Saturday, April 23, 2011

Deflation or Hyperinflation?


Chapter 84 – Bond salesmen's propaganda that "a dollar is a dollar" should be rewritten to say "a dollar is 3¢"

Since most ordinary people, bankers, and company presidents have never studied currency theory, they swallow it hook, line, and sinker when the bond salesmen tell them, "a dollar is a dollar." That piece of propaganda should be rewritten to say "a dollar is 3¢." The nominal dollar is officially worth no more than 14¢ of its 1940 value, unofficially only 3¢.

If computed in 1940 constant dollars, not more than $1,380 exists of the US $46,000 per capita gross public and private debt. More than $44,628 has been destroyed by inflation. But sadly, the owners of this debt do not want to hear about it. They do not wish to know that bonds are issued by governments with the sole purpose of debasement.

To my knowledge, no government in history has paid its debts in currency equal to the purchasing power of the currency lent to them. The people always lose their money on bonds.

It angers me. Bond salesmen should be thrown into the East River.


-The above was written in 1985 by Dr. Franz Pick, in the book "The Triumph of Gold" sent to me by one of my readers. The photos are from Time Magazine.


The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life's necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:

There is a quote I like that comes from Le Metropole Cafe. It goes, "we will have deflation in everything we own, and inflation in everything we use". This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. "We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."

My latest post on this subject was called Big Gap in Understanding Weakens Deflationist Argument in response to Rick Ackerman's "Big Gap in Logic Weakens Hyperinflation Argument". Rick also received responses from Jim Willie and Gonzalo Lira. Last week, with regard to Lira and Willie, Rick reported to his readers in "Rick's Picks":

I’ve concluded there is little to gain arguing on the one hand with a guy who turns rabid whenever someone contradicts him, even in a friendly way; and on the other, with a preening narcissist who comes to argumentation in the same state of sexual arousal that Jeffrey Dahmer must have experienced hovering over the fresh corpses of teenage boys. These guys are bad news, as lacking in civility and manners as buzzards in a scrum, and you’d do well to avoid them both. You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web.

I would first like to thank Rick Ackerman, and to also acknowledge his perspicacity in this particular regard. And because he has demonstrated such a discerning acumen in his preference for hyperinflationists (among other things), I will try, once again, to help him see the way. As our own Blondie likes to say (and I paraphrase for clarity), "you don't own your baggage, it owns you." Here is Rick's baggage, in his own words:

My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.

Rick repeats what he calls "C.V. Myers' dictum" quite often in his deflation-oriented posts: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” I'm going to go out on a limb here and say that this dictum is Rick's baggage, his foundational deflation premise, in a nutshell. And it leads him to his "bottom line" or his analytical conclusion:

Rick's Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.


In this post I will explain the flaw in Myers' dictum. I will go into great detail as to why the missing component in the dictum is the essential (and inevitable) one. I will show how this one flaw in Rick's premise sends his otherwise excellent analysis careening 180 degrees in the wrong direction (with regard to the subject of this post). And I will explain the proper frame of reference from which to view what I am describing. How's that for a kick-off?

First Myers' dictum. “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Rick: "Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit." Me: Yes, someone will pay. But there is a third option that is missing from Myers' dictum. "The hit" can be socialized:

"Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…"

"…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!"


(The quotes are from FOA on Hyperinflation and FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios respectively.)

As many of you know, I came to this debate, with no baggage and no hard opinion, in 2008. And in the "doom and gloom internet community" where I arrived there was definitely an equal helping of both deflation and inflation/hyperinflation talk. Most of it I found less than convincing (on both sides). The "deflation side" is actually bigger than you might think. Most of the peak this or peak that crowd, the majority of the survivalist community, and the Great American Collapse people are all expecting a sort of grand deflation, whether they understand the arguments or not.

If you want to think of a grand deflation as a deflating—or grand contraction—of economic activity that was previously "energized" by massive trade deficits, massive credit expansion, and the massive structural malinvestment that flows from those easy money expansions, well then I too am expecting a sort of grand deflation, in many of the same ways they are. But one thing I have learned from the writer that made the most sense to me, the writer that I found most convincing from within my "past baggage" vacuum, is that "deflationists" as a group still have a big gap in understanding.

Rick became a deflationist in the 1970s by his own account. And he certainly wasn't alone. I wasn't even aware of the existence of such a debate in the 1970s let alone 2007, so I can hardly add the wide perspective necessary in this debate from my own personal experience. What I can do, instead, is to share with you this excerpt from the one that spoke convincingly to me, the one that informed my developing view in 2008.

One point I hope you'll find curious in this excerpt is that deflationists have always fixated on residential real estate. This is one of Rick Ackerman's, almost obsessive, objections to the hyperinflation case, and it clearly has roots in his kind. This was written in 2001, just as the housing bubble was developing. My notes in [brackets]:

Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what. Mind you now,,,,,, most of them were split on the finer points of the issue, but for all of them; [de]flation would have its day even if prices would rise somewhat. Deflation was always the final outcome.

One of the central themes in these thoughts was concerning how this coming deflation would impact plain old residential real estate. You see, most of these guys advocated selling excess residential property because it was, sooner or later, going down for the count. Mostly because the mortgage markets would be destroyed in the deflation and nobody could buy [prices would collapse to the cash price].

-- Note: The reader has to understand that these discussions were directed towards people and investors that had plenty of net worth. And I do mean Plenty! The argument wasn't about how to survive; rather how to balance a truly conservative estate portfolio. --

As time has passed we can see several major flaws in their thinking. Flaws that cost them a bunch of credibility, if not personal money. [I want to jump in here with a quick quote from Gary North written in 2002:

"I remember in 1975 hearing C. V. Myers tell attendees at a gold conference, 'If you get this one wrong, you'll lose everything.' He was predicting deflation. He got it wrong. He didn't lose everything."

And now back to FOA] One point, that I have touched on here several times, was in understanding just how much ourselves and our economic structure would and did evolve into accepting fiat money use. Even though it was, "god forbid", separated from gold.

In one area alone, the bond markets, investors reacted far differently than deflationists thought they would. Twenty ++ years ago [again, this was written in 2001], it was expected that just gross increases in money printing alone would be enough to crash the bond markets. Not talking about price inflation here, but money inflation and that should have started a deflationary fall in our credit markets. It almost happened, several times, but never followed through. It seemed that the market function had evolved to accept fiat inflation as a prerequisite to modern economic function. In a like comparison to today's thinking; investors assumed that as long as we had an expanding economic stance [nominal GDP growth, credibility inflation and financial product appreciation], sourced by inflating fiat supply, price inflation would not impact long bond credibility. We saw confirmation of this over many years. We saw that our credit markets, especially long bonds, were used in spite of the price inflation threat. Indeed, there was a ready [highly liquid] market demand for bond purchases.

In hind sight, long term holders of bonds did do very well if their position was part of a balanced holding and they didn't need to sell at bad times. Even now, dollar bonds have gained as rates are pushed lower.

Back to the thought:

This whole IMF dollar system has always been based on an expanding fiat theory that swells [nominal] GDP over time. Investors that bet on deflation coming along, after each of our bouts of inflation, were badly burned as deflation was overcome. Economic function returned, essentially because price inflation could not rout the overall market for long credit.

The flaw in all of this was in the reserve structure of our Dollar IMF money system. The fact that the world had to walk, lock step, with our money policy meant that their goods production would almost always be cheaper than ours; keeping local US price inflation under control. In other words; local US-based price inflation could not get out of hand as long as the rest of the world was willing to use their economic production to control it by selling [products cheaper than we could produce them] into our expanding fiat system.

In this, the dollar [and its securities, and their derivatives] could be inflated without end while our credit markets functioned in a non-inflationary environment.

But there is an end.

A money system like this has a definite timeline and that point is reached when the world can move away from keeping price inflation low in the US. That point is reached when Another money system comes along to challenge the dollar and, in the process, offer these other goods-producing countries a chance to buy some "lifestyle" for themselves.

At first, the show is dull as investors keep right on buying into the dollar argument above: that an expanding fiat base builds non-inflationary [nominal] growth [in both GDP and securities]. This is one reason traders still buy US long credit, not to mention chasing rising dollar exchange rates; they expect more of the last several decades of economic theory to keep right on going. It won't.

The dollar faction saw its match early in the 90s as the Euro was taking shape. To counter this threat, as I have outlined here in several ways, they promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar / IMF system beyond its ability to serve as a real fiat money system, today. [See (my title): Is the Fed selling Hyperinflation Insurance Backed Only by Hyperinflation?]

I mean; that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

So what does this have to do with Real estate?

Take a look at any broad section of the US; Northeast, SouthWest, etc.. If any of the deflationists were correct, their reasoning back in the late 70s and early 80s should have produced at least an average fall in Residential real estate. Can any of you find an "average" of property today, that is lower than early 80s prices?

Of course I'm not talking about the spikes in Hawaii, New York, Denver or San Francisco; those are just blips on an ever rising inflation scale. Even if they fall some from here, it isn't part of a deflationary act playing out. Average home prices will rise all across this country no matter what the future economy holds. A super inflationary stance by the Fed means that even unemployed workers can buy a house and pay for it! Watch how this all comes about. The Dow will not be much different when seen ten years from now; a drop to 5,000 then off again, is a real possibility! [Note: The Dow dropped from 11,000 in 2001 down to 7000 and back up to 12,000 in 2011. Again, FOA wrote this ten years ago in 2001]

The same is true for anything perceived as something real: "even silver" (grin).

The difference is in the drastic ups and downs derivatives will place on all asset markets. My point is that we are on an "end time run" in fiat dollar production that will soon produce a spike in real price inflation that crushes hedge vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system [See: RPG #1], will outrun everything by a wide margin. No matter the derivative's hold on it!

As the Euro builds a base [which is happening right now in 2011 – see this, this, this, this, this and this], it will drive an inflationary recognition into our credit markets, then freezing up our derivative markets. That perception will fuel a complete failure of our bond markets and force the Fed to buy up any and all credit; paying in full. [Paying full price for deflating assets? Oh my, would the Fed ever do that? The deflationists never saw it coming!] If needed, Bush and congress will see to it that enough money is printed so we are paid in cash for everything! Don't laugh, this is where we are headed.

[I must insert here the rest of the famous FOA quote from above. I affectionately call it "the front-lawn dump" and it was coined by FOA a full 18 months before Bernanke's famous "Helicopter drop" speech:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

Okay, now back to the original excerpt…] In the meantime, whether or not our economy is growing, stalling or failing, will have little or no impact on price inflation.

You see, living with real serious price inflation goes something like this:

---- "Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling." ----

Inflation runs crazy when a money system is forced to "print out". We will "print out" our dollar, too. Getting there just takes time and an alternative system to cause it.


Now I do realize that it takes a certain talent to distill deep wisdom from a 10-year-old internet forum post. And I can almost hear some of you out there screaming, "but but but… house prices DID collapse… d… d… DEFLATION!" Wrong. Sorry. Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today's leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).

There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the "elite") have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:

"Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling."

I'll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what's coming. That doesn't mean home loan debt won't be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it's still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold. More on this in a moment.

The point of sharing this FOA excerpt was that deflationists, like other groups that have established encampments cluttered with old baggage, tend to miss what is actually unfolding. And for that, you might want to start with my post The Debtors and the Savers. Understanding the balance necessary to keep the peace between these two groups is fundamental to understanding the political will behind the inevitability of both Freegold and dollar hyperinflation.

Rick seems to have a number of hang-ups when it comes to both gold and hyperinflation. His biggest is obviously real estate and the modern home mortgage. He simply cannot seem to fathom how a system designed and managed by The Power Elites could ever deliver a "windfall" to overleveraged, underwater homeowners or shady, uncouth gold bugs. And, frankly, if you don't make the effort to understand what is actually unfolding, there's a good chance it won't.

To the deflationist, "a dollar is a dollar" just like it is to ordinary people, bankers, company presidents and bond salesmen in the quote at the top. And even though the dollar has already lost almost 99% of its original gold purchasing power, Rick believes The Power Elite will make sure it stays strong until you have worked off every last dollar you owe. Because someone has to pay! (He's right about that.) And it's not going to be "them". (He's mostly right about that too.)

The dollar has a long, storied past. To believe "a dollar is a dollar" is to simply ignore its history. Of course I'm not implying that deflationists are unaware of this chart:


But I am saying that they think the collapse of the dollar's financial system will strengthen the dollar itself and make prices fall in the end. This is a funny notion when you take the totality of the dollar's journey into consideration.

The dollar was once worth 1.555 grams of gold. Then it was reduced to .888 grams of gold. Today it is able to purchase .02 grams of gold, but only at the margin. Notice that I said "able to purchase" instead of "is worth," and I also added "at the margin." That's because the dollar is not worth .02 grams of gold today. Around 60 years into its 100-year life, not unlike the human retirement age, the dollar retired to become a purely symbolic, completely worthless token. And in the big scheme of things, this "retirement from value" is not such a bad thing. Someone emailed me a question the other day and this was my reply:

Hello Mark,

I don’t see much wrong with your grasp of the subject, other than those worthless tokens are actually a good thing. What sets us apart from those monkeys is our ability to divide labor in a way that resists the second law of thermodynamics and allows us to organize our environment.

This division of labor requires us to use a medium of exchange in order to avoid the double coincidence of wants.

The question then becomes, what is better as a medium of exchange? Should it be something of value? Or is it more beneficial to the anti-entropic process for it to be something purely symbolic and worthless?

If you answered “something of value” I would ask, Why? Is it because you want to hoard that thing in the case that you produce more than you consume? And what is the net effect on man’s battle against entropy if the circulation of that valuable medium slows due to hoarding? Conversely, with a worthless medium, why not just exchange it for that same valuable thing if, in fact, you do produce more than you consume? Seems simple enough to me.

Sincerely,
FOFOA


You see, this is where we are today. We are using, as a medium of exchange, a purely symbolic, completely worthless token. The logical action, then, is to exchange surplus worthless tokens for something of value. Yet still today, most everyone hoards up purely symbolic, completely worthless tokens in the form of the debt of more tokens to be worked off and paid by someone else. In fact, globally, this debt far exceeds the ability for it to ever be paid (worked off by future labor), at least not at today's dollar purchasing power of .02 grams of gold. And yet it will be paid by someone, just as the deflationists promise! So the question then becomes, how can an impossible debt be paid?

Answer: if it cannot be worked off by future labor, it will be worked off by past labor, the net surplus of which was erroneously stored in debt and dollars. The icing on the cake is that it is also the past labor of "someone else," if the profits can be capitalized and the losses socialized. Precisely the process we have witnessed over the past three years, for those with eyes to see.

Rick Ackerman's somewhat-myopic focus is on home mortgages as the lynch pin that will keep this worthless, symbolic token valuable while you toil on the chain-gang working off your debt of worthless tokens. So let's take a look at the larger picture to gauge the strength of this pin and the stress it must endure.

Total US mortgage debt is a little over $14 trillion. That number includes you and your neighbors. Of that $14 trillion, about $6 trillion sits on the balance sheets of banks and $9 trillion has been packaged and sold to savers like pension funds. Of that $9 trillion held by savers, about $5 trillion is guaranteed by the US government.

So here's Rick's lynchpin that's going to keep all of you indebted homeowners honest: $14 trillion - $5 trillion guaranteed = $9 trillion. And that $9 trillion lynchpin is so powerful because it is held by politically connected and powerful banksters and pension funds, or so they say. Now in a minute I'll tell you why these two groups would rather have all that debt printed and the cash handed to them than to watch even 20% of you default on your mortgages. But first, let's step back and take a wider look at what might be exerting shear stress on this supposed lynch pin.

Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government's unfunded liabilities (which definitely apply shear stress to the dollar's lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough "goods and services" (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.

So in real terms, that is, in terms of the dollar's purchasing power as it stands today, it would take, let's see… $168T/($14T produced - $14.5T consumed)= x years… hmm… somehow it's going to take us negative 336 years to deliver those promised dollars at today's purchasing power. Remember I said this debt would be "worked off" in the past, without the use of a time machine I might add? Well here you go—past surplus labor foolishly stored in dollars and dollar financial instruments and their derivatives will be tendered. Of course the deflationists want you to know that we will be forced to reduce our consumption to below our production in order to pay those off. And once again, they are correct, though not in the way they think.

Reducing consumption means reducing your standard of living. Some call it austerity. But with forced austerity also comes the competition to avoid reducing your standard of living. And herein lies the inevitability of US dollar hyperinflation.

You see, those Power Elites that Rick thinks are going to support the dollar and its $169 trillion burden (excluding derivatives) simply to make sure you'll work off your $9 trillion dollar mortgage at today's purchasing power are the same ones that will resist personal austerity measures the most. And as all good deflationists know, you simply cannot resist the irresistible without breaking something. And what they will ultimately break in their competition to maintain lifestyle is the value of the dollar, which will actually break quite easily due to the mountainous (think: landslide) shear stress applied to it right now.

Now let's go back to those "banksters" that, along with the politically powerful pension funds, are part of the Power Elite that are going to keep the dollar strong enough so that your mortgage isn't hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the dollar's debt problem, that is still sitting on the balance sheet of banks, yet gradually being absorbed and/or guaranteed by the Fed and/or the US government.

This is simple logic: Do you think they'd rather offload that debt onto the Fed's book in exchange for full cash value? Or would they prefer to hold onto those notes while you struggle to pay them off in symbolic tokens over the next 25 years? How about this: Is it better for the health of the bank to take possession of the houses (and then have to sell them) that roughly 20% of the troubled homeowners are walking away from? A 2009 jingle mail study showed that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. That represents roughly a 10% hit to the asset side of the banks' balance sheets. Yet the banks' liabilities (deposits created when the loans were originated) remain, fully insured by the FDIC which has no money.

Through the magic of commercial bank double-entry bookkeeping, the banks' balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token dollars. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate. So supporting deflation would be, to a bank, like suffering a masochism fetish.

Rick thinks the banks will defend their assets by keeping the dollar strong. But that only keeps their liabilities that much harder to meet while the effects of deflation tend to shrink their assets making it even harder still. Ignoring the dollar for a moment, and the flaw in Myers' dictum, what happens to a bank's balance sheet if all of the loans are defaulted at the same time? Or if the asset value of all of their collateral collapsed at the same time? It would have precisely the same impact. So would a mixture of the two. The banks have and are experiencing precisely this type of squeeze. How has their "guardian angel" the Fed responded so far?

Rick Ackerman's view of the banks' incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank's balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation.

As for the pension funds, they hold this debt not for its value to maturity, but for its appreciation in a falling interest-rate environment and its liquidity in trade. Pension funds get in trouble when they cannot perform nominally. They hold nominal assets and make nominal promises (like 8% returns) which simply cannot be met in a deflation. However, as disastrous as hyperinflation is for pensioners (the funds' clients), it is a Godsend for the politically-connected pension managers who were being crushed by deflation.

So once again, the incentive or preference of those who hold the note on your mortgage to prevent (as if they had that control) hyperinflation is simply not there. In fact, as I will show in a minute, there will be ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation. More on this in a moment.


What you see is the result of the perspective you choose

A small-minded ant's only interaction with Giants may be getting stepped on or sprayed with deadly poison. So from the ant's limited perspective, this activity of killing ants is what Giants live for, what motivates them, and what they spend their time scheming and planning for. Don't limit yourself to the ant's perspective. If you want to find the tasty morsels left by Giants, you've got to start thinking like a Giant. You can read more about ants in my post Life in the Ant Farm.

In his latest of several posts on this subject, Rick Ackerman presented two responses that he found "of particular interest." The second one is so ldo that I won't spend much time on it. It is a comment that explains the old truism, "you can't eat your gold." That's right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

And with a little understanding of how a monetary collapse actually unfolds, flipping the switch on illusions and revealing reality, you'll find that the actual crisis itself will be relatively short-lived. My best guess is 6 months maximum—for the worst of it—beginning when the normal distribution of food abruptly stops. So transporting your wealth to the other side should be of great importance to those with significant savings. But if you are one of the ants that cannot distinguish between a monetary collapse and the myriad other problems with our civilization (i.e. you think that when the money collapses everything else goes to permanent sh-t as well—it doesn't by the way, look at history), then you probably think we'll be in a Mad Max wasteland for a generation or more after the dollar finally goes the way of the peso.

In that case, you should probably buy yourself a Texas ranch, a lot of guns, and a few friends to help you shoot those guns, like the Circle K Cowboys. The way I see it, the monetary collapse is going to reverse and ultimately correct many of those myriad other problems because reality will be uncovered and freed to exert its more balanced supply and demand dynamic.

But that's enough on the Texas Rancher's Thunderdome wasteland. The first of the two responses that Rick found "of particular interest" was an email he received from Charles Hugh Smith, the man "Of Two Minds" who is bothered by the "conviction" (or what he perceives as single-mindedness) of others, particularly hyperinflationists. He said as much in the email:

What bothers me is the widespread conviction that hyperinflation is “guaranteed.”

Smith is truly a man of two minds. He likes to stay uncommitted and agile, to trade against the crowd:

I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist. Maybe we will get hyperinflation, I don’t claim to know… This smells like a one-sided trade to me, even if it is more of a meme than a trade.

I am up on a hill with a wide view of the valley. In this post I am attempting to share the framework in which you, too, can see what I see rolling in. It is a tsunami called currency collapse coming in, following a violent financial and economic earthquake, which in our case will end in probably the most devastating hyperinflation the world has ever seen. And the more people that come to see what I see rolling in; the more people that join me safely on higher ground with a view of the valley below, the more the man of two minds likes his contrarian position in the valley below. Did you see that newish video out of Japan? The one I have in mind?

In order to share my view with you, I am going to patiently work my way through Smith's email, correcting errors and explaining the flaws in his perspective as I go:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation?

I think we can safely define Charles Smith's "Elites" by his own words as the Financial (Wall Street) Elites, the politically powerful (including politically connected corporations and unions/union pension funds), the "banksters robbing us blind" and "CONgress" along with all the politicians running this country into the ground; basically everyone running the Dollar International Monetary and Financial System (the $IMFS). And he asks how do "they" benefit from hyperinflation? Well, they will benefit, in the same way that those closest to the printer benefit tremendously in all hyperinflations. But more importantly, Smith's core perspective on "the Elites" is wrong. He makes the same mistake Karl Marx made, which I explained in my post The Debtors and the Savers. [I know, this is the second time I've linked this post. It is intentional. I'll probably do it one more time as well.]

What I described in that post last July is the essential foundation to the framework for understanding why US dollar hyperinflation and Freegold are, simply, unavoidable, or to use Smith's word, "guaranteed." I have been accused of overconfidence in my views. But I specifically and actively limit the scope of this blog to only these two topics. I'm certainly not a know-it-all. I only describe the things that can be clearly seen, and how to ascend to that perspective.

Was the Japanese guy shooting that video up on a hill overconfident about his view of the tsunami rolling in while those still down in their houses had a more rational, balanced opinion? Perhaps they were of two minds; on the one hand, there had just been a Richter scale 9 earthquake and they lived in a tsunami warning zone. On the other hand, they were not exactly ocean-front properties and it would have to be a pretty big tsunami to bring the ocean over that levee. Surely they would hear it coming giving them plenty of time to escape. It's all about perspective. With the proper perspective you can see things more clearly.

In The Debtors and the Savers I wrote:

Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.

And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.

Marx writes, "The history of all hitherto existing society is the history of class struggle." He got this part right! What he got wrong was his delineation of the classes.

Marx's classes were:

1. Labour (the proletariat or workers) - anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) - anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.

Simply put, Marx says it's the rich versus the poor. According to Marx the rich exploit the poor to get themselves a "labor-free income", which spawns a class struggle.

This is an attractive perspective because it requires only a cursory, superficial judgment to place someone into one of the two camps, the rich or the poor. If someone is driving a Bentley we immediately know which group they are in, right?

[…]

As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The easy money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.

1789, the French Revolution, "the hard money camp" had been in power since 1720 when John Law's easy money collapsed, and starting in 1789 "the easy money camp" killed "the hard money camp" and took back the power. This is the way "the easy money camp", the Debtors, usually take power... by revolting against the hard repayment of their spending habits…


Obviously I don't want to reprint the whole article here, which is why I linked it three times. So please go read it.

But here's the fatal flaw in this Marxian paradigm; many of we, the modern proletariat, are savers who would prefer hard money like gold to protect our savings. It is we, the savers, that are punished by the current easy money system. That's why I delineated the groups as the Debtors and the Savers, otherwise known as "the easy money camp" and "the hard money camp."

And with the proper view of who Smith's Elite CONspirators really represent—the easy money camp, the debtors, the hungry collective—the answer to his question begins to develop. It is the opposing camp, the savers, that will be most-punished by hyperinflation and it is Smith's Elite that will profit the most during the race to spend.

If you can start to think of the administrators of the $IMFS, the "banksters", politicians and Western Capitalists in charge of the system as being firmly entrenched in the Debtor camp, you are well on your way to a very rewarding enlightenment. I realize this is counterintuitive, and counter also to much of the baggage that accumulates while reading other "hard money" writers on the Internet, which is why I spend so much time on it. But once it clicks, you'll be like, "OMG! WTF was I thinking?" I have conversed via email with many extremely intelligent people that have had this momentous "click", so I am tempted to consider that I may be on to something.

So call me overconfident if that makes you feel better, but I'm not going to be wishy-washy about what I can see. I'm certainly not of two minds on this.

How will "the Elite" profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.

Rick Ackerman and other deflationists agree with me that the unsustainable, unstable mountain of debt must and will collapse. And they view "the Elite" as the capitalist creditors and the rest of us poor working saps as the proletariat debtors. Therefore they believe that when the debt mountain collapses, their version of "the Elite" will not print Zimbabwe-style because, even though they just took a tremendous haircut on their bonds, they want to be sure that the super-saps among us, the proletariat that are still working, will continue to service the remainder with dollars of today's purchasing power.

This is a bass-ackward view in my opinion. The hungry collective provides ample political backing and sufficient naiveté for "the [Western] Elite" to print the full face value of their bonds and dump that worthless paper on the public's front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.

But the story runs deeper still. The reason I have been putting "the Elite" in quotes or referring to them as "Smith's Elite" is because, not only does he have the delineation wrong, but he is myopically focused on only one quarter of the bigger picture.

Some of you, I know, like to think in terms of grand conspiratorial conflicts, a "Clash of the Titans" (Clash of the Elites if you will), or something like that. Well I can probably help you with that view in this "Debtors v. Savers" paradigm.

We have the West which is roughly only 25% of the world's population, and then we have the rest of the world. And oh yes, they have their own "Elite". You'd probably guess that "the West" represents "the debtors" in this paradigm. But you'd be wrong to assume that the rest of the world is taking "the hard money camp" stance.

It is true, we are at the end of one of the longest-running "easy money camp" regimes. And these things usually swing back to the other side. But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it's usually the blood of the hard money campers that is shed. (See: the French Revolution.)

So the rest of the world has taken a different stance this time. It has been "in the works" for several decades.

Q: **Who does BIS really represent?

A: "old world, gold economy, as viewed thru modern eyes" or "way to move from US$ without war".


Those are the words of ANOTHER from my post "The Gold Man" (not Goldman) at the BIS. The BIS truly represents "the rest of the world" from a monetary perspective. It is the "trade union" of their Central Banks. All is not as it seems on the surface.

So how do you view an "old world gold economy" through modern eyes? And how do you move there peacefully with the easy money camp? It's quite simple actually. You let nature take its course, you support that natural course however long it takes (rather than pathologically fighting nature like the dollar system does with its obsessive-compulsive drive to control), and you don't deprive the easy money camp of their precious fiat. It's Freegold. It is about allowing meritocracy to rise like a Phoenix from the ashes of the dollar's inevitable collapse. It's not about a transfer of wealth. It is about a re-born meritocracy. The transfer of wealth that will take place is what blinds most people from seeing its inevitable approach.

More from Charles Hugh Smith via Rick's Picks:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then [who] owns the $160T in financial wealth?

First of all, it is unclear exactly how much gold there is, but it's probably over $8T by now, and only about 18% of it is owned by central banks, not anywhere near half. That leaves $6.6T in private hands, at today's price.

Smith exposes his ant-like perspective in this paragraph when he implies the Giants that own the lion's share of $160T in financial products should have already crashed the value of those financial products and exploded gold in the stampede from one to the other, if a collapse of the dollar was really on the horizon. On the contrary, you have to think like a Giant to see the best way to move your Giant wealth from one system to the next. True Giants do not panic out like ants, nor like ants imagine that Giants would. True Giants know that if they panicked out, with the weight they carry, they would end up transferring much LESS wealth into the new system.

Viewed from the Giant's perspective, you can see that most all of that dollar value, that $160T will vanish in a flash. And when that happens, the market for paper promises of gold delivery will also collapse and vanish as physical gold gaps up (in my estimation) 40x. That's right, $160T vanishes, and $6.6T worth of gold—in private hands—gaps up to $264T.

Oooh. Now I'll bet I've got the deflationists screaming! "You can't turn $160T into $264T in a flash during a deflationary collapse!" Au contraire, mon frère. What you see is the result of the perspective you choose. Reader "Reven" recently asked this same question, to which I replied:

It is a fallacy to compare a snapshot of gold with a snapshot of "global asset values" because it ignores the time dimension in which gold flows. Even if you are correct about everything in the world (other than gold) being worth [$160T] in 2011 constant dollars, the value of all the gold can be multiples of that amount. It is theoretically unlimited, unlike paper wealth which is self-limiting by its own objective metrics and economic ties. Paper wealth is limited to the upside but unlimited to the downside. Gold is the inverse of paper, unlimited to the upside, limited to the downside. It's not the total stock of gold that matters, but the flow from those that already hold it.

Here are a few snippets from my post How Can We Possibly Calculate the Future Value of Gold?

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

[...]

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

[...]

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand.

[...]

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

[...]

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude.


Back to Smith. Here's that same paragraph again. Let's see if we can answer his questions a little more concisely now that we have a new perspective:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then owns the $160T in financial wealth?

Yes, they've bought the gold and it's still priced at around $6.6T, at least that portion that is in private ownership. No, there will be no gold-backed currency because we aren't going back to "hard money" because "your Elites" wouldn't like that. No, they won't lose all their wealth; they will gain wealth. Here are the steps as viewed, not by ants, but by Gi-ants:

Step 1: Buy up as much physical gold as you can over a couple decades without running the price and without panicking out of your paper, while the Western investor is caught up in all manner of paper including paper gold.

Step 2: Wait patiently for the inevitable financial collapse. As Rick Ackerman himself wrote, "financial collapse is not just likely, but inevitable."

Step 3: When the collapse comes, sell that $XXXT in "financial wealth" to the printer for fresh cash at full face value in the name of "saving the system" and "survival of the country and the Western way of life."

Step 4: Spend the new cash.

Step 5: Adjust your balance sheet from the old paradigm where it used to read $160T paper/$6.6T gold to the new paradigm where it now reads $0 paper/$264T gold. A net gain of $97.4T.

Now I must explain here that I don't view this as a nefarious plan, plot or con. It is simply the way you deal with the inevitable collapse of the global reserve currency at the end of its financial timeline. And if you are a Gi-ant, it's the clearest way to transfer your wealth through the crisis and into the future. You don't do it with a high-yielding bond Con and a sustained deflation. LOL Gimme a break!

And if you think Congress will prevent the Fed from doing what it did in 2008… and 2009, 2010 and 2011… guess again. The USG will face a real, existential shut down this time. Nothing like the charade that happens every few years when it's time to renew the budget or raise the debt ceiling. This will be the real deal. Congress will DEMAND that the Fed print "for the good of the country" (and for their own paychecks).

Back to Smith:

This explanation — that the wealthy have already transferred their financial assets into gold and land and thus they don’t care if all money, bonds, mortgages, derivatives, insurance policies, etc. all go to zero and is wiped off the books as an asset—makes no sense because it doesn’t explain who is the bag holder to all this “fiat-based” wealth. If the wealthy don’t own all these financial assets, who does? Who did they sell it all to? Yet we know that the Financial Elites own all this financial wealth and thus it will not be in their self-interest to see it wiped out. Only debtors, i.e. Central States, want to see hyperinflation to wipe out their debt. But who considers all that sovereign debt an interest-paying asset? The Financial Elites, that’s who, along with politically powerful union pension funds, banks, etc.

Yes, I know I have already addressed everything in this paragraph. But I wanted to show you how silly it starts to read once you have a different perspective. Moving on:

Everyone seems to forget that debt is an asset to the guy on the other side of the trade. The debtor would love hyperinflation but the owner of the debt will resist hyperinflation with every fiber of his being — and that includes the Financial Elite who own the debt.

Okay, here Smith moves into the first of his two strongest complaints about hyperinflationists. Remember up at the beginning of this post I wrote that in 2008 I didn't find many of the arguments convincing on either side of the debate? That is, until I read FOA? Well, clearly Mr. Smith has not read much of my blog, not that I'd expect he had, because his two complaints are completely backward in their reasoning.

Those two complaints are that he views hyperinflationists as i) not considering that debt is an asset to someone else, and ii) that hyperinflationists don't understand that hyperinflation is a POLITICAL event and not a mechanical or "deterministic" event. Once again I had to LOL when I read this backward view.

I think it's time for me to post links to my three part series again, in which I DRIVE HOME these two topics… and how they inevitably end in hyperinflation, not deflation:

Just Another Hyperinflation Post - Part 1
Just Another Hyperinflation Post - Part 2
Just Another Hyperinflation Post - Part 3

If you haven't yet read them, you should probably start with the post I made just prior to those, Credibility Inflation, in order to understand what is actually deflating in our hyperinflation.

Basically, regarding Smith's paragraph above, "the guy on the other side of the trade," if he is well-connected enough to be considered "the Financial Elite who own the debt" would prefer to be relieved of that "asset" at full face value as long as he's getting that cash first. Remember, hyperinflation is a race, not against the bear (you can't outrun the bear) but against your neighbor.

Next:

This is basically a “politics of experience” analysis, and very few are equipped to understand such an analysis, as it’s outside their econometric comfort zone. They prefer a deterministic financial analysis that there are “laws” of economics which lead to hyperinflation, etc. Meanwhile, for me, there are only political choices, a narrow band of which lead to hyperinflation and a bunch of others which do not. This kind of analysis doesn’t lend itself to refutation or confirmation by financial models of the sort being bandied about — it’s a behavioral analysis and a political one.

I have yet to see how banks and the Financial Elites would benefit from hyperinflation. Without getting too fancy, it’s obvious that holders of debt, those collecting interest on debt assets, would be wiped out by hyperinflation. Thus as a simple matter of self-interest, we can deduce they will not favor policies that lead to hyperinflation. If the owners of debt (Treasuries, mortgages, corporate debt, commercial paper, etc.) were politically powerless, then we could expect them to be steamrolled by those who would benefit from hyperinflation. But they are not politically powerless — it’s the debtors who are powerless, except for the Central State, and it’s beholden to the Financial Elites who have captured the political and regulatory classes that govern the State.


This is the introduction of Smith's "it's about politics, and hyperinflationists don't get that" argument, which he refined in his next post on his own blog titled "Con of the Decade" or something like that. (By the way, this came out after Smith's blog post, but if there's any truth to it, it pretty much demolishes Smith's con idea and ensures—or insures—hyperinflation.) In that post Charles Hugh Smith pretty much threw down the gauntlet on this issue in the opening paragraph:

I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation. I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamentally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick's Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn't see even one comment in favor of this perspective.

Now I'm not sure if this is technically a straw man fallacy if Smith has never read FOA or FOFOA. Perhaps not. In any case, here are a few quotes from my hyperinflation posts:

What is a deflationist? It is one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up. The same political will that always changes the rules to suit its needs as surely as the sun rises. And it is this political will that makes dollar hyperinflation a certainty this time around.

[…]

As FOA warned 12 years ago, these bailouts were always baked into the cake. They are a mandatory function of the political will that backs the entire system. This is the main element that all of the deflationists miss.

[…]

The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.

[…]

Because we have a purely symbolic currency, a dollar-denominated deflation is impossible... because of the political will I mentioned above!

[…]

But this is also where the political (collective) will comes into play. It will NOT let that savers' balloon deflate. The Fed is helpless against the debtors' balloon and the credit/debt feedback loop, but it is most certainly NOT helpless against the savers' balloon.

The Fed has the power to keep the savers' balloon 100% full if it wants to, and the political will to fully back that action.

[…]

This is an excellent description of what the deflationists see, and also why they don't see the rest of the big picture. They view the monetary world as a machine rather than a human ecology. They underestimate the will of the "politicians and bureaucrats who are playing God." And they also underestimate the power of fear and monetary velocity.


I think you get the picture. But if you really want to get to the heart of this subject and see where Smith and the deflationists (notice I'm not calling Smith a deflationist here) go wrong on cause and effect with regard to hyperinflation and political will, you should read noteworthy deflationist Mish Shedlock's comment under my "Part 3" where he defended his post saying:

"I explicitly said hyperinflation is a political event… The amazing thing is I was agreeing with you…"

And my responding comment where I wrote:

"…Velocity can have the same exact effect as printing. Would you agree with this statement? Fear is the spark that ignites it. And then the government will need to fund itself in this hyperinflationary environment. This will entail THE massive printing that always follows immediately after hyperinflation starts. ***THIS IS THE POLITICAL EVENT THAT I AM TALKING ABOUT*** Not the priming beforehand. That's already done. We are already in the summer of 1922…

…It is this LATER political event that is 100% guaranteed. That our government will debase its currency TO ANY DEGREE to ease its own fiscal pain. And as for the cause, the prime, it's already there. Has been for at least 10 or 12 years now…"


And then Mish's follow-up where he writes:

"…I agree with FOFOA about what starts hyperinflation. I wish I would have made that perfectly clear in my post.

I disagree with him in regards to whether or not "politics" or as FOFOA calls it (loss of faith) makes the US more vulnerable.

It was a very gentle disagreement."


I didn't call Smith a deflationist because I don't know if he is. I haven't read enough of his blog to know if he's ever categorized himself. Usually deflationists are happy to categorize themselves as such, as in the case of Mish and Ackerman. But Smith appears to be a simple skeptic, a man of two minds, as he wrote in closing of that email to Rick Ackerman:

Maybe we will experience hyperinflation after all. I am a skeptic, not a true believer, but I am certainly open to it as a possibility. I think all the financial arguments are somewhat akin to biblical debates about how many angels can dance on the head of a pin. They are fundamentally deterministic and apolitical, while the actual process of setting policies that lead to hyperinflation is entirely political.

I have no econometric arguments against hyperinflation, I only have political ones. But since politics sets policy, then hyperinflation is necessarily a political choice. So a political analysis will trump an econometric one in my view.

But I could be wrong. As a basically poor person, I don’t have much of a stake in either outcome.


If Charles Hugh Smith happens to be reading this post, and I hope he is, I would like to point out that my hyperinflation arguments cover the gamut. And thanks to Rick Ackerman, I now have kudos from both camps, deflation and (hyper)inflation:

Deflation camp: "The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web."

[Hyper]Inflation camp: "FOFOA is probably one of the very best analyst in the whole world. The more I read from him, the more I am convinced of his vast superiority over most experts and analysts, probably of the Schiff-Turk caliber… This is one of the very best contributions in the inflation-deflation debate. It is long and detailed, but the topic is extraordinarily complex."

I really despise self-promoting in this way and risking coming across as if I think too highly of myself. The truth is quite the opposite, and I only post these so that skeptics like Smith will at least consider my arguments rather than dismissing them outright. I know my posts are long, and I know that some people think I'm just a crazy gold bug, which I am not. So there has to be a good reason for a skeptic to make that commitment of time and energy. And if he's read this far in my longest post ever, then at least that's something!

Now before I wrap this treatise up, there was one thing I said I would come back to that I haven't yet. And that is, if hyperinflation is guaranteed, why aren't all these hyperinflationists snatching up real estate left and right on the leverage that's still available? I, for one, don't have a mortgage. I don't even have any debt because I don't have an income, other than donations from this blog, to cover the carrying cost. And back when I was following Peter Schiff he was a proud renter too. Perhaps he still is, I don't know. There are literally dozens of answers to this question, almost all of them extremely personal. But the bottom line is that real estate will continue to fall in real terms even more than having an LTV of 95% hyperinflated away would cover.

Even if you accept that hyperinflation is 100% certain, real estate is still a poor investment choice to carry your wealth through. Gold is so much better that real estate shouldn't even be considered an investment choice (choice, as in a new investment) beyond your primary residence. Even with 10x or even 20x presumed leverage in a near-term debt wipeout, unleveraged gold is still a much better choice. And in addition to it being the lesser choice, leveraged real estate also carries a non-zero political risk in hyperinflation. I'm giving this an extremely low probability in today's world, but under any kind of conservative and personal "one percent doctrine" it must be factored heavily into the equation that includes expected leverage and the carrying costs on an unknowable timetable. This is an excerpt from an email I received a while ago:

Today I read a short little book titled Fiat Money Inflation in France by Andrew White (published 1912). My general impression is that there is no law so insane that it can't be enacted during a hyperinflation. As you may know, they even passed a law such that debts increased along with the issuance of further currency, so that for every so many additional assignats printed, one's debts increased by 25%. Thus they took away the one silver lining of currency debasement for the middle class. What a nightmare. I liked this bit:

"All this vast chapter in financial folly is sometimes referred to as if it resulted from the direct action of men utterly unskilled in finance. This is a grave error. That wild schemers and dreamers took a leading part in setting the fiat money system going is true; that speculation and interested financiers made it worse is also true; but the men who had charge of French finance during the Reign of Terror and who made these experiments, which seem to us so monstrous, in order to rescue themselves and their country from the flow which was sweeping everything to financial ruin, were universally recognized as among the most skillful and honest financiers in Europe. Cambon, especially, ranked then and ranks now as among the most expert in any period. The disastrous results of all his courage and ability in the attempt to stand against the deluge of paper money show how powerless are the most skillful masters of finance to stem the tide of fiat money calamity when one it is fairly under headway; and how useless are all enactments which they can devise against the underlying laws of nature."


Okay, last thought on the real estate home front, and then I'll let it go. I have a question for Rick and his commenter SD1 from the top of the post. Remember they wrote:

Rick's Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.


How close to the business end of the printing press are these millions of North Americans? You guys seem to assume that, during hyperinflation, millions of American mortgage payers will have access to this river of cash early enough to benefit overall. By the time they get their hands on it they may be struggling to meet other skyrocketing expense like property taxes and, uh, food. Wages won't keep up. Most people simply won't be able to keep up. And most of those who do will find that their wealth relative to those closest to the printing press will be declining. Like I said this is about outrunning the next guy, not the bear.

This is why I wrote, "if you don't make the effort to understand what is actually unfolding, there's a good chance [hyperinflation] won't [deliver any windfall in your direction]." If you really want "to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay," then you'd be best equipped to do so by buying some physical gold right now!


Inevitability

Here is Rick's premise once again: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” If the borrowers can't pay, at least not in full, and certainly not in real terms (today's purchasing power), and the politically connected lenders won't take the hit, that only leaves the third option which C.V. Myers missed and Rick can't seem to fathom.

How do I know hyperinflation is inevitable? I know that they will do the "front lawn dump" not only because they said they would do it, and then did it, and they continue doing it, but because it makes absolutely no logical sense, from their perspective, to NOT do it in the face of a crushing deflationary collapse like both Rick and I see as inevitable. It will be judged an infinitely better option than immediate total economic collapse. And besides, 75% of the world has been waiting patiently, for a long time, to get off the dollar standard. And it has prepared for this very, inevitable, eventuality. So it won't be fought from abroad.

This is very important: Once hyperinflation commences it is characterized by a running shortage of cash, even though it appears like the opposite to the outside observer. The currency collapses in value against economic goods because the debt and the credit collapsed. There is no credit, only cash, and there is a shortage of cash for everyone, including the Elite and the government. So they, the Elite/government, print and print for their own survival while saying it is for yours.

And for those of you that think they won't do it because they'll be afraid it will end the dollar, end the Fed, or end fiat currency altogether, guess again. Not a chance! After it's all said and done, Bernanke will say some sweet things like his cuddly Zimbabwe counterpart did in this 2009 interview:

Gideon Gono: "I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks…

"There are certain things, policies with the benefit of hindsight, where we could've managed our affairs better… We are [only] human…

"Only a fool does not change course when it is necessary. Because economics is not an exact science, you want to be able to be relevant. The only constant is change and adaptation…

"It's a free market, a business which must be allowed to succeed or fail…

"What keeps me bright and looking forward to every day is that it can't be any worse. And those who have studied the history of economies know that we are down, but that the only thing that can happen is we will move up. That is a certainty…

"I am modestly credited with the survival strategy of my country. The issue is if you want to break Zimbabwe and want it to fall, just deal with one man. You deal with Gideon Gono…

"I'm a normal guy: I miss going to the supermarket. One would like more freedom…

"If you raise the interest rate you'll be friends of people who have access to money. If you lower the interest rate, you'll be the darling of borrowers, but pensioners will curse you to hell. It's never about popularity. At all times you are definitely hurting some people in the economy…

"It's impossible to be directing the course of an entire economy and divorce yourself from politics. Politics are important because the turnaround of the economy hinges on political stability, but I can't tell when that will happen…

"I have been in the trenches during every moment of survival for my country. Any central bank governor is of necessity. When things go bad, we governors are the fall guys. No other governor in the world has had to deal with the kind of inflation levels that I deal with, no other governor has to come up with the gymnastics and strategy for the survival of his country. But let me say that in my bank resides the cutting edge of the country. I'm privileged to be the leader of that team."


Zimbabwe still has a Central Bank, and Dr. Gideon Gono still has a job as its governor. It will likely be no different for Bernanke and the Fed. Extreme times call for extreme measures. And that's how it will be spun. They will print for survival and they will say it was for the survival of America. The dollar will end this thing without reserve currency status, more like the peso. But at least we'll have Freegold!

In our time and for the first time in the modern US dollar history, the US will embark into a classic hyperinflation for the sake of retaining its own lessened dollar for trade use. As destructive as that might be to players in this financial house, it is better than immediate total economic failure. It will evolve in a form much like the course of any other third world country, if its currency too was suddenly deprived of world reserve status. We will, like people the world over, learn to live with it and live in it. Truly, our dollar and economy will not go away, but its function, use and value will change dramatically.

Thank you
FOA/ your Trail Guide


Happy Easter!

Sincerely,
FOFOA



Something filled up
My heart with nothing
Someone told me not to cry

But now that I'm older
My heart is colder
And I can see that it's a lie



Children, wake up
Hold your mistake up
Before they turn the summer into dust

If the children don't grow up
Our bodies get bigger but our hearts get torn up
We're just a million little gods causing rainstorms
Turning every good thing to rust

I guess we'll just have to adjust

With my lightning bolts a-glowin'
I can see where I am going to be
When the reaper, he reaches and touches my hand

With my lightning bolts a-glowin'
I can see where I am going
With my lightning bolts a-glowin'
I can see where I am go-going

You better look out below!

502 comments:

«Oldest   ‹Older   201 – 400 of 502   Newer›   Newest»
Motley Fool said...

(cont) p2

The final stage is the interesting part. Now while it is true that initially they will still be in a beneficial position, it does not remain true. The thing is, under Freesomething, us ants will be able to protect our value, and due to the nature of Freesomething taxes will decrease. They will lose their power to keep us ants down. Hereafter bad investments on their part will be paid for, not by us, but by them. Those 'elites' unworthy of their wealth will quickly lose it. Those of us ants that are worthy will be able to rise. This is what FOFOA terms the meritocracy. And THIS is the true value of Freesomething ( at least for us savers).

Myself, I don't want to battle the Giants over the choice of silver vs. gold. They have already chosen, and as we know they have the power at present. And will still have it directly after Freesomething. I am happy with the crumbs. And in my estimation the golden crumbs are the more sensible path than the silver crumbs.

So your worry and moral indignation about the 'elites' retaining power if gold is the focal point is unfounded in the long term.

I hope this helps you.

The Fool

Ps. I left a comment for you on forum 1500 on the current gains on silver vs. gold.

@costata

Yep, as I said, all of the problems I could find are trivial in nature. Out of respect for the truth , I did still bring them up, even if they are trivial.

@J

Lol, well I suppose that would be one use of the cash. :)

Peace

The Fool

dojufitz said...

Silver and Gold - if they go parabolic will collapse - according to Jim Rogers....

He is concerned that if Silver gets to $100US in 2011 it will then collapse - but it has to be related to what the US dollar is doing.....

http://www.youtube.com/watch?v=3aGtUyTLvwE&feature=related

DP said...

@MF: A present for you. It is your birthday, right?

Happy Birthday

mortymer said...

The fall of the Rupee

http://en.wikipedia.org/wiki/History_of_the_rupee#The_fall_of_the_Rupee

"...After its victory in the Franco-Prussian War (1870–71), Germany extracted a huge indemnity from France of £200,000,000, and then moved to join Britain on a gold standard for currency. France, the U.S. and other industrialising countries followed Germany in adopting a gold standard throughout the 1870s. At the same time, other countries, such as Japan, which DID NOT have the necessary ACCESS to gold or those, such as India, which were subject to IMPERIAL POLICIES that determined that they DID NOT MOVE TO A GOLD STANDARD, remained mostly on a silver standard. A huge divide between silver-based and gold-based economies resulted. The worst affected were economies with silver standard that traded mainly with economies with gold standard. With discovery of more and more silver reserves, those currencies based on gold continued to rise in value and those based on silver were declining due to demonetization of silver. For India which carried out most of its trade with gold based countries, especially Britain, the impact of this shift was profound. As the price of silver continued to fall, so too did the exchange value of the rupee, when measured against pound sterling..."

[Mrt: I find it fascinating that here few hundrets years later we are faced with another "imperail" IMF/BIS/ECB fractions trying to rule/organize somehow how-when-how to transition to new monetary system]

http://en.wikipedia.org/wiki/Gold_standard#The_crisis_of_silver_currency_and_bank_notes_.281750.E2.80.931870.29

By way of example, and following Germany's decision after the Franco-Prussian War to extract reparations to facilitate a move to the gold standard, Japan gained the needed reserves after the Sino-Japanese War of 1894–1895. Whether the gold standard provided a government sufficient bona fides when it sought to borrow abroad is debated. For Japan, moving to gold was considered vital to gain access to Western capital markets


British hesitate to return to gold standard

"...During the 1939–1942 period, the UK depleted much of its gold stock in purchases of munitions and weaponry on a "cash-and-carry" basis from the U.S. and other nations.[This depletion of the UK's reserve convinced Winston Churchill of the impracticality of returning to a pre-war style gold standard. To put it simply, the war had bankrupted Britain..."

Piripi said...

Motley Fool,

You are quite correct IMO, the final stage is the interesting part, but it seems to be the part that people have the most trouble visualizing, being on the other side of the paradigm shift.

As I have stated before, it is my view that society crystallizes/organizes around its value exchange (monetary) system in the same way an organism utilizes its DNA, and that when this system is altered the society reorganizes in response.

To think we will act the same when utilizing another system is as shortsighted as proposing that an organism will not change if its DNA is altered.

Money is the cause, and society is the effect.

It is nice to see others picking this up, as IMO this is the real beneficial change. Personal increases in buying power from holding gold through the "monetary restandardization" (yes I have read Moldbug too) are exciting when viewed from this paradigm... but in the next the creation of value will be rewarded equitably, giving all those conducting themselves with integrity just reward.

The effects that will flow from this will be profound(ly positive).

DP said...

Hallelujah, brothers MF and Blondie

Motley Fool said...

Hey Blondie

Yep. :)

TF

DP said...

@Blondie, I know you appreciate the arts. Do you think this might be a rough approximation of how we will see the present when we look back at it as History, from the future?

Thad said...

Great logic, but question:

You need to explain how the river turns into a flood?

How will the "elite" move the money fast enough so that either wages will rise or enough people will receive currency to spend it and create Hyper-inflation? By making Banks whole so they can again make loans to people who can't or won't take loans doesn't work. Bankers can't spend it fast enough for it to not create a bottle neck for your inflation theory. If they cannot distribute it quick enough we devolve into massive political unrest.

Please explain how the money or energy is transmitted semi-uniformly and through what conduits fast enough for hyperinflation to work in the US.

At some point a high % of population doesn't receive the flow you have a log jam and don't get hyperinflation.

Too me this is all you lack in your explanation.

costata said...

Carl,

"costata said...
Can you read a balance sheet?
-----------
Why yes I can, why do you ask?"

This (my emphasis):
"..even in failure and what they took became assets for the surviving banks that bought the failed banks and got those assets at pennies on the dollar."

mortymer said...

http://www.youtube.com/user/EconStories

Round II.

Ashvin said...

"a) I believe the "financial and political elite" you talk about are firmly in the debtors camp, so they represent the demand side (this is also the reason HI is very likely since they also control the supply side)."

They are in the debtors camp in so far as they rely on the healthy functioning of the US Treasury market to maintain their operations. Other than that, they are primarily creditors in the global financial system (the private side) and they also hold massive political/militaristic leverage.

Notice I am not even saying they are all Americans, because they are not. Many of their corporate and political institutions are based in America, Japan and Europe though.

"I on the other hand think that it's the (flow of) gold that the whole system is based on, not fiat."

I understand that the concept of Freegold underlies FOFOA's arguments, but obviously a "deflationist" such as myself does not buy into that concept. I fail to see how the flow of gold underlies the global financial system after convertibility was revoked by Nixon's Administration, and you had the explosion of debt-dollar finance. IMO, the entire system took on a degree of complexity and abstraction that cannot be adequately described by a PM-based monetary paradigm.

JR said...

Hi Mickette,

You write:

I hate any kind of censorship by muzzling thoughts and "intellectual masturbation" in general.

We completely agree!

We will have to help financially and morally our children and grandchildren. Any question and comment about our future is to take with seriousness.

Again, I whole-heartedly agree! This is why I respond as I do, because as we agree, this is a serious matter.

Our humble host has graciously chosen to share with us the fruits of his great investment of time and effort, and from my perch, its hard to imagine a more disrespectful approach than to patently ignore the **blog post your are responding to** and post something like Raoul did or Pipe repeatedly does, ala "OMG FOFOA you are so wrong because of xyz..." when xyz is the heart of FOFOA's point.

You, I and others are more than willing to help share out limited insights to help the collective understanding at this blog. This isn't easy, which is why FOFOA doesn't advertise it, and instead encourages people to come to it on their own. Lotsa people come to learn and share with an open mind, and they have are better off for it -- myself perhaps as much as anyone!! Some even suggest such an open mind is key, ala "It is the mark of an educated mind to be able to entertain a thought without accepting it."

But at the same time, when complete jerks clown it up with "OMG you are teh dumb FOFOA" because of strawmen/trollsish arguments predicated on fundamental misunderstandings of FOFOA's writing, I'm gonna call them on the B.S. Its obvious these clowns aren't here to learn. They recognize the cognitive dissonance between their dearly held beliefs and closed-minded worldviews and FOFOA's commentary, and this dissonance scares and frightens them, causing them to lash out. Its sort of a misplaced "people naturally get aggressive as a natural defense mechanism" type reaction.

They aren't hear to understand FOFOA, they are hear to ignore FOFOA and spam us with crap they think supports their worldview, ala Raoul's last post where he again shows he is still fundamentally confusing hyperinflation with really fast inflation and thus just "ninja links" a paper talking about credit deflation being more likely than really fast credit inflation, as if this somehow is in disagreement with what FOFOA is talking about. Of course we are gonna have credit deflation (aka the reverse of credibility inflation), its the whole point. From above:

While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash...
"Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…"


And the masterquote:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

So yeah, I'm gonna respond to these jerks in a fashion the is responsive to the disrespect, arrogance and conceit they first bring to the table. Tit for tat.

Just understand its in support of the very lofty and admirable precepts you hold up, even if you disagree with the means to that end.

Cheers and Visca el FOFOA, J.R.

Dwain said...

What's your point costata, and I'm still waiting on your promised respose to my comments from that other FOFOA hyperinflation thread.

Mike said...

FOFOA, you truly are the king among kings of this new gold market. Thank you so much. Making my donation now...

Dwain said...

JR, I like that you posted FOFA's "masterquote"

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

because it allows me to point out the flaw in FOFA's retort to the "deflationists" in that the "FIAT" part of our monetary system is but a tiny fraction of the whole and that is what FOFOA refuses to see.

In today's terms, hyper-deflation via the collapse of credit as currency is the real threat.

Ashvin said...

re: masterquote

The part that says "policy will allow the printing of cash, if necessary, to cover every last bit of debt" is an assumption, not an inevitability.

Can that be agreed upon?

There are at least three inter-connected influences that could prevent that policy - 1) the discipline of the public bond market, 2) widespread sociopolitical unrest and 3) calculated decisions by financial or political elites (i.e. temporary winding down of QE, crash of equity/commodity markets, planned austerity - conditional bailouts, etc.)

In essence, it becomes in exercise in managing deflation, rather than inflating the debt away, but that does not necessarily mean the exercise will be successful. Nothing is 100% certain.

Also, it seems that FOFOA is arguing that deflation is impossible regardless of supply-side policy. If they don't continue to monetize debt, the rest of the world will still lose confidence in the dollar at some future critical point that no one can predict (and what happens between now and then??). If they do monetize the debt at a faster rate than it is destroyed, then of course the dollar will be devalued. A combination of the former followed by the latter will lead to devastating HI.

DiverCity said...

As someone else said, an intellectual tour de force, this is!

JR said...

Hi Carl,

You comment:

In today's terms, hyper-deflation via the collapse of credit as currency is the real threat.

That's the whole point.

You are trying to argue FOFOA is wrong by advancing FOFOA's arguments.

Despite your desire to hate, you actually agree with FOFOA.

Its your FOFOA strawman you disagree with, and only you can choose to let him go.

Cheers and hopefully you can **Wake Up**, J.R.

The Dork of Cork said...

This is a interesting little snippet from Hayek “Denationalisation of Money”

“Opposition to new system from established bankers....
This necessity of all banks to develop wholly new practices
will undoubtedly be the cause of strong opposition to the
abolition of the government monopoly. It is unlikely that most
of the older bankers, brought up in the prevailing routine of
banking, will be capable of coping with those problems. I am
certain that many of the present leaders of the profession will
not be able to conceive how it could possibly work and therefore
will describe the whole system as impracticable and impossible.
Especially in countries where competition among banks
has for generations been restricted by cartel arrangements,
usually tolerated and even encouraged by governments, the
older generation of bankers would probably be completely
unable even to imagine how the new system would operate and
therefore be practically unanimous in rejecting it. But this
foreseeable opposition of the established practitioners ought not
to deter us. I am also convinced that if a new generation of
young bankers were given the opportunity they would rapidly
develop techniques to make the new forms of banking not only
safe and profitable but also much more beneficial to the whole
community than the existing one.”

His treatise was very influential in the creation of the Euro - tradional unsophisticated bankers thought of banking as fractionally multiplying a goverment money debt base
But there is not enough Euro goverment money to pay for private credit creation - the only other mechanism to clear the debt is the freefloating gold on the asset side of the Euro balance sheet.

The Euro was created to cut the balls off semi- sovergin republics and indeed Kingdoms
Banks are now completly independent of goverment executives
The Bond between the Prince and the Cardinal is broken
Ultimate power lads - do not let it go to your heads
http://www.youtube.com/watch?v=-qTA6ndc51w

Dwain said...

JR, Actually, the strawman is the hyperinflation argument attempting to refute the hyperdeflation it has attached itself to.

Art said...

GOLD AS MONEY AND HOW IT CAN WORK: First of all, we accept and use gold and silver as money. We can then issue gold- and silver-backed currency to circulate alongside precious metal coins (currency to be issued by a national, non-private and non-profit banking institution so as to eliminate the potential for abuse and fraud). Let the market decide the ratio of gold to silver based on the available supply of each metal and people's preference for them. Let the gold and silver backing of currency FLOAT but mark valuation of currency to MARKET continuously by announcing each day what your gold and silver reserves are and dividing it by the ENTIRE currency amount outstanding to determine the value of each unit of currency. Thereby render what you're doing with your currency TRANSPARENT. People will then choose and make the necessary compromise between the CONVENIENCE of carrying and transacting in currency and the SAFETY of holding gold and silver. They will punish you by selling your currency and buying precious metal coins if you're inflating your currency relative to the productive output of your economy.

ABOUT FREEGOLD: Freegold is what we have NOW. We have an ostensibly free market in gold and central bank-issued currency circulating alongside gold and silver and de facto competing with the precious metals in all monetary aspects including that of being a store of value.

JR said...

Hi Carl,

You most recent misguided assertion is:

the strawman is the hyperinflation argument attempting to refute the hyperdeflation it has attached itself to.

Tilting at windmills will get you nowhere quick!

FOFOA writes, in the very post you keep responding too:

"We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."

Its almost as if you didn't even read the post you are responding to ;)

Cheers, J.R.

The Dork of Cork said...

This is a interesting little snippet from Hayek “Denationalisation of Money”

“Opposition to new system from established bankers

This necessity of all banks to develop wholly new practices
will undoubtedly be the cause of strong opposition to the
abolition of the government monopoly. It is unlikely that most
of the older bankers, brought up in the prevailing routine of
banking, will be capable of coping with those problems. I am
certain that many of the present leaders of the profession will
not be able to conceive how it could possibly work and therefore
will describe the whole system as impracticable and impossible.

Especially in countries where competition among banks
has for generations been restricted by cartel arrangements,
usually tolerated and even encouraged by governments, the
older generation of bankers would probably be completely
unable even to imagine how the new system would operate and
therefore be practically unanimous in rejecting it. But this
foreseeable opposition of the established practitioners ought not
to deter us. I am also convinced that if a new generation of
young bankers were given the opportunity they would rapidly
develop techniques to make the new forms of banking not only
safe and profitable but also much more beneficial to the whole
community than the existing one.”

His treatise was very influential in the creation of the Euro - tradional unsophisticated bankers thought of banking as fractionally multiplying a goverment money debt base.
But there is not enough goverment money to pay for private credit creation - the only other mechanism to clear the debt is the freefloating gold on the asset side of the Euro balance sheet.

The Euro was created to cut the balls off semi- sovergin republics and indeed Kingdoms.
Banks are now completly independent of goverment executives.
The Bond between the Prince and the Cardinal is broken.
Ultimate power lads - do not let it go to your heads.
http://www.youtube.com/watch?v=-qTA6ndc51w

The Dork of Cork said...

Sorry about the double post

Edwardo said...

To Costata, and any others who may be interested:

You may recall that about a week ago I offered that my local PM dealer was not reporting dishoarding-my word, not his- of silver stock. Well, today, FWIW, as I was swapping silver for gold he had a very different story to tell.

At roughly two in the afternoon, he'd already purchased 46,000 FRNs worth of silver. As he put it, "I'm up to my eyes in silver."

Dwain said...

JR, indoctrinated much? ;)

Gold is just another strawman portion of the argument. We don't use gold in commerce; its price or value is incidental to the subject.

We will have hyperDEflation in everything measured against No Available Medium Of Exchange.

Will the Fed print Federal Reserve Notes (which are a lean against all of its owning bank’s assets) to fill the void left by the collapse of credit as currency or will the Treasury be forced to print dollars?

And, can they print and distribute them in sufficient quantity to overcome the hyperdeflation that will destroy all commerce before hand,, to the point of hyperinflation?

That's the argument.

Greyfox "It's the Debt, Stupid" said...

Plenty of silver available in my area. Gold is tight, very little available for sale through local dealers.

Tom Christoffel said...

Carl said:

"In today's terms, hyper-deflation via the collapse of credit as currency is the real threat."

This is in line with what Michele Foss sees. The loss of liquidity will strengthen the dollar in the short term in a flight to relative safety.

From FOFA I get the impression that the computers adding zeros as currency will keep up with the collapse of the credit computers providing zeros.

Even though many say the U.S. is not like Zimbabwe in many respects, the fact that it becomes the political thing to do suggests that the political thing will be done.

Texan said...

Carl,

Did you read my post to you and Ash? The G-7 CBs are "buying" debt now for cash.

Fannie/Freddie, TARP, Ireland, Japan interevention, etc.

Yes, if the CBs sit back and let the banks default due to non-performing assets, well then yes of course we will have deflation. In fact, it will be the mother of all deflations. There will be no credit, ergo no trade, ergo no food.

In order to avoid this rather dire outcome, the CBs are using every trick imaginable - including cash for trash - in the name of "liquidity".

Maybe you think the CBs will change course, but I don't. And Bernanke if anything yesterday reinforced the view that the Fed's real mandate is to support asset prices, by basically any means necessary. Inflation is "transitory".

To really understand FOFOA's argument, you have to move past what should happen absent no CB intervention, to what does happen because the CBs have no choice but to act to absorb the credit losses of the system. If you don't agree they will do so, that's fine, but that is where you should focus your disagreement.

JR said...

Hi Carl,

The hits keep coming. You write:

Will the Fed print Federal Reserve Notes (which are a lean against all of its owning bank’s assets) to fill the void left by the collapse of credit as currency or will the Treasury be forced to print dollars?

And, can they print and distribute them in sufficient quantity to overcome the hyperdeflation that will destroy all commerce before hand,, to the point of hyperinflation?

That's the argument.


Thanks, but I already understand your argument, hence this puerile game of whack-a mole. LDO credit > base money. That's your point, the supply of money is collapsing because credit is deflating and they can't print enough base money to counteract this.

But OMG, maybe base money isn't qualitatively the same as credit? I know that is a crazy thought for you to process, so I'll ease you in with a more intellectually accessible thought - hyperinflation is not about supply, its a demand driven event - its about the collapse of confidence in a currency.

*****

As FOFOA just discussed in the recent post Big Gap in Understanding Weakens Deflationist Argument (which you obviously didn't read):

First, the question. "Where will the money come from?" is a question of supply. Yet the answer to hyperinflation lies on the demand side of the equation. This is Rick Ackerman's big gap in understanding. Let me explain. ...

But in the same way that the marketplace has no control over the supply side, the printer is powerless on the demand side. ANOTHER alluded to this years ago when he wrote:

Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

So it is the receiver of currency—not the giver—that determines its value. That's the power of demand. And what do you think happens to the printer when the demand side drops the rope? If he was pulling he falls on his butt. If he was releasing, he's now pushing on a limp string. And this is part of what confounds deflationists. They can only imagine hyperinflation happening while demand is pulling and the printer is releasing. They imagine "inflation-on-steroids," but that's not how hyper works.

The measure of any money's store of value is a continuum of time. It is directly linked to demand and velocity. Even the worst money (say, Zimbabwe dollars during the hyperinflation) works as a very temporary store of value. Perhaps you read stories about workers in Zimbabwe getting paid twice a day and then running out to spend it before coming back to finish the shift. This is an example of the briefest time period in which currency stores value.

The point is, this is the way collapsing money demand plays out in reality. It plays out as the collapsing of the store of value time continuum scale. And as the time in which a currency stores value becomes shorter and shorter, the currency circulates faster and faster.

So a falling demand = a rising velocity....


*****

Ad hominem away at me as you please with labels like "indoctrinated," I thank you for the warm compliment. :) I appreciate your recognition of my understanding of Freegold and hyperinflation as discussed by FOFOA, but those kudos all flow back to our humble host.

Who knows, maybe one day you'll too undertake the task of seeking a greater understanding FOFOA. Until then:

Cheers, J.R.

Ashvin said...

Texan,

We should make clear that financial institutions have been allowed to get wiped out by losses on debt-assets, and governments have been allowed to technically default on their debts. In fact, it happens all the time after a significant credit bubbles.

Even some very big institutions (Lehman Brothers) have been allowed to "fail", which doesn't necessarily mean Dick Fuld (CEO) "failed". The key is to differentiate between who they can afford to sacrifice, and who they cannot.

Your comment concludes by saying:

"I think this is the strategy, but to do it over a period of years to prevent a hyper event. So high inflation, but not currency collapse."

I think you are on to something here, with regards to a clear strategy of targeted monetization over years, but that makes deflation more likely than "high inflation". You can only squeeze people with higher prices for so long when their incomes, investment equity (homes, stocks), retirement funds and welfare benefits are stagnating or decreasing.

Paul I said...

Ash

Keeping going, you're almost there!

"The key is to differentiate between who they can afford to sacrifice, and who they cannot."

Not who, what. They cannot afford to sacrifice a functioning society, so they must keep pressing the button.

Any defaulting debt that threatens the TBTFs has been, and will continue to be, cashed out. Its that simple. And it's addictive for the TBTFs. Just watch it happen.....

Ashvin said...

Paul,

You're right, it's not who, it's what. But it's not necessarily a country with arbitrary political borders, it's a global system of production and wealth extraction. Individual institutions of this system can be sacrificed, as long as it doesn't compromise the whole (from the perspective of the "TBTFs").

Some defaulting debt certainly does threaten them, but not ALL defaulting debt. That is the point of debt, and it has been true for thousands of years. That's why certain societies decided to develop laws against usury, because they recognized it was more than just a way to put excess money "to work".

Instead, it can be used as a means of commandeering a person's productive capacity and bleeding them dry. In fact, debt close to or in the process of default gives major creditors the most leverage, at least when the mechanisms of state power are under their control. It would be a mistake to assume that our modern "humane" society is not capable of reviving debtor's prisons, or that living in a "non-recourse" state means you can walk away from your home with no additional consequences.

I believe FOFOA has stated as much, in so far as he said the elites can change the rules of the game to suit them when it becomes necessary. However, I also believe he underestimates the extent to which the rules can change.

Casper said...

Hi Ash,

let me first say that it's quite refreshing to have new voices on this forum that don't get discouraged after a few posts.

I can see that your views aren't really that much different than mine (most of the old posters) - we all see a deflation and the efforts CBs are making to prevent it. As FOFOA suggests deflation (debt destruction) and hyperinflation (cash for debt that is defaulting) go hand in hand, so your and mine position aren't that much apart.

How much of FOFOA have you read anyway? You said that you're familiar with the "Freegold" concept - what are your thoughts on gold then?

In your previous response to me when I was implying that it was the flow of gold that was most instrumental to international trade you dismissed this with the reasoning that since Nixon has closed the gold window, gold stopped flowing.

Also, what are your thoughts on fiat/gold as a store of value and fiat/gold as a medium of exchange?

Casper

Paul I said...

Ash

Are you honestly saying you think it's more likely that governments will re-introduce debtors prisons to discourage default, than they are to continue their existing policy of back-stopping the credit system? That's ridiculous.

Desperado said...

@Dork,

Great post. Hayek's "older bankers" probably would include Another and other members of the elite with old inherited money. Many of this ruling elite must have seen this coming and would have their wealth protected if not in gold then certainly land and art.

My concern is that these guys may be pushing us to freegold in the realization that they would remain "giants" on the other side, especially when governments and politicians are grasping for any hard asset around and the elite have the lifeblood. Governments will probably attempt a one-time wealth tax on the vulnerable upper middle class, but the giants have properties, accounts and stashes around the world and lots of connections within governments. They will try to retain power and will resort to force to keep their grip on it.

Piripi said...

Desperado said:


”Hayek's "older bankers" probably would include Another...”

Yet the Hayek quote says:

”...many of the present leaders of the profession [older bankers] will 
not be able to conceive how it [new system]could possibly work and therefore will describe the whole system as impracticable and impossible.“

and

”... the older generation of bankers would probably be completely 
unable even to imagine how the new system would operate and
therefore be practically unanimous in rejecting it.“

Another described the new system, predicted it would prevail, was likely involved in the development of the Euro which was structured to operate in the new system, and yet you say he is part of the other group?

You are not stupid, so what are your motives?

Did you even read Motley Fool’s two part post directed specifically at you earlier today?

You clearly understand as much of the thoughts of A/FOA/FOFOA as suits your purposes and reject the rest. o you have a bad case of confirmation bias, or are you simply a troll?

I agree in that Dork's quote was very good, but clearly for contradictory reasons to Desperado's.

Piripi said...

At the very least Another was privy to the reasoning behind the structure of the Euro, understood it (and how) inside out.

This makes him by definition part of what Hayek describes as the "new generation", IMO.

Hayek wrote this in 1976, after all.

mortymer said...

Hilarious:

http://en.wikipedia.org/wiki/Gold_reserve#cite_note-9

"...The IMF maintains an internal book value of its gold that is far below market value. In 2000, this book value was SDR 35, or about US$47 per troy ounce.[8] An attempt to revalue the gold reserve to today's value has met resistance for different reasons. For example, Canada is against the idea of revaluing the reserve, as it may be a prelude to selling the gold on the open market and therefore depressing gold prices.[9]..."

Peter said...

Wow long article and 240 comments!

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

FOFOA -

Thanks for this reasoned and well written analysis. I've been trying to get my brain on this for a bit and your write up helped a lot.

My question is in regard to the end game.

Lets say you're holding a quantity of gold or silver. I get that it makes sense to sell off some near the top to pay off all debt with hyper inflated dollars.

But what happens next?

Do you hold over the hyperdeflationary waterfall into the depression? Do you liquidate some more or all at or near the top and roll it into assets that may not have increased in value as much, such as distressed rental real estate?

Won't the values of silver and gold decline as we go into the depression?

How can you maximize the amount of purchasing power that you hold into the deflationary period and set yourself up to take full advantage of the massively reduced asset prices?

I can't get my brain around this yet.

Your thoughts?

Ashvin said...

Casper,

"How much of FOFOA have you read anyway? You said that you're familiar with the "Freegold" concept - what are your thoughts on gold then?"

I'm familiar in so far as I have read a few FOFOA posts on it awhile back, so I probably need to refresh my memory. I do see gold as a potentially competing currency to fiat, but in a much less complex world. But then again, I could see many other forms of currency being used at these smaller scales.

So what I mean is that a system of gold floating against fiat (as a value store and exchange medium, respectively) does not seem feasible in a global society at our current level of financial or industrial complexity. I think that system, just like the current credit fiat system, would not be sustainable.

So, to sum up, I obviously don't agree with the concept of Freegold, but if I misunderstand it, please let me know and point to an article where I can refresh my memory.

Also, I wasn't trying to say that gold stopped flowing after Nixon, just that it's flows were not driving the dynamics of the financial system. I would say that the very concept of storing value took on a new level of abstraction, in which value was extracted from present productive labor/assets by selling them expectations of future productive/consumptive power, and the value then stored in digital records backed by the full force of law.

I say it's abstract because it's hard to explicitly or analogously imagine such a system operating at a smaller scale that consisted of just a few people engaging in economic activity between each other.

Paul,

"Are you honestly saying you think it's more likely that governments will re-introduce debtors prisons to discourage default, than they are to continue their existing policy of back-stopping the credit system?"

No, not at all. I said it would be a mistake to assume it was not possible, not that it was "more likely" than anything. And it's not all or nothing in reality... they could easily do a combination of both those things as well as many other tactics.

Also, it's not just to discourage default before the fact. It could also be used to force payments in some form from the debtor or his/her family/friends after the fact, as well as just a general means of limiting peoples' freedoms.

costata said...

Ash,

You exemplify sophistry:

So what I mean is that a system of gold floating against fiat (as a value store and exchange medium, respectively) does not seem feasible in a global society at our current level of financial or industrial complexity. I think that system, just like the current credit fiat system, would not be sustainable.

Check your brain at the door, Ash speaks.

Ashvin said...

costata,

For you, I can simplify:

Never-ending economic growth is NOT a given, and has most likely reached its terminal decline, regardless of the monetary paradigm our global society decides to use in the future.

Casper said...

Hi Ash,

there are many articles you may wanna read but I think you should definitely read:

"Gold is money" part 1,2,3

which were published in october 2009.

Then go to:

"Freegold Foundations"

published in january 2011

You can access them through links on the right hand side of the page.

Casper

Dwain said...

Texan,

The term "Credit Money" is an oxymoron.

The CBs are expanding and expending credit, that have yet to print any money in any significant quantity. All the hyperbole about impending hyperinflation is a gross mischaracterization of the reality surrounding current events.

Dwain said...

JR, I’ll make a deal with you; you refrain from using language that can be construed as underhanded slurs that attempt to besmirch my character and I'll refrain from using language that can be construed as ad hominem. OK? OK. It would also be nice if you were to actually address my argument instead of the one you've concocted for me. Thanks.

I find it ironic that you would presume to school me on the difference between credit and money when FOFOA's entire hyperinflation argument is dependent upon eradicating that distinction.

We are standing witness to the greatest credit/debt bubble expansion in the history of the world and all we get from the so called "experts" on the subject are wrote, quasi-historical, rejoinders replete with gross mischaracterizations and misnomers that portend an imminent hyperinflationary event that has no chance of taking place. And to understand the "why?" of this, all one has to know is the difference between credit and money.

There Is No Spoon

See my Blog: All money is currency but not all currency is money

Ashvin said...

Casper,

Thanks for recommending "Freegold Foundations", it certainly helped me see the concept in more detail. For the record, I do believe FOFOA (and FOA/A) are/were very insightful observers of monetary and currency history, and appear to fully understand the their theoretical foundations (much better than I do). I am confident they could discuss that history with the likes of Marx (the irony, I know) or Hayek themselves.

That being said, my earlier point has not changed. I do not believe a transition to a Freegold monetary paradigm is inevitable given the dynamic evolution of human society over thousands of years. Gold as a "focal point" store of value for excess (net) production relies on the continued existence of increasing net production, which relies on increasing net energy/resources.

You may say that it is unfair to bring peak oil/resources into this debate over short-term deflation or HI of the dollar. I would say that it is necessary if we want to consider the premise that Freegold is inevitable. If I am correct, at it is not, then perhaps the arguments for near-term dollar deflation become more compelling (which would most likely also substantially reduce the dollar value of gold).

I think it is counter-intuitive for most to think that a fiat currency designed for its ease of use in exchange could increase in value when those "easy" mechanisms of exchange break down. However, IMO, it is very possible and even likely, as long as people continue to trust it as a medium of exchange. I believe the latter is also possible and likely over the next few years.

I'm sure this discussion, however, will continue on for some time as well, and I am not the one to make up my mind with 100% certainty and refuse to listen to new arguments... so I will continue reading and learning.

Art said...

@Carl

YOU SAID: "The CBs are expanding and expending credit, that have yet to print any money in any significant quantity. All the hyperbole about impending hyperinflation is a gross mischaracterization of the reality surrounding current events."

MY REPLY: The only way to lock all that credit into wealth and value is to turn it into currency and use it to buy real money like gold and silver, or other commodities, or means of productive output like factories, or real estate etc. The choice the bankers have is, do they let all that "credit" disappear in the inevitable monetary dislocation to come OR do they jump ship first?

I reckon some aspects of the panic that will ensue will have hyperinflation-like outcomes.

Desperado said...

@Blondie, I hadn't noticed Motley Fool's post(s). A reply will soon follow.

You wrote:

"Another described the new system, predicted it would prevail, was likely involved in the development of the Euro which was structured to operate in the new system, and yet you say he is part of the other group?....You are not stupid, so what are your motives?"

I don't think this statement of yours really contradicts my assertion that Another was likely an "older banker" because my assertion was that at a minimum some of these guys realized where this fractional reserve fiat system was headed and that likely their plans incorporated freegold or something similar. As far as the Euro is concerned I have posted my skepticism concerning the arm twisting revolving around the Euro implementation many times, and Another's involvement/support for the Euro is what turned me into a skeptic of his. IMO, a final freegold system in Europe with a non-elected EU bureaucracy controlling the masses through the Euro is very far from being a desirable outcome.

Finally, I don't really have any "motives". Like Mikette, I dislike the "intellectual" bullying that goes on on this site, especially when it comes the that continual inquisition concerning "how many times have you read the archives?". I also have a sneaking suspicion that many who claim to have seen the "freegold light" are simply riding on the bandwagon.

Tom Christoffel said...
This comment has been removed by the author.
radix46 said...
This comment has been removed by the author.
radix46 said...

Desperado,

So, if you don't like the ideas or the 'bullying' atmosphere, then I assume you are only here to save all the poor misguided Freegolders from themselves or are some kind of masochist.

You don't seem to like it much. Why are you here?

DP said...

@costata: +1

Desperado, promise me you'll never change. (A promise I just know you'll keep.)

Goldilocks said...

Tina said

This leaves the question to everyone living outside the $system how will this Hyperinflation affect me? Especially what will be in the Euro Zone?

Well no one really lives outside the $ system :) Not much discussion on this aspect although there are many readers in RoW. I am interested in how the commodity currencies and their economies will be affected i.e. Canada, South Africa, Australia.

The ZAR trades more and more with gold than it ever did. Before it was a favourite short during risk aversion and everyone barrelling into treasuries, now this isn’t nearly as much the case. The dollar carry trade is alive and well, our stocks are back to 2008 highs, China looking at gold miners, Wal Mart buying controlling share of one of our biggest retailers, Vodafone buying controlling share of our biggest cellular company, real estate bubble resisting collapse, consumers maxed out.

Although the ZAR is backed to the tune of 70% by the dollar, it’s always been more about the gold [and other PM’s] in the ground which is the real backing. We have MTM gold reserves of only 130 tons or so with a possible 6000 tons still in the ground. Our currency is reaching “new” highs against the dollar and one wonders whether it could go back to 0.70 to $1 as it was in the late 60’s early 70’s before the Nixon event. The appreciation of the ZAR is still not keeping the fuel and food inflation in check but it is lessening the impact. Gold, silver, platinum are still rising in ZAR terms.

On the political side there is pressure to join the currency race to the bottom from trade unions and the socialists to protect the non PM export sectors like wine/manufacturing. However with an economy just 2% of the US there is no point in buying dollars to weaken the currency, we are outgunned, although this hasn’t stopped the Reserve Bank trying, with big losses. Our remaining capital controls on outflows have been abolished rather than a tax on inflows a la Brazil.

I surmise that during a HI of the dollar we would see these trends ramp up. This would cause huge asset deflation here and I’m staying well out of real estate until the dust clears, especially since we have the biggest bubble in the world at over 400% as an average, up to 1000% or more in some areas. Food and fuel will skyrocket and if demand for our exports [other than PM’s] tank again we will go straight back into recession.

Since the IMF practically runs our Reserve Bank and monetary policy I don’t know what measures will be taken. The safest, and the right bet so far, has been to stay primarily with gold and some silver, and to keep on buying.

Desperado said...

@Motley Fool,

Sorry, I missed all three of your posts, I hope that this reply is not too late.

In your post from "Forum 1500" you talked about having 5% of your wealth in Silver. This is probably pretty close to my silver investments although mine have increased due to the crashing GSR. Although I do own a couple of kilo's of pre-1966 Swiss silver coins that I bought around $14/oz and several tubes of Silver Maples, most of my silver is "paper". In fact, a much higher proportion of my silver investment is paper (ZKB Silver ETF) than gold where I have a larger proportion of physical. Here is Switzerland Silver is subject to an 8% VAT that gold is exempted from, so this makes the ETF more attractive. Lately I have been considering moving some of my silver investment to platinum in the hope of being able to catch the "platinum express" the same way I managed to catch the "silver express". One thing Americans probably don't realize is that as a Swiss PM investor my gold has gone nowhere or even down over the last year when priced in CHF whereas silver has done really well. As a Swiss citizen I feel that OECD tax tyranny and EU domination are a bigger threat to my well being than a collapse in the CHF.

In your second post you asked whether I believe in "freesomething". You are somewhat right except that I consider "freesomething" to be more like the golden fleece and I am Jason. There are all kinds of adventures and trials between here there, assuming it even exists.

You then go on with "The final stage is the interesting part. Now while it is true that initially they will still be in a beneficial position, it does not remain true. The thing is, under Freesomething, us ants will be able to protect our value". IMO, here you are making several major assumptions. Firstly, I consider my ever seeing "freesomething" to be roughly as likely as my premature death. Secondly I doubt that the final stage even if it includes some kind of "freesomething" will be anywhere near as "clean" as you seem to think.

You are certainly correct that I am extremely suspicious of the "elites". As a Californian and a Swiss I agree with Celente that Harvard/Princeton/Yale are probably the biggest curse the US faces, and I will never be satisfied if these assholes retain the reigns of power after "freesomething" and sorry, unlike you I will never be "happy with the crumbs".

costata said...

Texan,

Please, listen to Carl,

"The term "Credit Money" is an oxymoron."

What part of that don't you understand? Texas used to be the Lone Star State not the State Of Denial.

If Carl was wrong people would be able to buy stuff with Oxy Moron cards.

Please recall Carl's definition of money:

5. Money - Legal Tender - Federal Reserve Notes & U.S. Minted Coin - Cash.

Of course, the foundation of Carl's ideas and arguments dies (and goes to ideology heaven?) the moment anyone uses a credit card to buy a gram of gold. Who would be so inconsiderate?

costata said...

Desperado,

You wrote:
I hope that this reply is not too late.

It's never too late to hear from someone who can see the funny side of Auschwitz. You may recall saying this:

Sorry DP, I don't feel compelled to lower myself to your level. Why don't you find another concentration camp blog to post your "freegold macht frei" sign.

Dwain said...

costata, I always enjoy your juvenile attempts at sarcasm.

Pleas Read: All money is currency but not all currency is money


.

Ashvin said...

Carl,

"The CBs are expanding and expending credit, that have yet to print any money in any significant quantity."

As much as it pains me to be critical of one of the few people here who thinks dollar deflation is possible ;-)... I think we should be clear in this discussion.

CBs are issuing credit when they monetize Treasury bonds, as it is basically the same as a private bank lending money (sorry, fiat currency) to the Treasury. There may be only a slight aspect of pure money printing that stems from the inherent corruption in the process (CB paying slightly higher value to primary dealer banks facilitating the transaction than it would pay directly to the UST, or other smaller investors on the secondary market).

However, when the CB monetizes a toxic mortgage-backed bond, they are printing a significant amount of money, which represents the difference between what it pays and what the security is worth in the financial marketplace (which can be big since it is "toxic"). There is no additional liability attached to that difference for the bank, unlike the Treasury situation, hence the pure printing of money.

Dwain said...

Ash, it's all credit currency and credit currency will only exist for as long as the assets that back it retain their value, the banks that issue and maintain it remain solvent and functional and the people continue to accept it as currency. A major failure in any one of those components, and credit as currency goes "POOF!".

.

DP said...

'Reserves held at the Fed' are promises to print, not credit.

Ashvin said...

But Carl,

The HI argument is that the third component you mention will fail, in no small part because the Fed will continue to monetize debt-assets of banks.

So it helps to know what exactly they are monetizing, how much and what liabilities attach. If a bank gives the seller of a home money, in return for the buyer's promise to pay it back (secured by the home), and then the buyer defaults and collateral value significantly drops, the bank should technically write down the value of their loan asset accordingly.

When they are allowed not to write it down and the Fed buys it for its previous full value, it is essentially giving the bank money without any liability attached. All else being equal, that increases the money supply without increasing outstanding debt by the same amount. That is a distinct situation from when it buys up Treasury bonds.

DP said...

Mortymer, I strongly suspect this is a much more important 'boring detail for the nerds' than most people here have realised, IMO. I've been waiting to see if anyone else would notice it, and frankly I'm a little frightened that nobody seems to have... :{

Dwain said...

Ash, unless the seller specifically asks for money, all the bank will do is credit the seller's account. Interesting little side note; no bank account of any type within the US has any money in them, they are all credited accounts.

It's all still credit and the ongoing machinations of the Fed only serve to hasten its demise. By the way, the Fed's charter expires in 2013.

Anonymous said...

@DP: I'm pretty sure bank systems don't use "double" as representation and they never will; since that does not allow for the precision needed for storing balances.

I would expect them to use 64bit fixed point (signed).

That gives you range:

-9223372036854775808..9223372036854775807

which is quite large (9.2 quintillion == 9_200_000 trillion), in my opinion.

I'm not sure this is enough... but I would think it gives some small room for catching up (in case of emergency).

Ashvin said...

Carl,

Do you agree that there is some portion of the currency out there that is not credit, meaning its value is not listed on someone's balance sheet as a liability?

That's all I'm saying.

"By the way, the Fed's charter expires in 2013."

If only major institutions died quicker than individual people...

Anonymous said...

@DP: Btw, just checked SWIFT and FIX (out of curiosity) and found out that they're using text-based formats for representing money-values. No problem on this front.

The real question is how is it stored in the database. But since 32bit integer would be blown out of water by average billionaire, I'm betting on 64bit.

Question is how do they represent "cents"... that's something I forgot in my previous message.

Because that issue alone will greatly affect the maximum value that can be represented. I would assume they use 2-5 "digits" for the part after decimal point. Which reduces the maximum that could be represented by factor of 2-5.

Again, this is all wild guess on my part but I'd be surprised to be substantially off mark.

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

@Blondie (or anyone else, for that matter):

Took me a while (and some of my questions were cleared by the comments that were posted in the meantime), but I have first question.

The flow of gold and oil.

Another said something like "gold and oil won't flow in the same direction". OK, let's accept that as premise; makes sense.

Then my question is: why was it beneficial for middle-east to sell their oil (after '71) for ever-decreasing amount of gold?

Their oil reserves are depleting. Therefore it would make more sense (to me) to get the best "bang" for their "buck". Which is something completely different than concentrating on the flow of gold (rather than per-unit value).

So, what am I missing here? Why is it better to keep the gold flowing rather than maximising the profit?

(oh, and all my questions are like this -- sometimes I think I know something and then I read something by A/FOA/FOFOA and it's almost 180 degrees opposite to my "common sense"; that's why I feel I'm more or less lost)

FOFOA said...

Hello Carl,

Congratulations on starting your own blog. Catchy name, too: "Carl Random Thoughts!" Your first post is great. It looks at money and credit from a single, specific, well-defined angle, and describes our system in a way completely consistent with that viewpoint. I realize it is "too be continued," but so far I completely agree with your post!

I try to look at it from as many different angles as possible, but I can respect your tenacity in doggedly sticking to only one until people finally get it.

I have always proffered that hyperinflation will be a physical currency event on the surface, as opposed to credit, plastic, digital or any kind of private institution liabilities. I don't see it any other way. All credit is gone during a hyperinflation, and if not, it is quickly destroyed. No one will ever buy a billion-dollar apple with a plastic debit/credit card. All you have to do is find the inevitable path from here to there. It's quite simple really. In order to keep that unit, the dollar, functioning as a medium of exchange (for themselves, primarily), they will be forced to print it out. And with the quantities needed, they'll have to print higher denominations than already exist.

But as I've pointed out, this "print out" is not the cause of the currency collapse. It is an effect. It is a supply-side response to the market's demand-side reaction to an uncontrolled financial collapse. I think you and I differ on how the supply-side (printer/CB/government) can and will respond when faced with the inability to flex its power by spending currency.

Does the following sound consistent with your post? At least the part about digital currency? I know you think they will never print out, but I assume that'll be in your "to be continued." This is from my post Just Another Hyperinflation Post - Part 2:

---
Another comment: "…but the printing of physical currency is one of the last stages in the game."

No it's not. The printing of physical currency will be the central theme all the way up that curved graph. Hopefully above you got the point that digital currency is simply a promise by private institutions to find you a physical dollar that they don't yet have. Digital currency only circulates as a tethered unit, tethered to the institutional circuit of banks. Imagine a dog run, where you put your dog's leash on a taut steel cable and your dog thinks it is running free, but it is really tethered the whole way down the run. This is how digital currency circulates. When you transfer a digital payment to someone, your bank and their bank are the ones that actually agree to a new debt between each other.

This is important because it happens billions of times a day.

---

Sincerely,
FOFOA

costata said...

Edwardo,

Thanks for the info about your dealer. Bron Suchecki has a couple of interesting articles here.

http://goldchat.blogspot.com/2011/04/silver-debunking.html

Apparently some of Eric Sprott's funds have been selling down on their PSLV shares.

Indenture said...

Gold, Gresham's Law and the Dong

"Unable, therefore, to directly incentivize people the hold paper money, the authorities have resorted instead to marginally disrupting gold's monetary function. But this won't work. People will still prefer to hold gold because the Dong is failing to fulfill one of the core functions of money. It is a terrible store of value.

That is why the Vietnamese continue to hoard "good" money (gold) while passing the bad stuff around. Just as Gresham's Law predicts."

Terry said...

So, a monetary system (Freegold) was created to combine the needs of the easy and hard money interests, many years ago, and it is in the process of destroying the world economy so the new system can be implemented, and minimize the blood shed during the transition. A plan that spans generations. Wow!
http://terry-cogitations.blogspot.com/

costata said...

Indenture,

Thanks for the link to that piece on Vietnam.

Cheers

Pete said...

@ Ash

Just to clarify:

HyperInflation does not equal 'excessive inflation.

HyperInflation results from a reduction in confidence in a pure fiat currencies ability to act as a store of value.

The USA is the reserve currency of the world. The USA is not 'the world', there are other countries besides the USA. These others countries use US dollars. These other countries will stop using US dollars if they are not confident that it will hold it's value.

What do you see happening at the moment? The USD is being massively devalued across other currencies.

Do you really think the collapse of debt will make people think the USD is suddenly valuable? Do you think that if the USD defaults on debt provided by other countries, that they will continue to support use of the USD?

There will be no miracle deflation of the USD that makes it suddenly more valuable. Even Paul Volcker couldn't save the USD by hiking interest rates, because the local US economy would die (even more so).

If you take into account the forces of BOTH local and international USD valuations/confidence, perhaps you will see differently.

Tom Christoffel said...

Here's another item which may be of interest. Its from Jesse - a metals advocate at Jesse's Café Américain:

26 April 2011
Eisenbeis: What's A Central Bank To Do Besides Printing Money (And Pursue A Hidden Agenda?)

"I thought this was a fairly nice thumbnail sketch of the problem facing the world's central banks vis à vis the US dollar as reserve currency and globalization. I have to add that this current impasse was not unforeseen.

I suggest you take a look at a very brief description of Triffin's Dilemma.

The Triffin dilemma is a theory that when a national currency also serves as an international reserve currency, there could be 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 whose currency foreign nations wish to hold (i.e. the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfil world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit.

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 any national currency as an international reserve currency.

The problems with any domestic currency operating as the world's reserve currency are well known, and yet the United States decided to pursue this after Nixon closed the gold window. Perhaps that is because the risks to the many were outweighed by the benefits to a few.

I enjoyed the author's flat out statement that "it is undeniable that the world's central banks collectively have flooded world financial markets with liquidity by printing money."

... finish at link:
http://jessescrossroadscafe.blogspot.com/2011/04/eisenbeis-whats-central-bank-to-do.html

Lets keep watching together. Thx.

Motley Fool said...

Hiya ad

My view is this. The ROW has as reserves predominantly US $. Once the dollar starts hyperinflating these reserves will quickly be worthless, which significantly affects their asset positions. Even if they have MTM gold reserves and this buffers the fall, the effect on people as a whole will be unchanged due to the action of the gold price. As we know the behemoth of government is slow to react, by the time they find somewhere to deploy these reserves( assuming they find anyone willing to take them) it will be too late.

I do not envision this collapse happening overnight. So while it is in progress the price of gold in all fiat currencies will continue rising sharply. This will trigger a global run on banks as people try to get currency out( while it still has some value left) to try and buy gold and essentials. This will spark hyperinflation in all other currencies. As FOFOA has so brilliantly illustrated, HI is a psychological event. This includes a major sell-off of any available bonds and equities. I concur with Another that all paper will burn.

I do think HI starting in the US dollar is key( it being the world reserve currency), though any earlier pressure of HI and or high inflation in other minor currencies( such as the Vietnamese Dong, what we saw in Greece, etc) of course impacts the price of gold and the pace of the final collapse.

That's my opinion. I welcome anyone that can contradict my logical progression. It's a tough topic. If there is flaw in my logic it is about the effect of the dollar collapse on the exchange rate of those countries with a MTM gold reserve and my opinion that the increase in gold prices due to this panic will exceed the rate of currency revaluation due to MTM reserves. Haha, what a sentence. I would welcome our host's opinion on this delicate dynamic. :)

Last note... 6000 tons only? I had hoped we had more reserves. :(

Cheers

TF

Motley Fool said...

Hello Desperado

Nope, I'm still around to read it, so it's not too late.

Hehe, I see.

Well here in South Africa the same has happened in regards to silver and gold, also due to our strengthening currency. Silver up, gold about the same. Incidentally I view the stable gold price as a blessing as opposed to the curse which you see it as.

What I also see is that you are a trader. You want to make gains on 'whatever' during this collapse, shifting nimbly around. You probably don't pay much mind to FOFOA's comment that wealthy people know that true wealth doesn't always need to be correctly priced, as long as it does so once. With this in mind I don't think this blog is for traders(trading). Don't misunderstand, I am not opposed to you being here. I'm careful of confirmation bias and welcome logical counterarguments, and you are intelligent enough to maybe provide some in future.

Being that you have physical gold you are on the right side of this fleecing, most the rest of the public are Jason's. Debates on the morality of this fleecing aside, as a practical matter I prefer being on the right side. My response to the moral question is that I started a blog on the topic a few years ago, that is as much as I am able and willing to do.

I do think Freegold is coming soon enough, a few years at most. I am happy with crumbs now because that is all I can afford. To want more than you can afford, puts one in the debtors camp, which I am not. I believe it is honest and good to live within my means.

Sadly it seems my main point was lost on you. Those "assholes" won't remain in power using the same kinds of tricks after Freegold. Perhaps you should read my most recent blog post on my view of what effects Freegold will have on the world. Maybe that will help you.

Alas, as Blondie observed it seems to be hard for most people to peek behind the curtain.

Peace

The Fool

Piripi said...

Wejn said:

”why was it beneficial for middle-east to sell their oil (after '71) for ever-decreasing amount of gold?

Their oil reserves are depleting. Therefore it would make more sense (to me) to get the best "bang" for their "buck". Which is something completely different than concentrating on the flow of gold (rather than per-unit value).

So, what am I missing here? Why is it better to keep the gold flowing rather than maximising the profit?”


FOFOA addressed this directly in It’s the Flow, Stupid:

”The producer/saver doesn't care about the price of gold, only the flow. To the producer/saver the price doesn't matter because it is a straight currency exchange, like exchanging dollars for euros.“

The bucks you are referring to are for saving to their capital account, so what better place than gold, which preserves the ability to maximize "bang for the buck" indefinitely?

DP said...

@Wejn, how about an old school 32 bit float for some of the less recently written code?

Indenture said...

Ben Bernanke as a Three Card Monte Dealer

J said...

I came across my first "gold to go" vending machine about an hour ago.

I felt obliged to make a purchase. Pretty neat.

Anonymous said...

@Blondie: No, the "bucks" was their oil reserve.

The thing I don't understand is why is it beneficial for them to sell their oil for always decreasing quantites of gold (per unit of oil), as opposed to standing behind their price (not selling for less than fixed amount of gold, no matter the current USD price).

The saving into gold is crystal clear to me. ;-)

Anonymous said...

@DP, that would not work even today (re my "blown out already by average billionaire").

32bit range:

-2147483648..2147483647

when you take at 2 digits for "cents" (bare minimum), you get 21_474_836 maximum which is not all that much.

Therefore I would say it is not stored in 32bit fixed point even today.

mrbeyond said...

Economic hitman has a point of view about recent proceedings in the gold dinar and oil trade freed from dollar. In the mix Robert Zoellick has a word of his own also regarding World Bank and the new currency. Toughts on this?

http://www.johnperkins.org/?p=1051

Ashvin said...

Pete,

Yes, those "clarifications" are not disputed.

"What do you see happening at the moment? The USD is being massively devalued across other currencies."

I see many countries devaluing their currencies, with the Euro having the worst prospects this year.

'Do you really think the collapse of debt will make people think the USD is suddenly valuable?"

Uh, yes, and not suddenly. The process has been underway for a few years now. People continue to lose jobs at an alarming rate, wages continue to be suppressed, benefits continue to expire and consumer spending continues to be dismal. These people are (were) paid in USD. Only in the last few months have we seen a sharp spike in commodity prices, which corresponds to a similar equity (see "risk asset") spike as well.

"Do you think that if the USD defaults on debt provided by other countries, that they will continue to support use of the USD?"

No, not necessarily.

Approximately when do you believe the UST will default on its debt, and what do you think will happen to the USD's value between now and then?

Texan said...

Wejn,

Check out the PBS documentary "House of Saud". It's great.

The Saudis sell oil primarily in exchange for implicit military protection. They also get to use thir USD to buy gold at bargain basement prices, though my view is that most of their petrodollars are recycled into paper securities, ie bonds, equites, and of course, real estate, yachts, planes, and some infrastructure investment in their home country.

Pretty good deal.

Texan said...

Ash,

The argument is that if the government devalues the USD via overprinting, ROW CBs will not want to hold dollars as reserves.

This is the paradox of Triffin's Dilemna. In its own way, being THE reserve currency is equivalent to a gold standard, because holders of your currency are expecting you to maintain it's purchasing power. This expectation, the so-called "strong dollar policy", severely limits an economy's ability to rebalance via currency devaluation. In fact, if one is very strict about maintaining PPP, the reeve currency gets arbed out by mercantilists like China.

No one gets to have the cake and eat it too, but that is exactly what the US is trying to do. But I think the ROW is now fully convinced that the actual goal is weak dollar, so opts a question mow of whether the decline remains semi-orderly or not.

If not, the conditions for ROW HI being imported into the US are created.

Pete said...

@ Ash

Regarding USD increasing in value:

"Uh, yes, and not suddenly. The process has been underway for a few years now. People continue to lose jobs at an alarming rate, wages continue to be suppressed, benefits continue to expire and consumer spending continues to be dismal."

Look outside of the USA. It doesn't matter what the locals think, to a large extent. Also, if no-one locally has any money, times are going to be tough. That does not bode well for employment and economic growth - both of which are vital if other benefits such as retirement and health care are to be paid for (and that's not all).

"Approximately when do you believe the UST will default on its debt, and what do you think will happen to the USD's value between now and then? "

Well, following FOFOA, I don't think the US will default on its debt. And if I did think that, I wouldn't have a time-frame. There's no way for me to second-guess the will of the rest of the world and their confidence in the USD.

In general, I take your argument to be that the US will not 'let' hyperinflation happen. FOFOA covers it fairly well in this article. I think the counter to your argument is that they don't actually have much of a choice. As Texan has said above, the US is trying to "have the cake and eat it too". The rest of the world will get sick of that, and when it starts, the US's problems will become exponential.

Dwain said...

Hello FOFOA,

My position on this subject is not dictated by a point of view, it is dictated by this: If you do not understand the mechanics of a thing then you will never be able to properly diagnose problems when they arise or properly predict an outcome when it fails.

The majority of this information can be found on Federal Reserve web sites.

Here it is in a nutshell:

The Federal Reserve System is a government contracted service.

The Federal Reserve Note is a private issued currency owned by the Federal Reserve Banks.

Issued Federal Reserve Notes are backed by the assets of the Federal Reserve Banking system.

The government also backs the note issue with its full faith and credit while retaining the right to take control of the notes and the assets of the Fed that are used to back them.

And then, we have the wild card: United States Treasury issued Dollar Notes or USDs, which are still in play.

Now, if you can take this information and apply your considerable deductive reasoning skills to it, I’m reasonably confident that you could build an alternate scenario and outcome to the one you’ve currently chosen.

Carl

Dick Groen said...

about velocity (and gold)

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/4/30_Jim_Rickards_files/Jim%20Rickards%204%3A30%3A2011.mp3

Dick Groen said...

about velocity (and gold)

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/4/30_Jim_Rickards_files/Jim%20Rickards%204%3A30%3A2011.mp3

Texan said...

Carl,

US Dollar Notes? What are those?

Jeff said...

300 comments and one conclusion: it's foolish to argue with deflationists and silverbugs. They are like priests studying chicken entrails, creating complex scenarios, oblivious to events around them. Buy silver, hoard dollars; it's your business. Time will prove all things, someone once said. Freegold is coming and if you can't see the train coming down the track it will run you over. The train doesn't care! Neither do we. Freegold is coming.

mortymer said...

Carl, good post on your blog. Well defined.
FWIW:
USG~FED~BankSys
where "~" = umbilical cord

&

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationist get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)~FOA"

mortymer said...

FWIW2:
It is all about external int. link/relationship which you did not put into your equation -> phasing out USD out from a reserve currency status while introducing new system. In this new sys USD acts as any other currency.

Dwain said...

They are Dollars owned by the United States Treasury, not the Federal Reserve.

Here's a picture of 1963 $5.00 note.

http://upload.wikimedia.org/wikipedia/commons/9/94/US_%245_1963_USN.jpg

I believe there are about $240 Million USDs in circulation but don't quote me on that...

.

Dwain said...

mortymer,
Thanks for the positive comments regarding my blog.

That quote by "FOA" illustrates his misunderstanding of money. He speaks the lingo without bothering to understand what it means.

.

Jeff said...

Carl,

That's pretty funny. You are new around here but already you are sure FOA (have you read FOA, btw?) doesn't know what he's talking about. You seem like the kind of party guest who arruves uninvited, drink the hosts liquor and loudly proclaim the party a bore, and the host uncouth.

Should I go to Carl's blog and pontificate on his ignorance of the subject matter? Why bother...

Dwain said...

Jeff, I'm sorry; I didn't mean to hurt your feelings.


Let me clarify my comment for you; if FOA is going to convey an argument with any gravitas then it would behoove him to be more precise in his choice of words, there meaning and the context within which they are used, especially so when he is conveying condescension.

For instance, “fiat” is the dollars in your wallet and the coins in your pocket and they are not destroyed when a debt is defaulted.

Now if he is so fundamentally wrong regarding the use of the word “fiat” then how am I to gauge his other word choices and the context they are presented? What does he mean when he uses the words “cash” or “dollar” or “printing”? If he can’t get “fiat” right then what else is he getting wrong? How can I trust anything else he writes on this subject?

FOFOA said...

Carl,

What I liked about your blog was that it was a breath of fresh air from the nasty persona you project in forums. It was different from the cryptic snarking you have been spewing onto forums for years. Instead of proclaiming that anyone who's not a deflationist like you simply doesn't understand the mechanics of money, you carefully explained part of your perspective.

But from your comments today I can tell that you are under the delusion that there exists a universal explanation/definition of money and it is yours. Good luck with that!

There's one other thing I can tell from your words today. That no matter how well it turns out that you know and understand American money, its laws, history, definitions, the mechanisms of the Fed and the Treasury, and whatever else you think you know, you are very clearly only looking at half of the big picture that brings about hyperinflation.

Deflationists like you are complete nits. If anyone had doubts, it was cleared up by your last comment:

"if FOA is going to convey an argument with any gravitas then it would behoove him to be more precise in his choice of words, there meaning and the context within which they are used, especially so when he is conveying condescension…

"Now if he is so fundamentally wrong regarding the use of the word “fiat” then how am I to gauge his other word choices and the context they are presented?"


And by nit, I mean what I wrote in a post last September:

"What is a deflationist? It is one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up"

I won't even bother with the question of who is more condescending, FOA or Carl when he writes:

"That quote by "FOA" illustrates his misunderstanding of money. He speaks the lingo without bothering to understand what it means."

Carl, do you even know what I meant by "only looking at half of the big picture?" Nowhere have you even come close to displaying an awareness of this most important monetary mechanism. I bet you don't even see it or know that it exists!

Also, can you see that your words quoted in this comment display a delusional personality? You know, I was excited to have a dialogue with you when I read your first blog post. I thought, finally I can see where Carl is coming from. And then you come back with more of your tired old true believer bullshit. I am disappointed that you confirmed what I suspected.

Sincerely,
FOFOA

Diamond Jack said...

I have heard everyone loves a circus. The lead photo seems to draw the traffic?

A tour de force, a love story, a question that answers itself.

Could it be that FOFOA, not an activist, is building a consensus? Insight and perspective bridge gaps in understanding.

I only know that reading this last wknd almost had me late for Pilates. More

Blue Donkeyman said...

Dear Fofoa,

I hope you can answer this in a regular post and not in the comment section since I will never find it here.

I have a question. I live in Greece and things are shitty here as you know. They are acutally shittier than most people are aware. After a recent trip to Athens (I live on Santorini) I notices about 40% of the shops in my neighborhood strip empty with "for rent" signs on them. They are killing us with austerity in order to pay the debt and this is taking a terrible toll on the economy and I dont really understand how they expect to raise revenue when everything is shutting down. If I understand correctly, you say that the bankers will get 100% of their paper paid to them at our expense and that they will use this money to buy gold. Here in Greece it looks like this paper will be traded for other things like islands, the acropolis, our national lottery corp, the public power company, tolls, etc. They will take these national treasures and once they have taken them we will be hung with the haircut (50-95% according to zerohedge). Is it possible that all the paper that the elites trade in will not go to gold but perhaps they will get assets as I described above instead? I mean gold will benefit but perhaps not as much if they transder the useless paper to other weatlh assets which generate income?

Diamond Jack said...

I knew viscerally that physical activity ultimately serves my inner being. The physical benefits are undoubtedly important, but the effect on the inner being carry implications that are infinite. They influence how you function, how you feel, how you relate to yourself and those around you, and how successful you are in every respect.

Real Isacowitz
Pilates

Diamond Jack said...

That's Rael Isacowitz


My mom sends a note,
Just because it's called Fungold doesn't mean you can run across the room with scissors in you hands.

Someone was looking for a currency to bridge dollar collapse and RPG. Fungold Personal Fuels Division has envisioned the Exlir (-e). A liquid store of food value that seeks to replicate the effects of know social lubricants. It can also be used as a fuel.

When mind and body are aligned the occurs, at times what I call the Firework Effect.

To wit. The idea to liquify fermentables lead to obtaining a vitamix. I got the old school version. 3600 plus. One third price of new ones. Post Fungold I'm buying a new one, hell, I might buy the company.

Been drinking smoothies ever since. Great way to use and save on food.

Cheers

costata said...

info,

If you don't mind I would like to respond to the question you posed to FOFOA.

Sometimes we use the word "gold" here in the context of "enduring value". When you speak of Greek assets being sold off such as the Acropolis I read that as akin to selling off the "Mona Lisa". An exchange of an asset (currency), or settlement of a currency debt, with an ephemeral value for an asset of enduring value.

If you are seeking to protect wealth and you cannot obtain, say, gold you must move down this pyramid of enduring value taking the best alternatives you can obtain. Prime real estate is obviously one of the alternatives. Likewise if you are attempting to collect on a debt that is not collateralized. You try to take the debtors assets anyway regardless of whether you have any legitimate claim on those assets.

The IMF forces states to settle debts with an exchange of assets of enduring value at firesale prices. Think of it like a debt (bonds) for equity (stock) swap.

Instead of a haircut on the bondholders the public are also squeezed to service debts for as long as possible. This is a competition to make someone else bear the result of debt becoming unpayable and the lower standard of living called "austerity".

Some of these budget cuts are necessary where the social welfare state has grown to be unsustainable but the IMF does vastly more harm than good because its stated mission is not its' real mission. It is an enforcer. A leg breaker for the loan sharks.

Nick said...

FOFOA,

Another great post, with such clarity. Glad to see the huge increase in stats. However, as you can tell, an increase in new readers brings an increase in comments, some of which show an ignorance to the prerequisite knowledge of your older posts and the posts of FOA/Another. If I may suggest, perhaps a post directed towards your suggested readings on freegold and hyperinflation is in order for the plethora of new readers? (beyond the scope of the excellent articles linked to in your most recent post)

Just a thought. And thanks again for a great read!

Ashvin said...

Pete,

"In general, I take your argument to be that the US will not 'let' hyperinflation happen. FOFOA covers it fairly well in this article. I think the counter to your argument is that they don't actually have much of a choice. As Texan has said above, the US is trying to "have the cake and eat it too". The rest of the world will get sick of that, and when it starts, the US's problems will become exponential."

My arguments are much more fundamental than anything you assume, or reflect from cliches about people having cakes and eating them too. You guys need to come up with one coherent argument, that is not logically inconsistent.

Too much to ask? Here's how it can be done:

Take your conclusion that HI of the dollar is inevitable to occur before any $ deflation and ask yourself why it is inevitable?

Is it the money printing? What if someone gave you a decent argument for why money printing on its current scale would not be continued. Or that none of that printed money would ever make it out into the real economy.

Then, tell me, what would be your response, assuming he is right?

If you still think people will lose confidence in the dollar soon, regardless of money printing, then explain what are the likely events that would cause such a loss of confidence in such a short time period.

If you believe it will happen, but could be anywhere from next month to five years from now, then tellme what you think will happen between then and the HI tipping point, in regards to the dollar's value.

There are simple questions requiring a bit of straightforward logic and honesty. I have asked versions of them multiple times on this forum, but unsurprisingly, I have yet to receive any coherent reply...

Look forward to hearing them.

Anonymous said...

On a somewhat different subject. Most of you have probably heard of the paper

Gibson's Paradox and the Gold Standard by Robert B Barsky and Lawrence H Summers.

I encourage everyone to read the original paper rather than what various secondary sources say about it. The paper is very well written and quite readable.

Brief summary: The price of gold in real terms (i.e. the purchase power of gold) has a strong inverse correlation with the real return on long dated bonds. This is an empirical finding backed by a few centuries of data and holds both during the time of the classic gold standard and during times in which the price of gold floated.

This discovery of Barsky and Summers contradicts one of the common claims of you free gold people, namely that the purchase power of gold will rise sharply when the US$ financial system fails and that it will stay elevated.

Barsky and Summers would agree that the price of gold will rise extremely high when the failure of the US financial system is imminent. For their results to apply it does not even matter whether the dollar loses its value through strong inflation or whether large parts of the banking system default in a deflation similar to the 1930s. In both cases, the (risk-adjusted) real yield of long dated bonds is strongly negative.

But according to Barsky and Summers, once a new financial order has been established with higher real long term interest rates, the price of gold would decrease again and not remain elevated.

The findings of Barsky and Summers are backed by a few centuries of data, whether or not the price of gold was pegged to the official currency. You can even use their idea in order to detect whether the price of gold was pegged or not. When it is pegged, the real price of gold increases by a decrease in consumer prices relative to the gold standard currency. When it is not pegged, the real price of gold rises by increasing nominally even faster than consumer prices. Reginald Howe shows a graph that uses the idea of Barsky and Summers to support the claim that the price of gold was basically pegged to the dollar during the 1990s.

So, how do you sustain your claim that the price of gold in real terms will stay high and how do you refute Barsky and Summers?

Victor

JR said...

Victor,

Briefly, the essence of their paper is "A shock that raises the underlying real rate of return in the economy reduces the equilibrium relative price of gold"

That's consistent with Freegold. A store of wealth that can be hoarded or utilized. And the real return available is a big factor in that decision.

Right now we are in the midst of a "shock" that is *diminishing* the underlying rate of real return in the economy.

Cheers, J.R.

JR said...

Victor,

WRT to the "Strong Dollar Policy" evident from Barsky and Summers' investigation into the relationship between currencies and the pricing of gold in those currencies, our host has long ago issued some initial observations in comments here and there and more fully discussed in Is the Dollar "Good as Tungsten"?

Cheers, J.R.

BonusCash said...

"Brief summary: The price of gold in real terms (i.e. the purchase power of gold) has a strong inverse correlation with the real return on long dated bonds. This is an empirical finding backed by a few centuries of data and holds both during the time of the classic gold standard and during times in which the price of gold floated."

I think you are failing to fully appreciate that during most of that time frame that gold was the currency, also. It is an apples to oranges comparison.

When gold is the reserve currency, it is naturally going to be inversely related to long bond yields.

However, we are in a the first ever world fiat reserve currency data set. The only data that even can come close to be relevant is from 1971 on. Even then, that data set is not able to fully account for the manipulation of bond yields and the POG that will only be fully realized once the entire data set is complete(i.e, FRN collapse).

Let alone the fact that the other data sets didn't have to contend with digital currencies and derivatives.

costata said...

victorthecleaner,

Thanks for the link I always enjoy reading Reg Howe's papers. It seems like years since I read that paper. I'm not sure how you justify the conclusions about the implications of these papers for the Euro Freegold-RPG regime we discuss here nor any contra-indicators you seem to find in this research. (Though I have been unwell and it may be the medication I'm on.)

(Howe in quote marks with plain text and Barsky and Summers in italics (as quoted by RH)):

"For this, they develop a simple model (at 539-543) that assumes full convertibility between gold and dollars at a fixed parity, fully flexible prices for goods and services, and fixed exchange rates........ Next, they examine the response of the model to changes in the available real rate of return."

The economic mechanism is clear. Increases in real interest rates raise the carrying cost of nonmonetary gold, reducing the demand for it. They also reduce the demand for monetary gold as long as money demand is interest elastic. The resulting reduction in the real price of gold is equivalent to an increase in the general price level.

Data from recent years indicate that changes in long-term real interest rates are indeed associated with movements in the relative price of gold in the opposite direction and that this effect is a dominant feature of gold price fluctuations.

As the chart shows, Gibson's paradox continued to operate for another decade after the period covered by Barsky and Summers. But sometime around 1995, real long-term interest rates and inverted gold prices began a period of sharp and increasing divergence that has continued to the present time.

VTC asserts (italics):
"This discovery of Barsky and Summers contradicts one of the common claims of you free gold people, namely that the purchase power of gold will rise sharply when the US$ financial system fails and that it will stay elevated."

I don't think the Barsky and Summers research has any relevance to the transition period. It may have some relevance to the present and it could after the revaluation and the transition to the new IMFS regime.

"But according to Barsky and Summers, once a new financial order has been established with higher real long term interest rates, the price of gold would decrease again and not remain elevated."

Rather than assume a decrease I think it would be realistic to say that the price of gold would, after the transition, once again respond to interest rates in a way that their model could predict (to some degree).

"So, how do you sustain your claim that the price of gold in real terms will stay high and how do you refute Barsky and Summers?"

Why do we have to refute Barsky and Summers given the conditions they placed on their model? Do you see "full convertibility between gold and dollars at a fixed parity, fully flexible prices for goods and services, and fixed exchange rates" being the norm under the new IMFS?

I don't think any of those conditions are realistic assumptions.

Piripi said...

"...according to Barsky and Summers, once a new financial order has been established with higher real long term interest rates..."

And if there was a 100% reserve requirement for all lending in this new financial order?

This would impact the setting of interest rates, no?

As a further thought experiment, how about no lending at all, and thus no interest rates? LOL

The model only applies within the confines of their assumptions. The human economy is an organism, and as such bloodless technical theory issued from ivory towers exists at its discretion, not the other way around.

Anonymous said...

Let's see where we are:

JR,

> A shock that raises the underlying real rate of return in
> the economy reduces the equilibrium relative price of gold

'Shock' is a technical term that refers to some reason for a change in real interest rates outside of what they model.

> WRT to the "Strong Dollar Policy" [...]

This referes to roughly 1985-2000. Yes, as the article by Reginald Howe suggests, the price of gold was effectively pegged to the dollar during this period.

But Barsky and Summers also study earlier periods in which gold was not pegged to the dollar and during which the relationship holds.

Finally, you still need to explain why the real price of gold will not go down as real interest rates rise after the transition.

Victor

Anonymous said...

BonusCash,

> I think you are failing to fully appreciate that during most of that
> time frame that gold was the currency, also. It is an apples to oranges comparison.

Take a look at their Figure 4. This is in fact what's so cool about their paper. It is the insight that the relationship is not limited to the gold standard. It is a relationship between the price of gold in real terms and the long term interest rates in real terms, irrespective of what the currency is.

By the way, this is the reason why all of you ought to love Barsky and Summers. It is because their result indicates that gold has always competed with debt as a store of value and that the real price of gold has always correctly anticipated the performance of that debt in (risk adjusted) real terms, independent of what some government might have declared to be the official currency.

costata,

> Why do we have to refute Barsky and Summers given the conditions they placed on their model?

I am not talking about the model. This is why I said, I encourage people to read the original paper and not what others (Howe) write about it. Take a look at Figure 4 of Barsky-Summers and the associated correlation data. This is an empirical finding, not a model.

Again, what you still need to explain is why the purchasing power of gold will not fall when real interest rates rise during or immediately after the transition. The fact that they will rise should be out of question once you buy into either one of the hyperinflation or the deflationary collapse scenarios.

> I'm not sure how you justify the conclusions about the implications of these papers for the Euro Freegold-RPG regime we discuss here

I still do not know what the word 'Euro' means here. As I said earlier, there seem to be two things that are called 'Euro'. One is a fantasy that has no relevance outside of this blog. The other one is the fiat currency presently in use in a large part of continental Europe.

Blondie,

> And if there was a 100% reserve requirement for all lending in this new financial order?

Are you not contradicting yourself here? I thought you expect that the Euro (the fantasy) continues to exist as a fiat currency after the transition. Anyway,

> This would impact the setting of interest rates, no?

yes, they would go up. So my question remains open, doesn't it?

Victor

michael3c2000 said...

In the free, fair and open marketplace, competition is secondary to cooperation. Formal rules are secondary to the common interest. Productive outputs and contributions to society are goods and services, not war, usury, taxation, bondage or other exploitation. This goes a long way towards explaining the contrast between a free and fair gold market and today's collusive corporate fascist markets freely bribing, extorting and intimidating their way from Wall Street to the rest of society leaving not even our daughters bedrooms safe from their lust and greed. This has gone too far for too long. Slowly the wheels turn and with them the fortunes of men.

JR said...

Hi Victor,

'Shock' is a technical term that refers to some reason for a change in real interest rates outside of what they model.

LDO brah! I'm so happy you actually read the paper too and thus know what's in the model. (hint: Howe's labels it "simple" - exogenous = most everything, like most notably real economic activity, is "exogenous").

*****

But Barsky and Summers also study earlier periods in which gold was not pegged to the dollar and during which the relationship holds.

I'd be careful to understand what relationship holds, and what is meant pegged, as in addition to pre "strong dollar policy" and when the US had fixed dollar to gold convertibility or international convertibility under Bretton Woods - aka *monetized gold* -- they go even further back. Again, the essence of their paper is (from the abstract): "A shock that raises the underlying real rate of return in the economy reduces the equilibrium relative price of gold".

And as you note, wrt to the dollar and fixed classic gold standard, (aka *monetized gold*): A shock that raises the underlying real rate of return in the economy reduces the equilibrium relative price of gold and, with the nominal price of gold pegged by the authorities, must raise the price level.

See that! Moentized and demoentized gold. Hmmm. Moar food for thought in the next line: "The mechanism involves the allocation of gold between monetary and nonmonetary uses" Hmm...

******

Finally, you still need to explain why the real price of gold will not go down as real interest rates rise after the transition.

Again, a big point of the paper is: A shock that raises the underlying real rate of return in the economy reduces the equilibrium relative price of gold

In Freegold, gold is a real storage of wealth that will need to be "coaxed" instead of "voted" and/or "taken" or... out of one's possession. Its demonetized. That's what they mean in a sense - in my ineloquent language, the idea is sorta that all else equal, gold's price falls when ample productive opportunities arise and gold is coaxed into circulation, verse when gold lies still and awaits brighter productive times.

Cheers, J.R.

costata said...

All,

I realize this is off topic, but how did you all feel about Kate's dress? Was the train long enough? Was the veil too burqa-like for you?

A discussion of the royal wedding might provide a respite from our forensic examination of the economic fate of the world. And a diversion from the efforts of Ash to provide enough examples of sophistry to supply a textbook on the subject.

Klaverius said...

Victor,

I tend to agree with you, but I'm not sure there is necessarily an inconsistency between FOFOA what you have proffered. During the revaluation, gold will reach a top. It is likely that the nominal price will decline as you have stated when things "normalize," but the equilibrium price will be much higher than the $200-$300 price when the run started.

I guess my question is, how far do you see the price declining after normalization?

Goldilocks said...

Motley,

That 130 tons would be equivalent to 200 billion at $50 000/oz, 2/3rds of SA GDP, not insignificant. Dollar reserves are presently 45.5 billion so gold only has to rise to just under $11000/oz to compensate for the loss. These figures should give one pause. SA would only need to add between 30 to 60 tons or so to equal the US gold reserve proportionally to economic size and output.

Furthermore, 6000 tons for an economy 50 times smaller than the US and roughly a 6th of the population? That’s around 3oz per person. All of a sudden 6000 tons in the ground looks mighty big; because it is.

Sure there will be turmoil currency wise everywhere, but at some point quite early on imo many will realise the above and that will change everything in ZAR terms.

Jeff said...

To follow up on Costata's point; FOFOA posted a well-thought article examing both the HI and deflationary argument. Why can't deflationists take the same tone? Snarky 'gotcha' arguments that start with 'hey dumb inflationists, prove that these 10 points are wrong or I won't believe you...' are wearying. No one is trying to force a belief on deflationists here. If I heard a compelling deflationary premise, I would consider it; my mind is open to new ideas. Are yours, deflationists?

Art said...

FREEGOLD: Use 'worthless tokens' [that's what FOFOA said] or paper as money and buy gold in order to save yourself from paper money.

FREEGOLD = NONSENSE!

Why willingly contract the disease in the first place [of fiat money] just so that you can attempt to cure yourself from it [by buying gold]? PREVENTION IS BEST!

FREEGOLD is what we have TODAY de jure and de facto in Europe. FREEGOLD is what we have de facto in the United States (no one buys or sells gold at $42.22, including the government itself).

HINT: What if paper money loses much or all of its purchasing power AFTER you exchange your gold for it and BEFORE you can spend your paper money to buy something valuable with it? FREEGOLD is monetary Russian roulette at best!

Only people with mental issues or spurious agendas buy FREEGOLD.

Ashvin said...

costata,

If asking simple questions amounts to sophistry in your mind, then fine, I am a hardcore sophist. Now that I have admitted to it... can you answer any of the questions in my last post, or not? I'm assuming not.

"It isn't backed by debt it is sold/swapped to the US Treasury/Others for debt. Once it reaches the hands of J6P it is more ephemeral."

Your comments to me were filled with statements like the above. I'm the sophist, right...

Greyfox "It's the Debt, Stupid" said...

@ Art, sited you a disparaging comment on your web site in response to your comment here.

Texan said...

Ash,

I am not sure you understand what I said. Do you understand Triffin's Dilemna?

Do you think a store of value will retain it's value as the quantity of it increases?

Maybe you think there aren't more USD as a result of all the intervention Good for you. If you are right, your USD savings will no doubt be very valuable 5 years from now.

I don't think that. I think the opposite. I think USD won't buy much at all 5 years from now. I suspect, but obviously can't prove, that a bunch of people, including central banks, think like I do.

So you have to decide if you think that the US is politically going to accept massive defaults throughout it's economy, or whether it will absorb the losses through bailouts.

So far, the trend is pretty clear.

Art said...

@GREYFOX

YOU SAID: "Truly, I do not know where to begin in refuting your arguments concerning freegold. Reminds me of what my father use to say about really dumb people, “that were not capable of pouring piss out of a boot with the instructions written on the heel”. Reckon it would be a waste of time and electrons as you obviously have read only the single article written by FOFOA, “Deflation or Hyperinflation”, yet posting disparaging comments. Perhaps you wish to read some of the archives before you comment about a subject you are not familiar with."

MY ANSWER: I debated FOFOA's predecessor FOA at the USAGold Forum when it was still open to the public more than a decade ago. I dealt with these bankers incognito long before YOU arrived on the scene. I read what they wrote and I know where they're coming from.

Son,

If you wanna get somewhere, you gotta start SOMEWHERE. And if you don't know where to begin then it means you'll get NOWHERE fast, Mr. Genius.

I'll give you a gentle nudge on your Journey to nowhere: ad hominems are NOT sound arguments and they prove nothing.

Paul said...

art

not all wine gets better with age

Art said...

Paul,

How about a sound argument to debunk what I said instead of futile personal attacks? This debate is about money; not about ME.

Jeff said...

Art, after all those years you are still a hard money socialist? Haven't you learned that men will never be constrained by the gold standard? Maybe you need to read FOA again, art.

FOA: Modern economics has come head to head with
the drive by our socialist hard money school to place gold within the money world of credit
bankers. A school of thought born of bankers and instituted so bankers could inflate money
with no measurement by Free Gold. Once within the banking money world, the limiting nature
of a "gold fix" is quickly printed away through the use of credit.

How about rebutting that, Art?

Paul said...

art

My time is much to valuable to waste on futile attacks. Imagine what a decade must feel like ...

good luck

Art said...

Paul,

I didn't know it took you a decade to write a couple of sentences. I'll make it easy for you Mr. Genius. You can rebut me with single words:

1. FOFOA says that we should use 'worthless tokens' or paper as money. YES or NO?

2. FOFOA acknowledges that paper money facilitates hyperinflation and financial crises. YES or NO?

3. FOFOA acknowledges that hyperinflation and financial crises are BAD. YES or NO?

4. It follows that FOFOA is a supporter of paper money (or 'worthless tokens' as he put it) even though he says that paper money helps bring about hyperinflation and financial crises which he considers to be BAD.

RHETORICAL QUESTION: what kind of a doctor promotes disease? And what kind of a doctor preaches that disease (i.e. inflation) is inevitable therefore we should make every effort (i.e. use paper money) to catch it?

FOFOA?

Paul said...

Art

I prefer company less disdain to drink with and don't drink my wine ad fundum

try shooting a mirror

Dwain said...

FOFOA, So, can I assume that you agree with my assessment of FOA’s comment and that you’re just upset by my manner of delivery and my lack of vision of the “big picture”?

I'm truly sorry that you're offended by my conciseness and desire for precision. I'm neither a typist nor a writer so I try to get what I have to say in as succinctly and unambiguously as possible. There is far too much ambiguity on this subject already and I do not want to add to it.

I’m not arguing the deflationist’s side, I'm arguing against the notion of hyperinflation via the reality of our monetary system. And it's not my definition of money, it's congress's and the law's definition, I'm simply conveying the reality of it and I don't see why you feel the need to heap indignities upon me for bringing clarity to the subject.

As I said I'm not a writer, but I definitely know how to read and if you can't make your point by utilizing words within their proper context and meaning, then all you’re writing is embellished works of fiction. And if I failed to see the “big picture”, it is because you failed to properly paint it, frame it and hang it.

As for the “political (collective) will”: Recent history has conclusively demonstrated that the political will is whatever their masters dictate it to be, the collective will be damned in the process.

Succinctly
Carl

Piripi said...

I can field that, Art:

1) Yes.
2) Yes.
3) Yes.
4) Yes.

Art, how can you have spent so long considering this topic (by your own admission) and have been unable to grasp the fundamental difference Freegold makes to worthless paper tokens?

I have said, elsewhere:
"With RPG/Freegold actual value is not stored in the currency, but in gold, a demonetized physical asset.

Currency is then only useful if it can access that value stored in the gold. If it can, then it will be found acceptable in exchange for everything else.

Today, the value is "stored" in the currency, and its value "guaranteed" by its issuing government, the very institution which is misappropriating value via the currency issuance mechanism (aka monetary inflation). The other agent performing similar misappropriation is the debtor who exchanges credit for real value in the marketplace, thus also consuming beyond his/her means, just like the issuer/government."


Otherwise worthless paper tokens can perform this function just fine.

Your apparent emotional attachment to your position seems to be stopping you from seeing the obvious, IMO.

******

“Any intelligent fool can make things bigger and more complex... It takes a touch of genius - and a lot of courage to move in the opposite direction.”

“A man should look for what is, and not for what he thinks should be.”

“The true sign of intelligence is not knowledge but imagination.”

“To raise new questions, new possibilities, to regard old problems from a new angle, requires creative imagination and marks real advance in science.”

-Albert Einstein

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

Edit:

Otherwise worthless paper tokens can perform this function just fine, when the store of value and medium of exchange functions of money are not attempting to be performed by the same medium simultaneously.

Art said...

Paul,

The debate is about money and NOT about alcoholism or how much you hate the truth.

Texan said...

Carl,

Why do you insist on looking at everything from a US perspective?

The primary buyers of gold are not in the US.

The rest of the world does not want any more dollars.

I don't know how much clearer it could be?

Piripi said...

Texan,

MF made the case for the reasoning behind why gold and why the rest of the world (particularly China) wants it here.

Succinctly put, I'm sure you'll agree.

Art said...

BLONDIE,

YOU SAID: " Today, the value is "stored" in the currency, and its value "guaranteed" by its issuing government, the very institution which is misappropriating value via the currency issuance mechanism (aka monetary inflation)."

MY ANSWER TO YOU: I'm not even going to say that you're wrong. I'm going to say that you're a LIAR because the following is COMMON KNOWLEDGE: The VALUE of NO major fiat currency in existence today is GUARANTEED or even DEFINED. Something that has NO contractual or any kind of rational value ascribed to it CANNOT, by definition, BE a store of value for it has NO value!

(For instance, all it says on the dollar bill is that it is legal tender for ALL debts, public and private - WITHOUT reference to how much debt or even what kind of debt we're talking about.)

Mr. Freegolder,

Whence comes your nonsense that there is presently some inconvenient link between gold and fiat? We are living under "Freegold" NOW. It does't say on the dollar bill that 'the dollar bill can access value stored in gold' like you're suggesting!

LASTLY, YOU SAID that because value is "stored" [FALSE!] in paper money and "guaranteed" [FALSE AGAIN!], debtors are enabled to spend beyond their means. You said that "Otherwise worthless paper tokens can perform this function [of spending beyond one's means] just fine, when the store of value and medium of exchange functions of money are not attempting to be performed by the same medium simultaneously."

MY COMMENT: You are BAD. Why do you want to enable people to spend beyond their means by imposing paper as money when this is precisely what the problem is? Paper money facilitates misallocation of capital, hyperinflation and deflation. Why do you want to FOSTER financial crises Mr. Freegolder?

What's your problem?

Texan said...

Oh absolutely agree. There have been lots of benefits by staying pegged, but now that oil and food are moving higher it's time to depeg.

It's got to be clear to them that they need to develop their internal economy to a greater extent because getting paid in paper ain't working out too well.

Texan said...

Art,


You are completely INCOHERENT.

I don't have the SLIGHTEST IDEA what you are trying to say.

Buy gold? DONT buy gold? Keep all your savings in a bank account in IOWA?

Me = LOST :(

Piripi said...

Art,

ROFLMAO, what a turkey you are!

"Why do you want to enable people to spend beyond their means by imposing paper as money when this is precisely what the problem is?"

This is the EXACT opposite of what I'm saying, but despite a clear description you seem hellbent on not understanding.

The function of otherwise worthless paper tokens in a Freegold world is to act as a medium of exchange, not "spending beyond one's means". This is the exact oppositeof what will be possible.

It would appear that Freegold is actually the answer to your prayers, Art.

It would also appear the problem is yours.

Indenture said...

Art: can I change your sentence to "FOFOA says that we should use 'worthless tokens' or paper as A Transactional Fiat Currency. YES or NO?

Indenture said...

Art: I think the word 'Money' is hanging you up. Try dropping it from your vocabulary. Even after ten years of scoffing at Freegold you can change.

Or the environment can change and then you can adapt. But the word 'Money' is too vague.

enough said...

Silver is getting beaten like a baby harp seal, down $5

The Dork of Cork said...

@Blondie

I share many of Despardos concerns.

Its very instructive when you live on a island that is on the edge of the euro and dollar tectonic plates - its real up close and personnel here.

Many of the not so bright Irish bankers and academics have been gamed to perfection as they were using old sovergin metrics to gauge economic success - they looked at the sov yields and saw nothing as nothing was showing when CBs were flooding the Gold market with their reserves to keep the illusion of stability - so they loaded up with credit..............
Yet we now have the largest trade surplus per capita and the second largest trade surplus in real terms in Europe - we are even running a current account surplus since late last year...
Yet who gets the Yield from our endevours? london , Frankfurt etc.

I recently suggested the term accounts in the Irish banks should become goverment money as they have been socialised already (Risk bonds could have the bank assets which would sell at cash prices insuring a massive loss for these characters but no disruption to the mechanics of the basic money supply but to no avail.

These are not the somewhat conservative sov debt bankers of old - these are pure bankers divorced from all executive sanction with devestating results for the physical economies.

Daniel Gros recently came over here and had a little chat with the local hobbits about this and that (can we remain solvent) and had some great ideas but in a following article suggested that maybe domestic holders of Irish debt be taxed at 50% and thus further socialising debt on the peasants instead of the international banks - pure avarice

This is a nasty den of vipers we have got here - anyhow this is the link to the video which I thought quite interesting but Gross did not mention this possibility at this time

www.iiea.com/events/the-irish-economy-and-the-euro-crisis--a-view-from- brussels -

JR said...

Hi Costata,

I heart me some Pippa.

Cheers, J.R.

Piripi said...

Dork,

I think Ireland should follow Iceland's lead (like they did on the way into this mess) and simply tell 'em to stick it.

Everything gets sorted in the ensuing domino effect.

How long you guys gonna watch them eat your lunch?

I understand it is a lot more real at the coalface so to speak, which makes it all the more surprising the Irish just lie back and take it. It will end in the same fashion one way or another; might as well make it sooner rather than later, IMO.

Getting technical with the situation just favors the bankers, and is unnecessary.

"The study of money, above all other fields in economics, is one in which complexity is used to disguise or evade truth, not reveal it."
-J. Kenneth Galbraith


"When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it."


–Frederic Bastiat

JR said...

Hi The Dork of Cork,

I share many of Despardos concerns.

Only you can slay those strawmen. How can you expect people to take you seriously when you frame of reference is the town clown. Its really about moar then the willingness of people to keep playing whack-a-mole, no? Its fun to be a member of the audience bu that doesn't preclude engaging yourself in it.

I have to imagine know enjoy the show too but come'on, clowns may be but you know the discussion is well above that gutter.

Cheers, J.R.

Ashvin said...

Texan,

Yes, I do understand Triffin's Dilemma. What I have been saying is the US currency imbalances (flooding the world with dollars) is the equivalent of flooding the world with debt. If economies slow down and the debt obligations are not erased (and why would they be?), then you see a spike in demand for the currency in which the debt is denominated. It is NOT a good thing for the US economy, China's economy, or a bunch of other economies. It also is not good for the dollar in the long-term.

"Do you think a store of value will retain it's value as the quantity of it increases?"

No it won't, if the supply of goods/services does not expand at the same rate. Unfortunately (for your argument), the broadest measure of dollar money supply (M3) is still contracting.

http://www.shadowstats.com/alternate_data/money-supply-charts

"So you have to decide if you think that the US is politically going to accept massive defaults throughout it's economy, or whether it will absorb the losses through bailouts.

So far, the trend is pretty clear."

Worthless in 5 years you say? I can see that, and I have never argued against anyone on this on that point. I can see how you believed I was, because many people in the HI crowd tend to erroneously think that deflationists love the dollar and think it is the best thing to ever be imagined by human beings... it makes their attacks a lot easier to carry out.

The trend has been clear - bailouts for some of the biggest institutions and wealthiest people in the world, and everyone else is allowed to "fail". Sure, your average Joe gets a meager hand out once in awhile, in the form of food stamps, temporary unemployment benefits or a home buyer tax credit, but that stuff is not going to last. My student loan will not be monetized, and your car loan won't be either, and frankly I could see A LOT of banks in the US and Europe being eaten alive in the next year or two.

The realistic dynamics of such an unprecedented financial crisis will not be as simple as PRINT or DON'T PRINT, BAILOUT or NO BAILOUT.

The Dork of Cork said...

@Blondie

The difference is the currency - the Icelandic middleclass had nothing to lose as their currency was toast.
Remember during a credit boom deposits are created also - many Irish have very very large saving rates in a strong currency - they have something to lose if they rock the boat.
The money is still there but the velocity has come to a sudden stop.
Anyhow the sov debt is in Irelands case a money illusion as we now have a current account surplus and huge assets outside the country.

There is a history of Irish commercial banks holding more Sterling debt then irish Debt going back to the 20s - this tradition has been extended to pension funds which hold very little domestic assets - in essence we could get high yields off our own debt but this country works in a counter intutative manner if it works at all - we are in many ways one of the strangest animals in the economic zoo.

Texan said...

Well Ash, if you think the dollar is going to be worthless, I am hard pressed to define you as a deflationist. But if you say you are, I will take your word for it.

Agreed that the path will be tumultuous, no one wants to arrive at the destination, after all

The Dork of Cork said...

@JR
You oviously have a linear sense of houmour - and therefore I find it really painfull to read your posts.
Attack the ball and not the man JR - I am a senstive soul don't you know ?
I off to have a little cry now.

Piripi said...

Dork,

"... many Irish have very very large saving rates in a strong currency - they have something to lose if they rock the boat.
The money is still there but the velocity has come to a sudden stop."


The money may nominally be there, but the value it supposedly represents is not, and in this light there is nothing to lose (except some illusions).

"we are in many ways one of the strangest animals in the economic zoo"

As evidenced by your (ex)avatar??

******
Texan,

"the path will be tumultuous, no one wants to arrive at the destination, after all"

I do. The longer we tarry, the more tumultuous it gets. As I remarked to DoC above, we are going there regardless.

Art said...

INDENTURE,

The answer is Yes.

Art said...

BLONDIE,

YOU SAID: "The function of otherwise worthless paper tokens in a Freegold world is to act as a medium of exchange, not 'spending beyond one's means'."

ANSWER: IF we could use worthless tokens as a medium of exchange WITHOUT taking advantage of their WORTHLESSNESS to use them to get something for nothing, then we wouldn't even NEED money of ANY sort for then we would be ANGELS and not HUMANS.

Do you feel OK with exchanging your gold for paper money knowing that at any moment it could be devalued or demonetized even? What if this happens just after you sold a million dollars' worth of gold to buy a house and the dollar crashes to a tenth of what it was before you did that BEFORE you were able to buy the house?

Still laughing?

Ashvin said...

"Well Ash, if you think the dollar is going to be worthless, I am hard pressed to define you as a deflationist."

Why?? The legitimate deflation/HI debate is all about timing, and has never been about anything else. That's why FOFOA framed the debate incorrectly at the very beginning of this article.

Do I think the dollar will become relatively worthless within 5-10 years? Yes, I'd lay at least 5oz of gold against 1 on that. Would I tell everyone I know to keep less than 10% of their wealth in dollars right now, or use most of their dollars to load up on gold? No, not a chance in hell.

The Dork of Cork said...

@Blondie

Something is paying for our current account surplus.
The worlds trade is now strangely disfunctional as London , Paris and other financial centers produce paper obligations with no risk of default while we service them with real goods.
Any country with a large trade surplus is a colony including Germany.
The old naval powers remain in defecit - but for how long ?

Art said...
This comment has been removed by the author.
Pete said...

@ Everyone

Can we please stop feeding the troll (Art).

I think it is trying to get traffic to it's blog.

Art said...

TEXAN,

BUY gold and silver.

Freegold says that gold is good ONLY so that people who believe in gold BUY the Freegold-ers insistence that money should be fiat - just because Freegold-ers also said that gold is good.

Freegold is a non-sequitur (false) argument. It doesn't follow that just because you were right about BUYING gold you must also be right about fiat or paper money.

Just because you're against abortion doesn't mean that you're right when you promote murder, does it?

Piripi said...

Art said:

"Still laughing? "

What do you think?

******
Dork,

"The worlds trade is now strangely disfunctional as London , Paris and other financial centers produce paper obligations with no risk of default while we service them with real goods."

Dysfunctional for Irish taxpayers... the other side of the trade are getting good function... I maintain that they're eating your lunch.

******
Pete,

Art's not a troll. He has a view, and he thinks we haven't seen it. He is able to articulate that view very well (if a little rudely at times). I admire his passion, his tenacity and his overall goal which is to see an inequitable system replaced with an equitable one.

Indenture said...

Bankers, Treasury Bubbles, and the Painful Consequenes

"We do not believe Americans and most of Europe understand the impact of the European banking crisis. The meeting in Athens next week to restructure Greek debt probably will trigger a EU-wide banking crisis"

"Both the European, eurozone, and US banking systems are insolvent and nothing can be done to save them. Both systems have to default. That is why we say sooner or later a meeting will be held where all currencies will be devalued and revalued and there would be a multilateral default and debt settlement. It would also be an opportune time to implement a new world reserve currency or indexed trading unit, which in order to be acceptable would have to contain a 25% gold backing, which would force other currencies to adopt gold baking as well. The new setting for an official gold price would be at a level 4 to 5 times today’s levels. Incidentally, it has been found historically that a bimetallic standard does not work."

The Dork of Cork said...

@Blondie

Yes I agree - but it has always been that way.
As I siad we could fund our own fiscal debt for years with savings in banks that no longer produce much credit but the "authorties" refuse to engage resulting in a massive fall in domestic demand and depopulation.
This bog never really changes

Pete said...

@ Blondie

I went to Art's blog and posted some comments.

My perception is that Art absolutely hates FOFOA, for whatever reason. He is so firmly in the hard money camp that he borders on fanatical.

Ultimately, the main problem Art seems to have with Freegold is that it continues to allow fractional reserve banking in fiat money.

Wouldn't it be nice to live in a perfect world? We could all peg our currencies to each other and a fixed amount of gold and we'd live happily ever after without corruption and creative finances.

Freegold represents a compromise between the current fiat regime and a gold standard. Art doesn't believe in compromise... only capslock.

Indenture said...

Art: You lose a lot of credibility when you use abortion in a non-associated debate. And please don't use all capital letters in your posts. It is regarded as 'yelling' on posts. Thank You.

costata said...

TDOC,

If you ignore the wholesale transfer of the private banking system debt to the "sovereign" balance sheet then Australia's economy is the mirror image of the Irish economy you describe.

You can be an economic colony through a trade deficit as well simply by allowing foreign debt (masquerading as capital) to acquire assets in your country with minimal restrictions.

BTW stop crying, it will make your mascara run. That look went out with Alice Cooper.

Texan said...

Ash,


Timing the pullback hasn't worked out so well over the past decade or so, but maybe you will get your shot to buy $500 gold after " the great deflationary collapse".

Just be patient.

Piripi said...

Pete,

I've read your comments there.
" the main problem Art seems to have with Freegold is that it continues to allow fractional reserve banking in fiat money."

If everyone followed a little logic in this it should be clear that fractional reserve becomes unworkable under Freegold. It doesn't need to be legislated against. Debt would be shunned in favour of equity arrangements.

The world can and will operate much better for all when we all live within our means. People underestimate what their actual means are worth today, courtesy of debtors eating their lunch for them, and thus feel insecure about facing that future.

People do love to get assumptions in the way of facts (you don't own your baggage, it owns you).

Drop your baggage.

costata said...

Ash,

I've been watching you shed the sophistry in some of your exchanges with other posters. Good to see it. Now you seem to have taken a position here:

"The legitimate deflation/HI debate is all about timing, and has never been about anything else. That's why FOFOA framed the debate incorrectly at the very beginning of this article."

I presume you are talking about this statement by FOFOA in this post:

"The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end."

Here you seem to have taken the position that it will be deflation now and HI later.

"Do I think the dollar will become relatively worthless within 5-10 years? Yes, I'd lay at least 5oz of gold against 1 on that.

Another strong stance here. Dollars now and gold later? Is that your position?

"Would I tell everyone I know to keep less than 10% of their wealth in dollars right now, or use most of their dollars to load up on gold? No, not a chance in hell.

Present your case and don't waste our time with sophistry and waffle. Convince us.

Ashvin said...

Texan,

Come on, man. I'm not timing the pullback on gold, you're timing the skyrocketing price on everything. Just think about it for a little while, that's all I ask.

BTW, I own gold and silver (started buying early last year), and I am in the process of investing a good amount of $ cash into physical preparations. That has nothing to do with this argument though.

Remember, I'm not the one arguing for the inevitability of a specific price trend across all asset classes from here on out...

Texan said...

Ash,

It's ALL I think about. Every day I ask myself, " when are they going to take thir foot off the pedal?".

And they never do. Not China, not Japan, not the ECB, and certainly not the Fed. They talk a lot about "exits" and "reserve requirements" and "rate hikes", but every single major trading bloc has HUGE negative interest rates right now. And on top of that, incredibly, G-7 deficits are increasing! Not decreasing, not even stabilizing , they are increasing.

This tells me something. It tells me they are scared out of their minds that if they ease off the liquidiy flood for one second, the deflationary collapse you think is possible may indeed come to pass. It also tells me that the amount of monetization to come just to keep even with today, much less " grow", is so enormous that they are risking a full blown HI.

Now that they have all of this infrastructure in place to prevent deflation, it simply is not to happen unless there is some major political change in the US. Ie, Ron Paul is elected President or the debt limit ceiling increase isn't passed, something like that. I give that very long odds.

Wendy said...

Holy cow, it's taken me a week and a half to catch up, even scrolling through retorhic.

Hello FOFOA et al, and dedicated commenters......

You boys have not been playing nicely at all recently. No suprise!!

Here's a few bats and knives ... go murder each other out in the backyard, BUT do not get any blood on my clean floor.....

I've also heard that there is a new rule here?

No profanity!!!

FUCK THAT

I researve the right to type whatever the hell I like until such time as my posts are deleted and I do not get the satisfaction of seeing myself star lit" on this blog.
:P

*

Wendy said...

In addition to working I've been busy with this

http://www.youtube.com/watch?v=AuE9Ef2FSV0

I know it's not the stuff of freegold, and my apologies to FOFOA et al in that respect

Daniel said...

First post here, Great post by FOFOA and interesting discussion.

Ash,

Quoting you "For you, I can simplify:

Never-ending economic growth is NOT a given, and has most likely reached its terminal decline, regardless of the monetary paradigm our global society decides to use in the future. "

100% agree with this. however isn't it possible this does not mean deflation in debt backed currency. for example what happens when a bond holder finds out that his bond may not be paid back due to the company having negative growth? bond is now worth less. Since most/all? currency's are debt backed instruments with a infinite duration i am not sure why they would increase in value.

mortymer said...

"Eppur si muove" is an Italian phrase meaning ´And yet it moves´ purportedly uttered by the Italian mathematician, physicist and philosopher Galileo Galilei after being forced to recant, under threat of physical torture, in 1633, before the Inquisition, his belief that the Earth moves around the Sun. Some historians believe this might have happened instead upon his transfer from house arrest under the watch of Archbishop Ascanio Piccolomini to that of someone less favorable towards his views, near Florence..."

http://en.wikipedia.org/wiki/E_pur_si_muove!

It was unimaginable for many to get rid of the view that Earth is not a centerpoint of universum. There were thought that skies will fall, that if we were on a big ball the rotation will rip us apart, etc.

Hyper/inflation or hyper/deflation talks are meaningless in sence of what we observe is just a CHANGE OF THE SYSTEM, of the perception we understand our monetary matters.

All ***flations talks take in reference a past system and compare.

Like Atheist who let their minds wander in search or deeper meaning and then find themselves without a need of a belief system floating finding strength in their understanding.
[Mrt: Used purely for comparison, no offence to any belief systems here]

Float your ideas for god sake people! YES we need gold, YES we need paper currency.


"RS View: In her commentary Rebb has focused on FX, but the real game-changer is the shift toward the paramount centralization of physical gold reserves within the central bankers’ cosmos of international currency and reserve management. For over ten years at these pages I’ve been detailing this subtle yet steady shift so that you would have the right context in which to proactively understand the upwardly floating gold meme that is gathering pace, and to do so without getting yourself entangled in all the foreseeable distractions yet to be offered by ill-informed bubble-visionaries and in the form of the frozen monetary standards of ideologically arrested gold bugs. Gold shall continue to float higher against national currencies and against other real assets, and in the course of this process the footing of the international monetary system will become surer and better balanced than at any time prior in all of human history. As a productive being you will like it; and as a physical gold owner/saver even more so."

Freegold IS happening right now right here at the very moment, it has been for the last 10 years, wake up!

J said...
This comment has been removed by the author.
Piripi said...

Using Mortymer's comment as a context establishing springboard, I would like to expand upon my last comment.

Unencumbered physical gold (store of value) establishes an objective reference point for the valuation of currencies (medium of exchange), and by extension everything else.

Ergo any fractional reserve lending (being inflationary with regard to the currency involved) will weaken that currency's exchange rate with gold (aka its value). Any lending not 100% reserved will be logistically impossible.

Debt will be replaced by equity. A system without leverage, without living beyond one's means, where investing means having your own skin in the game.

Due diligence will be a growth industry.

This is a system of responsibility, responsibility for yourself.

Gold does not grant you power over others, it grants you freedom from the power of others over you.

You can only be as free as you are willing to be responsible.


Eppur si muove.



(as usual, please pass on my apologies to your baggage.)

J said...

Blondie, do you think, then, that people will be so aware of the perils / toxicity of fractional reserve banking that they will make it their business to understand the degree to which a given currency has been devalued by it before assigning a gold-denominated value to it?

Seems to me that at present it would be very hard to 'know' the value of a currency given the murkiness of things. Certainly for the individual gold-holder, anyway...

Paul said...

It would be a treat to drink wine with blondie art !

no need for you to worry about alcoholism, as blondie just explains, this is about being responsible, and being confident about yourself and your abilities.

Works in this system, and will work even better in the next ...

Piripi said...

J,

Yes.
People won't need to make it their business. This will be the market's business. Live 24/7 gold exchange rates in all currencies is the bright sunlight that exposes the truth, where real value is and where it is not.

Murkiness is gone. Good riddance.

mortymer said...

Blondie, nice vid 4u2c;
In mythology you would call it a "one-eyed creature" :o)

http://www.imf.org/external/mmedia/view.aspx?vid=79187384001

Btw: I came also across a news that IMF is shredding some stuff, about 380 (?) employees; somewhere here...
http://www.imf.org/external/np/sec/pr/2011/pr11152.htm

J said...

Blondie, that's what I'd hope the market would be doing NOW, but of course it's not. Do you think that a move to Freegold will necessarily be universal, in terms of the recognition of gold as the reference point? This may well be covered in earlier posts, but if so I wasn't picking up on it at the time.

Motley Fool said...

Hi FOFOA

I apologise for this piece of vitriol. You are welcome to delete this comment if you feel it pollutes the atmosphere here. I got so annoyed, I was no longer able to continue ignoring Carl.
Respectfully
TF

@Carl

You are either willfully ignorant or remarkably skilled in the use of sophistry and strawman rhethoric. If it is the latter you should consider giving a class.

I was tempted to leave that comment standing on it's on but decided that since I don't engage in ad hominem attacks, I should rather back it up.

"As debt defaults, fiat is destroyed."

What does the destruction of fiat mean? The strawman you proffer of coins dissapearing from our pockets and paper evaporating is obviously not true.

Now while this may be one way in which fiat is destroyed ( dollar bonfire anyone? keeps out da cold) is it possible there is another? Why yes, in fact there is. Since we both agree that spontaneous combustion is not in the cards is it possible FOA was reffering to another method of destruction? Why I suppose that just maybe possible. (Aww and the feeling of fiat bonfires made me all warm and fuzzy)

And what is this other method of destruction? Loss of confidence in the currency.

Absurd isn't it carl? How dare those slaves consider losing confidence in the almighty dollar?

What's that you say? The Zimbabweans did it? Well they are a backward third world country, they don't know any better. Americans are much more patriotic. They will hold onto that fiat if it's the last thing they do.

Pagh. What a waste of my time.

TF

mortymer said...

interesting:
http://www.imf.org/external/mmedia/view.aspx?vid=921830109001

-10.5.2011 D.S.Kahn, Switzerland; 00:30min
-info about Greece

Motley Fool said...

Hi Art

Arguing from authority is another fallacious method of argumentation, in addition to ad hominem attacks. :)

I personally do not care if you debated Freegold with Adam( from the garden of eden fame) , that fact does nothing to support or deny your position.

As to your argument for a floating backing of the monetary system. That was close to my view of the solution, if you will, before I decided Freegold was better. What changed my mind? Two things.

Firstly a fully backed gold system will eventually become fractional and collapse( or suffer heavy losses).

A simple example. Imagine everyone uses the same bank. A deposits 200 ounces. Bank asset sheet- 200 ounces; liabilities- 200 ounces. B loans 100 ounces to buy a house. Bank asset sheet – 100 ounces physical, 100 ounces to be repaid by B; liabilities 200 ounces to repay to A. C receives the payment and deposits it in the bank. Bank assets – 300 ounces( 200 physical, 100 to be repaid by B); bank liabilities – 300 ounces ( 200 to A, 100 to B). After these transactions bank liability sheet has increased by 100 ounces but still only 200 ounces exist. B defaults. Bank has 200 ounces physical and owes 300 ounces. Oh shit. :P

Which leads to the second thing-> losses are socialized. Imagine for a moment that B represents 33% of the population and defaults is due to idk a natural disaster. You think the masses are going to allow A and C to bear the punishment? Or would they rather spread out that punishment over the whole population. History teaches that the latter is the case.

People want easy money. So given them fiat to borrow. As long as we are able to store our value in gold.

Freegold.

Furthermore the HI argument is not about the credit component of money collapsing. It is about the Belief in store of value function of the currency collapsing. That component may be one of the causes. A simple question, what if everyone decided tomorrow that they would no longer accept dollars in payment? What would be the value of the dollar? Zip, nada, nothing. And don't come with the it's illegal BS, a gun is not an argument.

Also the idea of HI being built into the system is not inevitable. It is possible that major policy changes could stop it and eventually turn it into deflation instead. Things such as eliminating the defense budget, removing all social security, welfare, food stamps, subsidies, etc. If they did that then, sure , deflation would occur(never mind the riots, lol). Do you think that likely? Do I? Are you nucking futs? Hehe

The argument is that if the current policy remains the same( which it looks like it bloody will) then HI is inevitable. Would HI in the US be bad now? Yes, it would be devastating, a 10 on the Richter scale. Why? Because people wont be able to protect their wealth. How about HI under Freegold? Well assuming it's possible( it is , but the likelihood is insignificant) it would be bloody annoying. But a catastrophe? Not so much, maybe a 3 or 4 on the Richter scale.

Four part question. 1- Yes; 2 – Yes; 3 – Yes. 4. Does not follow. Your mistake lies in point 2. Facilitation is not the same as causation.

But what do I know, I suffer from mental issues.. or was it a spurious agenda, I forget? :P

Perhaps I should change my name from The Fool to The Mental Retard. Haha.

TF

mortymer said...

IMF’s Strauss-Kahn: Global Coordination Essential; October 7, 2010

http://www.imf.org/external/mmedia/view.aspx?vid=628177573001

"The IMF Managing Director says that we all want the rebalancing of the global economy, and this rebalancing cannot happen without a change in the relative value of currencies. "

Piripi said...

J said:

" Do you think that a move to Freegold will necessarily be universal, in terms of the recognition of gold as the reference point?"

Necessarily, yes.
It's an all or nothing type of arrangement.
Once it's out, it must be fully adopted. Resistance would be painful from a capital flight point of view.
Impossibly painful.

golden tube said...

the best book to read to learn why hyperinflation is a loss of confidence event ( and the printing is the effect NOT the cause is "when money dies" by Adam Fergusson

golden tube said...

also, from a simple point of view , we dont own our currencies. the private for profit central CB's do, it's their FRN, their £ etc and everyone created is someone elses libility. but gold in our hand, well that's nothing to do with them

Greyfox "It's the Debt, Stupid" said...

Slightly off topic but interesting info.

US kills Osama bin Laden decade after 9/11 attacks

http://news.yahoo.com/s/ap/20110502/ap_on_re_us/us_bin_laden

The Dork of Cork said...

@Costata

All that coal / uranium etc flowing out of the country and what do you get - more frigging houses.
Irelands domestic banks fed off the scraps of a gigantic money laundering scheme located in Dublin and also the foregin mutinational sector starting in the late 50s
They leveraged to the hilt and lost big time by supplying houses to the drones and worker bees.

If China collapses then Australia is dead in the water until you can reinternalise the wealth rather then trading it.

PS I am a rebel without a fashion.

costata said...

golden tube,

".. but gold in our hand, well that's nothing to do with them"

And on that thought,

Bon Nuit

pipe said...

Hi MotleyFool- you said, "When choosing a Freesomething it needs to have certain characteristics. Limited, unable to be created,..."

So if gold is the universal store of value, how much gasoline would you expect to be able obtain in FreeGold, should you decide to take your 'store of value', a 1 oz Krugerrand, and get the actual wealth into your storage tank behind your house?

Currently, you could convert the ounce of gold to fiat and get $1550 (spot), and then buy gasoline at $4.25/gal. 1550/4.25 = 365 gallons of gasoline.

In FreeGold, we would have roughly the same amount of above ground pure gold, about 7 billion ounces. But there is only 1.75 billions of gasoline leaving refineries per day. (90 million barrels per day of liquids plus refinery gains time 42 gallons per barrel, with half of refinery output going to gasoline). So that same Krugerrand, which then as now would represent one 7 billionth of the world's gold, and one 7 billionth store of the world's wealth, is a store of value for 1/4 of a gallon of gasoline per day. ( as well as one 7 billionth of the rest of the world's wealth.)

So, today you can with a Krugerrand get one gallon of gas per day for a year, or 1/4 of a gallon for 4 years. In FreeGold, your Krugerrand is a call option on 1/4 of a gallon of gasoline per day, as well as a call option on one 7 billionth of the rest of the world's stuff.

So you can see there will not be any significant increase in gold's buying power in FreeGold. In fact, it will decline, as gold's above ground supply will increase by 1% or 2% per year, and since we are near 'peak oil', the amount of gasoline available for purchase will decline, so will you will soon get LESS than 1/4 of a gallon of gas per day. [your share of the world's other stuff might increase, depending on the thing, but we are in finite world, so most things will drop in quantity per ounce of gold].

Desperado said...

Dork of Cork writes:

"I share many of Despardos concerns."

To which JR replies "Only you can slay those strawmen. How can you expect people to take you seriously when you frame of reference is the town clown. Its really about moar then the willingness of people to keep playing whack-a-mole, no? "

Where to begin, with the poor spelling, the incoherency, or the guilt by association?

I wonder if JR works for the TSA? His lack of intelligence, his bullying and his false sense righteousness would indicate that he works with them.

DofC, Ireland at least has 2 channels between it and the EU elite in Brussels. Switzerland is surrounded by the EU the same way they were by Hitler in WWII. Now, just like then, Switzerland is being forced to cede sovereignty almost as fast as JR cedes intelligence to his addiction to blog post bullying.

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