold standard are not talking about this. I understand that sometimes you have to speak in terms familiar to your audience in order to not be tuned out, but I also hope that my readers come to understand how and why a new gold standard with a fixed price of gold, no matter how high, will simply not work anymore.

The full explanation of why it will not work is quite involved, and I'm not going to do it here. But the short answer is that the very act of defending a fixed price of gold in your currency ensures the failure of your currency. And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It is the act of defending your currency against gold that kills your currency.

You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail. Your currency will fail. Slowly in the past, quickly today. If you set the price too high you will first hyperinflate your currency buying gold, but you won't get much real gold in exchange for collapsing the global confidence in your currency, and then you will have to empty your gold vaults selling gold (to defend your price) as your currency heads to zero. And do you think the world trusts the US to ever empty its vaults? Nope. Fool me once…

If you set the price too low, like, say, $5,000/ounce, you will first expose your own currency folly with such an act and have little opportunity to buy any of the real stuff as the world quickly understands what has gone wrong and empties your gold vaults with all those easy dollars floating around. You will sell, sell, sell trying to defend your price, but in the end, the price will be higher and you'll be out of gold. Either that, or you'll close the gold window (once again), sigh, and finally admit that Freegold it is.

Yes, the gold price must… WILL go much higher. The world needs MONEY! And by that, I mean recapitalization. Unfortunately the dollar is not the right money. And printing boatloads of it will no longer recapitalize anything. Today we are getting a negative real return on every dollar printed. That means, the more you print, the more you DEcapitalize the very system you are trying to save. Less printing, decapitalized. More printing, decapitalized. Freegold… RECAPITALIZED. Yes, it's a Catch-22, until you understand Freegold.

There Can Only Be One

A "focal point" is the obvious, salient champion. But for many reasons, some things are not as obvious as we would think they should be. Mish ended his recent post, Still More Hype Regarding Silver; Just the Math Maam, with the following disclosure:
As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years.

Now is it just me, or did he say that because gold is money, he is long both silver and gold?

Here's another one from a recent article on Zero Hedge:
Part 3. People lie…..

“…I want to make it equally clear that this nation will maintain the dollar as good as gold, freely interchangeable with gold at $35 an ounce, the foundation-stone of the free world’s trade and payments system.”
-John F. Kennedy, July 18, 1963

“That we stand ready to use our gold to meet our international obligations–down to the last bar of gold, if that be necessary–should be crystal clear to all.”
-William McChesney Martin, Jr. (Federal Reserve Chairman) December 9, 1963

Lesson: When someone says you can exchange paper for precious metals – make the swap before they change the rules.

Whoa. Wait. Did he just take two quotes about monetary gold and extend the lesson to all precious metals? Is this right? Should we all be assuming that "gold" always means "precious metals?"

According to Wikipedia:

A precious metal is a rare, naturally occurring metallic chemical element of high economic value, which is not radioactive… Historically, precious metals were important as currency, but are now regarded mainly as investment and industrial commodities…

The best-known precious metals are the coinage metals gold and silver. While both have industrial uses, they are better known for their uses in art, jewellery and coinage. Other precious metals include the platinum group metals: ruthenium, rhodium, palladium, osmium, iridium, and platinum, of which platinum is the most widely traded.

The demand for precious metals is driven not only by their practical use, but also by their role as investments and a store of value. Historically, precious metals have commanded much higher prices than common industrial metals.

Here's how I read the above description. Precious metals have a high economic value. But because of investment demand, they also tend to have a price higher than it would be on its industrial merits alone. Gold and silver carry some additional sentimentality for their past coinage. In other words, precious metals are industrial commodities with an elevated price due to levitation from investment demand. Fair enough?

Now to understand Freegold, I think there are two issues that need to be addressed. The first is the difference between money, or a monetary store of value, and an industrial commodity levitated by investment demand. And the second, once the first is understood, is whether silver belongs in category with gold as money, or with platinum as an elevated commodity. You see, the very key to understanding Freegold may actually lie in understanding the difference between gold and silver with regard to their commodity versus monetary wealth reserve functions.

So from here, I will explore the valuation fundamentals of money versus levitated commodities. And then I will explore the history of silver as money and ask the question: Is silver money today?

First, money. Money is always an overvalued something. Usually a commodity of some sort. But it can be as simple as an overvalued line in the sand, or a digital entry in a computer database. But the key is, it is always overvalued relative to its industrial uses! That's what makes it money! If it was undervalued as money, it would go into hiding, just like Gresham's law says, be melted down, and sold for whatever use valued it higher than its monetary use.

It is fair to also say that commodities levitated by investment demand are overvalued in a similar way. But there are a couple of important differences. First is that all of our experience with commodity markets during currency turmoil happened while the two naturally-divergent monetary functions (the spur and the brake) were rolled into one unit, namely the dollar. This left only the commodity markets as an escape. Second is that monetary overvaluation usually has official support while commodity overvaluation often has government disdain.

There is this idea out there that if you have a paper investment market for a commodity that is larger than the physical units backing it (fractionally reserved, so to speak), that the commodity's price must automatically be suppressed by the market. This is simply not true unless we are talking about money masquerading as a commodity.

A paper market brings in investment demand and leverage (borrowed money), two levitating factors that would simply not be present if the paper market disappeared. And these two factors, "the speculators," can take a commodity's price well into overvalued territory. Just look at oil for an example. Even the sellers of the physical stuff say they prefer a lower price than right now, not to mention during the all-time high in 2008.

You'd think the sellers of a physical commodity would love a higher price driven by speculators. But they don't, because it is only a real price if all the investment participants have a real use for, and ability to take possession of, your physical commodity. Otherwise it's just a casino.

Back to the Zero Hedge piece:
At today’s prices, a million dollars in gold weighs less than fifty pounds, but a million dollars in silver weighs more than 2,300 pounds! So ask yourself, how many rich people are storing their own silver? How many hedge funds hold physical silver in their own storage facility?

Cool! So a million in gold only weighs 50 lbs.? Sounds like low storage fees and easy delivery! 2,300 lbs. for silver? Wow, that sucks. How many rich people are taking possession of their silver? Not many, I'd guess.

To be honest, I really don't know if silver is overvalued or undervalued today at $30/ounce. But if you are counting on the industrial fundamentals of silver for your moonshot like the Zero Hedge article is, or on a busted paper market like the "vigilantes," you may be in for an unpleasant surprise. The same fundamental arguments that are used today were also used back in 1982. [3] In gold, at least, we know that jewelry demand rises and falls opposite the price of gold. [4] But then again, gold is money, right? So, is silver still money?

Easy Money

Silver was certainly used as money in the past. So why not again today? Maybe the people will rise up and demand silver money! Maybe China, or somebody else, will remonetize silver and start a new silver standard, right? After all, China was the last to use a silver standard.

I don't mean to pick a fight with silver. In fact, I write this post with a heavy heart. But there is so much silver hype right now that I feel I owe it to my readers to at least try to spell out Another perspective. And China is certainly on the minds of the silverbugs these days. How often have we heard about China encouraging its citizens to buy gold and silver lately? (There's that "gold and silver" again.)

But did you know that China was practically dumping its silver a decade ago? And to this day it is still a large exporter of silver. Not gold. Just silver. In 2009 China exported 3,500 tonnes of silver. That amount will probably be cut in half for 2010. The drop is due to increases in both industrial and investor demand, but also due to China's recent move to stem the shipment of all natural resources leaving its shores.

I'm sure many of you know that China was the last country on Earth to end its silver standard back in 1935, in the middle of the Great Depression. But do you know why? And would China ever want to start a new silver standard? Does it make any sense now that they've sold most of their silver? And what has changed since 1935 that would make them want to go back?

Something very interesting happened after Jan. 30, 1934 when Roosevelt devalued the dollar against gold. The price of gold went up 70%. What do you think happened to silver? Did it go up more than gold? Did it shoot the moon? Was it leveraged to gold? No, it dropped like an unwanted rock.

In response to the falling price of silver, on June 19, 1934 (four and a half months later) the U.S. Congress approved the Silver Purchase Act of 1934 which authorized President Roosevelt to nationalize silver holdings (to buy silver). This decision resulted in an increase in the world price of silver, which forced China to abandon the silver standard in November 1935.

The US Silver Purchase Act created an intolerable demand on China's silver coins, and so in the end the silver standard was officially abandoned in 1935 in favor of the four Chinese national banks "legal note" issues.

Remember what Mundell wrote (See Mundell in The Value of Gold). The use of a commodity as money is the overvaluing of that commodity for profit by the monetary authority. When the US started buying commodity silver on the open market (to prop up the price artificially) the Chinese people found it was better to sell their silver coins for melt value than to use them in commerce for face value (which was lower than melt).

This effect to China's base money (silver) in 1934 was similar to what the US felt in 1933 and 1971 with gold. The main difference being that the demand for silver in 1934 was artificial (from one single entity, the US govt.) while the demand for gold has always been real, global and market-driven. This price supporting move (not unlike the Agriculture Adjustment Act and other destructive price control measures) by the US caused the "Shanghai Financial Crisis" which lasted from June 1934 until November 1935, finally ending in Currency Reform on Nov. 4, 1935.

So, in 1934, the US govt. wanted to devalue (set the price of) the dollar against gold and silver. In order to do so, it had to influence the market of each. For gold, it had to inflict capital controls internally and sell gold externally at the new higher price. For silver, it had to BUY silver at the new higher price. Sell gold, buy silver. The same exact thing that happened 45 years earlier with the Sherman Silver Purchase act of 1890.

Pushed by the Silverites, the Sherman Silver Purchase act of 1890 increased the amount of silver the government was required to purchase every month. It was passed in response to the growing complaints of farmers and mining interests. Farmers had immense debts that could not be paid off due to deflation caused by overproduction, and they urged the government to pass the Sherman Silver Purchase Act in order to boost the economy and cause inflation, allowing them to pay their debts with cheaper dollars. Mining companies, meanwhile, had extracted vast quantities of silver from western mines; the resulting oversupply drove down the price of their product, often to below the point where it was profitable to mine it. They hoped to enlist the government to artificially increase demand for, and thus the price of, silver.

Under the Act, the federal government purchased millions of ounces of silver, with issues of paper currency; it became the second-largest buyer in the world. In addition to the $2 million to $4 million that had been required by the Bland-Allison Act of 1878, the U.S. government was now required to purchase an additional 4.5 million ounces of silver bullion every month. The law required the Treasury to buy the silver with a special issue of Treasury Notes that could be redeemed for either silver or gold.

That plan backfired, as people turned in the new coin notes for gold dollars, thus depleting the government's gold reserves. After the Panic of 1893 broke, President Grover Cleveland repealed the Act in 1893 to prevent the depletion of the country's gold reserves. [5]

To "set the price" of anything, you must either buy or sell that thing. Governments cannot just "set" prices. Whenever they try, the items just disappear or go into hiding. If the price you set is lower than the value, then you will have to sell. If the price is too high, you will have to buy. More from Mundell:
"[In the 1870s] France pondered the idea of returning to a bimetallic monetary standard, but with American production of silver going up and Germany dumping silver as the new German Empire shifted to gold, France realized it would have to buy up all the excess silver in the world on its own."

So... if your standard is going to overvalue something, you must buy it. If you undervalue something, you must sell it. And what was the US doing with gold throughout the entire Bretton Woods system? That's right, it was SELLING gold through the gold window. So it wasn't the gold that the US monetary authority was overvaluing for profit. It was the cotton-pulp paper in the FRNs! Cotton pulp! That's the overvalued commodity today!

Remember what Another wrote? "Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!"

Why do you think you need a stockpile of gold to start a gold standard? In the case of France in 1870 above, they realized they would have to buy all the excess silver in the world to keep a silver monetary standard. You don't need a stockpile to do that! Yet you don't need to worry about buying all the gold to have a gold standard. You need to be prepared to SELL! That's why you need a stockpile. So what's the difference?

Could it be that silver is only a commodity today (and for the last 150 years at least) and because of this, any monetary use is not backed by the free market? Any silver standard is an unnatural levitation requiring BUYING of silver by the monetary authority. While a gold standard gives the free market what it really wants, gold, requiring SELLING of gold by the monetary authority.

Can you find an example where the opposite occurred? Can you show me where a government ever had to buy gold and sell silver (at whatever price or ratio) in order to maintain its system?

The US quit bimetallism during the Civil War, prior to the Silverite movement. [6] This ended the government's "overvaluing" of all silver for use in money. After the Civil War, there was a difference between commodity silver (what the miners dug up) and monetary silver (overvalued silver in US coins) because in order for the US to sustain bimetallism (or a silver standard) it would have had to value (buy) ALL the excess silver in the world at the overvalued price of the coins.

This meant it would have to BUY any and all commodity silver that was offered for sale (to prop up the price). You see, silver needs its price propped up (huh? why?) while gold appears to need its price suppressed (see: The London Gold Pool). So rather than actually "valuing" silver, the government compromised with the Silverites and agreed to buy a specified quota of commodity silver. At least it did until it ran out of gold in 1893. Something must have been wrong with that 16:1 ratio in the 1800s, huh?

70 years later, when the price of commodity silver finally overran the value of the coins in 1964, it was because of cotton-pulp printing (inflation) only, not global monetary demand! This is exactly how commodities act. They respond directly to monetary inflation until the commodity value overruns the face value.

So it seems that the free market wants to exchange its "money" for gold. But "the people" (at least in the late 1800s) wanted silver to be money. They wanted to SELL their silver to the government while the government SOLD its gold to the market. This is a one-way flow that tends to end in a vault full of silver with no gold. So why did the US Government intervene in the silver market and support this folly?

The government caved primarily because of politics (pressure from the Silverites – the farmers and miners out west), and tradition secondarily (past use of silver as money, the US Constitution, etc.). Politically, "the people" will always want easy money. And silver was their easy money of the day.

Price deflation in the late 1800s was hurting the farmers. The farmer business cycle is seasonal. Borrow money for equipment and seeds to plant in the spring. Then grow your product. Then harvest and sell in the fall and pay off your debt with the proceeds.

The effect of causing an inflationary environment through "easy money" means that it is A) easier to pay off your debt in the fall than it was in the spring (or the year before), and B) you get more money for your crop than you did last year. The effect of a deflationary environment is the opposite. Your debt gets harder to pay and you get less money for your crop. It's the same for all businesses actually. But farmers were a big political group in the 1800s that were all roughly on the same business cycle.

This bears repeating: "The people" wanted silver back then (late 1800s) because it was the "easy money" of the time. "The people" NEVER want harder money. Today silver would be harder money, so it will never have the support of "the people" (other than the silverbugs). 16:1 was quite obviously an artificial monetary ratio, because whenever they maintained it, there was a run on the gold. The market wanted to push the ratio much wider, and the government, in service to "the people," fought that market force.

Today silver would be "harder" money than cotton-pulp. This is why there will NEVER be a big enough political movement of the people that will bring back a silver standard. We have now discovered easier money than silver!!!

If you want harder money, it's gold. If you want easier money, it's cotton-pulp. So where does silver fit in? Well, it's just another industrial commodity with a lingering sentimental mystique as the old "easy money."

And where does gold fit in? Freegold of course! The monetary wealth reserve as demonstrated by the Central Banks of the world!

So what if gold really is the wealth reserve of choice for the giants that A/FOA said it was? That means silver is nothing but an industrial commodity today, being somewhat levitated by the lingering hype. What if silver is just a commodity, like copper or oil?

Monetary value is a self-supporting, self-sustaining levitation. Money is the bubble that doesn't pop. The price of money is arbitrary. Not so with commodities.

So... is silver really money today? I know gold is. Here's the evidence:

Does anyone have any evidence that silver is still money today?

Yes, I am aware that the stock of silver is disappearing into our landfills. These "properties" of silver have been with the metal since the early 80s, through decades of single-digit prices. [3] So, is jacking the raw materials from industry and holding them hostage for ransom at a higher price the real play today? (Hint: this tactic often ends badly for the speculator.) Or is the real play front running the new global monetary wealth reserve during a transition in our international monetary system?

Here's one silverbug who is starting to put two and two together! I think he might also be reading FOFOA. ;) (Hi Joe. I think you are confusing me with FOA in your video. But that's okay, it's a wonderful compliment to me! Tip to others: If you mention me in a video include a link in the description and I might just find your video.)

[UPDATE: Since Joe took down all his old silver videos, including this one, I decided to fill this slot with this fun retrospective.]

Did you hear him at 6:35? "Only one metal in the world that fits the bill for money, and that's gold!" That's right Joe! Good job from the "Silverfuturist". There can be only one! Did you see my subheading? And please read the description of a "Focal Point" again. It's the first thing in this post. Can you put two and two together like Joe?

I don't write about silver very much. Just like I don't write about copper or pork bellies. But, in fact, I have addressed many of the standard arguments for silver over gold in various comments on this blog and others. I'm sure someone will dig them out again and post links as people pose these arguments once again in the comments. But here's a new one.

One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this.

So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation.

So as you contemplate which commodity will be the monetary focal point of the future, I'll leave you, as I often do, with a little music.


I've paid my dues
Time after time
I've done my sentence
But committed no crime
And bad mistakes
I've made a few
I've had my share of sand kicked in my face
But I've come through

We are the champions, my friends
And we'll keep on fighting - till the end
We are the champions
We are the champions
No time for losers
Cause we are the champions - of the world

I've taken my bows
And my curtain calls
You brought me fame and fortune and everything that goes with it
I thank you all

But it's been no bed of roses
No pleasure cruise -
I consider it a challenge before the whole human race
And I aint gonna lose -

We are the champions - my friends
And we'll keep on fighting - till the end
We are the champions
We are the champions
No time for losers
Cause we are the champions - of the world

[1] Focal Point – Wikipedia
[2] A brilliant piece on the complexity of today's division of labor and supply chains: A Capital Paradox by John Butler
[3] Silver Bulls, Silver Bulls: It's Celebrating Time In Precious Metals Bob Prechter reveals how today's silver boom is similar to that of 1980
[4] Gold Jewelry Demand
[5] Sherman Silver Purchase Act
[6] Bimetallism
[7] Congratulations to King's Highway!