Wednesday, June 22, 2011

From the Treasure Chest

On my computer I have a database file that contains almost 50,000 email files. I probably refer back to and search this file more than I even realize. It's one of those things that you don't quite realize the value of it until you suddenly face the loss of it (perhaps like Satoshi Nakamoto and all his "millions").

Very recently my computer crashed from what appeared to be a really nasty virus that apparently wiped out my hard drive. Thankfully I was able to recover everything, even my Treasure Chest email file. And full, 100% credit for the recovery goes to one of my greatest supporters, Warren, who told me exactly what to buy, what to do with it, and even paid for it! Thank you Warren!

Here is Warren's current project, SLV Database, which Bron mentioned the other day in PMs and the LME Warehouse Scam:

"Which is why I am very interested in this ETF bar list project and am doing what I can to help, as this I believe holds the potential to reveal just how big that dark pool of stock really is."

Check out Warren's project, and if you see him, thank him for saving FOFOA's computer!

Anyway, I thought I would celebrate my full Treasure recovery by sharing with you all a few nuggets from The Chest. The following are just a few recent highlights from my email file:


I am fortunate to have found your blog in more ways than one would believe. :)

I have been reading your posts with much interest ever since. You write very well.

This sounds is a little crazy cause I feel like I hit a Vegas jackpot or something.

I came across bitcoin awhile ago and was intrigued so I ran the generating program for a while but I cannot remember why I had stopped it. Although it really doesn't matter with all the what if's. Anyway, reading your latest post sparked my memory in that I had looked at it. I am amazed at how it's evolved with even a trading market. I reinstalled the program to have a look at it again and to my surprise I had 50 bitcoin credits! I only remember just running it for a couple days so a quick calculation showed USD value of a little over $800 worth of bitcoins (as of last Saturday). I sent the credits right away to market (mt.gox I think) and surprisingly they sold quick. The funds from the trade went again right away to which handles exchanges for cash through a bank transfers. So far so good but I will know in a couple of days of the successful transfer.

I think I will be trading those bitcoin generated USD's for a nice 1/2 oz Canadian Maple or Australian gold coin.

Thank you for posting about bitcoin. I probably would've never had a second thought about it otherwise.




A few questions – maybe you have already answered these. I need to go back and reread all your posts again.

Regarding the stability of the dollar: What is the significance of the Saudi currency being pegged to the dollar? What is the significance of the Yuan being pegged to a currency basket heavily weighted in favor of the dollar? As long as these heavyweights not only accept dollars, but go so far as to bind their own currencies to the dollar, it seems like the petrodollar system may be able to limp along for a long long time. I would expect a de-linking to be a sign of an imminent collapse, but it is diffiult to imagine a collapse as long as the links remain. Other lesser but notable pegs include Hong Kong, UAE and Venezuela.

Hello R, I don’t know how much you know about the different types of currency management, but this is a good paper. It is a debate in 2001 between Robert Mundell (“father of the euro”) and Milton Friedman.

Pegging is arguably a better choice than a “dirty float” in which you surreptitiously intervene. Pegging is one step down from a hard fixed exchange rate like California shares with Texas, or Greece with Germany. And sharing a fixed currency is really no different than sharing any fixed scientific metric, like a meter or a gram. California can still have to pay a higher interest rate than Texas as Greece pays more than Germany (from private debt markets). The fixed currency is not the problem any more than the shared weight of a gram should be a problem. So a pegged currency would be analogous to the meter being pegged to 3.28 feet. Two countries use different standards, but they peg their conversion rate.

The problem is with the perpetual US trade deficit. In order to stay pegged to the dollar, there are only two things these countries can do. And most economists are only aware of one of them. The way everyone thinks it is done is by recycling those dollars into US assets, primarily Treasuries. The Chinese (or Saudi) exporter receives dollars and exchanges them for local currency at the bank. That bank then sells them to the central bank for freshly printed currency, and the CB then buys US assets with the dollars.

And since the US is not in the business of selling off the farm, we sell government debt paper. This has the effect of funding the US government through the trade deficit and exporting the currency inflation to those trading partners that must print their own currency to stay pegged. If they were to buy US-made products with those dollars rather than Treasury paper, then there would be no trade deficit. But then the American economy would have less goods, more cash (inflation) and the government would have to find another stream of funding.

But there is another thing they can do (and are starting to do) with those dollars we are sending them for their goods. They can buy gold on the open market. It really doesn’t matter if the exporter that receives the dollars buys the gold himself, even inside the country, or if the CB buys it from London. If it is purchased in country by citizens, that will raise the internal price of gold and create an arbitrage opportunity that will cause gold to flow into the country until the price differential (inside and out) is equalized.

So this is a way to use your excess dollars on the world market, rather than inside the US, which also helps keep your currency pegged without running into a foreign exchange crisis. I have my own theory that the actual physical flow of gold into China corresponds to money that Ben Bernanke must now print that was previously being funded by the PBOC. This takes a long chain of thoughts to get there which I’m not going to write here, but I think you can get the concept intuitively.

Buy gold (instead of Treasuries) with your excess dollars received from selling to products or oil to the US. As long as you buy on the open market (as opposed to dark pools as the Saudis used to do or from mines inside your own country) this drives up the price of gold and causes a physical inflow into your country. You no longer have to print equal amounts of your own currency so you have stopped your internal monetary inflation and, instead, channeled it into the price of gold (inflation only against gold, not life’s necessities). The Fed, in turn, is forced into “QE” which is essentially printing those dollars you would have given to Treasury since Congress can’t cut the budget. Also, those dollars you used to buy gold in London or Zurich will eventually find their way back into the US through private channels and add inflation on top of the printing the Fed is doing.

So now, you’ve sent all that monetary inflation back into the US, and still kept your currency pegged. And if you follow this train of thought far enough, I think you’ll find that it leads to stresses that will ultimately break both the US dollar and the paper gold market without ever officially “de-linking”.

The physical gold must continue flowing into the physical boundaries of trade surplus zones while the price of gold rises. Weight-based flow and price level offset each other somewhat. But ultimately this will break the paper gold market because we’re talking about physical flows from the debtor zones into the saver zones. And now the US finds itself between a rock and a hard place. The hard place being that dollar interest rates in the US must skyrocket which would destroy the dollar banking system, Wall Street, the US government welfare state and the US economy, or else the Fed must print to oblivion to keep rates down and suffer the ravages of hyperinflation. That’s the rock, because it will win out over the hard place seven days a week.

Question: You frequently refer to financial wealth “going to zero” – but this seems to be an exaggeration. Many financial assets may go to zero, but other forms of intangible property (such as shares in a company with capital assets and no debt) should have some value when all the dust settles, no?

FOFOA: I think it is mainly debt-based assets that will go to zero because their numeraire will be hyperinflated. Even if interest rates were to skyrocket they’d go to pretty near zero. Equity assets will suffer the ravages of economic hardship brought on by the dollar’s collapse, but you’re right, they won’t lose all value. In Argentina, the stock market lagged the currency devaluation. The stock market only doubled in nominal price while the currency it was denominated in devalued 3:1. So if you had 3 pesos in stocks before the devaluation, you now had 6 pesos after the devaluation but they were only worth 2 of the old peso value. So you lost about 33% being in equities during the currency crisis. I imagine it could be much worse than this in US equities during a US dollar devaluation.

Question: You refer to freegold as the natural consequences of the end of fractional reserve bullion banking. I can see how a worldwide run could crash the system, but in the aftermath what would prevent an eventual return to fractional reserve bullion banking? Giants may someday once again have some risk appetite to lend out their bullion holdings, no?

FOFOA: Against what collateral? Gold is (will be) the ultimate collateral. To protect gold’s status as such, and its invaluable contribution to a stable monetary system, courts will not enforce the forfeiture of any lesser collateral in the failure of a loan of the ultimate collateral. This will be enough to prevent the lending of gold, which will be frowned upon by the system.

The only reason to borrow the ultimate collateral is to short it. Can you see why a newly stabilized system would frown on this and therefore not support it if and when it goes bad? If you want to put your gold to work you just sell it and then put those dollars or euros to work. You don’t lend it out because you might not get it back.

Question: Regarding the onset of hyperinflation: Do you expect that the initial loss of confidence will come from a foreign government? Or from the private sector?

FOFOA: I think it will come from a panic in the private sector, because even though foreign governments have already lost confidence, they will never take overt action to destroy the system. That’s the kind of thing that starts wars.




I can imagine you must have a ton of emails so thank you for finding time to reply. At your leisure, is there anything besides storage in my home or backyard (in other words paid storage) that you would recommend?


Hi V,

I think a good rule of thumb is that each person should take responsibility for his own wealth. This is kind of what Freegold or a meritocracy is about, personal responsibility. As I have written in the past, if you have too much wealth that you cannot take personal responsibility for it, then this crisis will solve your problem for you one way or another.

I know one guy who has around 2,000 ounces of physical. I don't know where it is, but he has led me to believe it is under his direct control and possession. He sent me a snapshot from his computer holding a single, monster 320 ounce coin. So he has at least that much under his immediate physical control.

I'm sure there are many safe storage options in your town. I've heard of "private" vaults, like a bank safety deposit box, but not at a bank. Or perhaps it is best to diversify. Some here, some there. If diversified, I'd be fine with some in a bank deposit box. I don't know. Seems like a very personal decision to me. I suppose if you had ten million in gold it would be a good idea to keep some in a paid vault in Switzerland. You'd probably have a paid-off house there too, and a gassed-up car in the garage of your Swiss chalet. But even a million in gold today fits in a very small box (or safe). That's the beauty of gold!



Hello FOFOA, hope you are doing well. I just got home from a rafting trip through the Grand Canyon and brought your (at the time) most recent essay. Thank you for yet another thoughtful piece, it provided me some enjoyable reading in a very beautiful setting. It even spurred on a great conversation with my friend when he asked me what I was reading. I thought you would enjoy this pic of the view I enjoyed while reading your essay. Thanks again for consistently great work!


Hey, check out this picture one of my readers sent me!

Har! That's excellent, FOFOA!

And the untold story is that when they unexpectedly ran short of toilet paper mid- journey, they began conscripting their supplies of bread for that duty in a valiant sacrifice to preserve those precious pages, thus sparing the keen insights of FOFOA from an inglorious end.



I just wanted to extend my respect to you and do my part in supporting your efforts. I hope my small donation will help:) Your writings, as well as those of Another and FOA, have really opened my eyes in the last few weeks. I don't post in the comments section of your blog, or many other blogs for that matter, but I read and learn as much as I can from you. You're a fantastic writer and you have a brilliant mind. I'm happy you are sharing your mind with us and stimulating intelligent thought and conversation. Our world can always use more of that! haha.

I live in southern BC, Canada. Just turned 33 and I'm on my new path as a prospector/ Placer gold miner after giving up my profession and cashing out on a few investments in a HOT real estate market a few years back. All is well and I enjoy my new lifestyle immensely:) Spring is approaching once again and we'll be back out on my claims collecting gold very soon. I'm also in the process of selling my small orchard property and stepping down to a smaller acreage so I can invest half of my savings into gold bullion. I'm even selling my beloved hotrod!! 1934 ford Tudor Sedan:) It's kinda hard to part with it but I feel it in my soul that gold will prove to be a much better investment in the future.

I know how you feel about gold mining when Freegold naturally takes effect, but I feel that Placer mining will be a bit of a hidden bonus to those "in the know". There are just way too many creeks and vast open spaces up here to properly police. I have a feeling that there will at least be a grace period where they won't be able to keep track of exactly what people are doing and where. I have friends that pull at least 50 ounces a year and not a single person ever sees them or knows exactly where they get their gold. That is including the government mining inspectors and Department of Fisheries.

To further expand on this; the gov doesn't even have a clue that some of the claims are as rich as they are. For example, I have a claim that's located on a creek that has "official" reports of only 50 ounces in its whole history. The old timers never reported the exact amount of gold they were pullin' out in almost all of the gold bearing areas in this province from the beginning of the first gold rush in the mid 1800's. My claim with the 50 ounces reported is much, much richer than that:) I've located documents and personal journal entries from the last living family member that mined the claim back in the 40's. They pulled just under 3000 ounces from one section of my claim and estimated their reserves at another 3000 ounces from a section that they never touched due to old age/retirement. They kept secrecy at all costs, a family secret that has remained hidden until only a few months ago. Anyway, just a little something extra to think about.

I could see the gov implementing some sort of laws regarding placer gold though, and regulations to try to prevent the sale of it into the (official)market at untaxed levels. However, it is not too difficult to smelt placer gold into bricks:) though they wouldn't be officially minted bars.

Well, I don't want to take up too much of your valuable time so I'll end here:) I hope I've given you a little something extra to think about regarding gold mining of a different sort.

Thanks so much and keep up the great work:)



I have just sent a donation of $100.00.

Like so many others, I find your blog a gripping read, and I take its advice to heart (by buying bullion), though I have yet to post any comment there.

I am particularly intrigued by a statement you made in your post Freegold Foundations:

"It seems—and correct me if I'm wrong here—that physical gold (along with a few other discreet collectible items like real estate, fine art, antique furniture, ancient artifacts, fine gemstones, fine jewelry and rare classic cars) may be the only true wealth holdings in which you are not a jerk. What do you think?"

I have a personal and financial, as well as an intrinsic intellectual stake, in the following questions (which I believe you will find to be of intrinsic interest) regarding these sorts of "discreet collectible items":

Do you expect them to appreciate at near the rate that gold will appreciate when we get Freegold? Or did you mean only that they would hold value while paper collapses?

At first glance, the latter seems likely to me, since, as I understand your argument, the Freegold spike will happen primarily because there are many more (paper) claims on physical gold than there are bars and coins to satisfy those claims; whereas these "discreet collectible items" will not enjoy any such spike, as there is no excess of paper claims upon them.

However, other considerations may pertain. As you presumably know, Goldsubject(
HERE) popularizes Freegold to mean that, because "there simply aren’t enough physical goods in the world to satisfy the demands of all the money and other paper wealth that exists", you could get Freegold (even if paper claims on physical gold could all be met by matching bars and ounces for satisfaction of those claims).

While Goldsubject claims that (his understanding of) Freegold means that all of the money fleeing paper wealth will flow to physical gold, that result seems unlikely to me, particularly since so many "investors" are taught to diversify. Given your confidence in "discreet collectible items", why would you not expect investors to diversify into such items as they flee paper wealth? But, would they do so at anywhere near the pace of their flight into bullion?

Moreover, would not much depend upon the quality/rarity of the "discreet collectible items"? Wouldn't, say, rare classic cars do much better in this environment than, non-distinctive real estate; but again, would this gap increase at anywhere near the pace of that of gold in Freegold?

These issues are of particular importance to me, as I own numerous extremely (in one case, supremely) important historical objects, which I presume to be worthy of inclusion in your list of "discreet collectible items".

Insofar as that such items have little chance of keeping pace with gold bullion when Freegold emerges, I ought to dump these objects ASAP for lower prices than I judge them to deserve, and pour the proceeds into bullion.

Insofar as that such items have a substantial chance to keep pace with gold bullion when Freegold emerges, I ought to keep these objects as diversification, until I obtain for them sums in keeping with what prices I judge them to deserve.

So I anticipate with great interest any thoughts you have about the issues described above.

If you choose to reply to my queries, I will be of a mind to pursue with you other related issues of intrinsic interest, e.g. that the Exeter pyramid puts such "discreet collectible items" as real estate and fine jewelry (this surely having no counter-party risk) quite far above the "power money", and above even the paper assets from which he expected capital to flee when all paper assets became distrusted for their counter-party risk.

I would appreciate any response that you could send. A separate blog post on these issues would also be of interest; feel free to quote me as you wish.


Dear J,

Thank you very much for your support and also for your query.

When I mentioned those items in the Foundations post it was only in the context of being a true physical wealth holding. Not in the context of a transitional revaluation. You’ll notice that these items tend to be the kinds of things that the super-rich have in abundance. The super-rich spend lots of money but lose little value, because they buy fine (and rare/scarce) things. This is the way wealth can and should be enjoyed.

As to these kinds of things revaluing upwards with gold, I don’t really see that happening. Collectibles already conform to the “rules” that gold will conform to under Freegold. Collectibles have unambiguous owners. When they are sold, there is an unambiguous seller and an unambiguous buyer. There are no pool accounts of collectibles with unallocated account holders. There are no circulating (trading) “paper-collectibles.” There are not more “claims” on collectibles than there are physical collectibles. Etc.

This may apply to your question. Someone asked me last week:

"You’ve said hyperinflation and freegold are separate events. I can only imagine them all rolled up in one messy ball. Would love to know how you see the separate events relate to each other as they unfold separately, if you haven’t already covered it."

I replied:

"They will most likely be rolled up in one messy ball. But thinking about it in that way makes people miss that they are distinct, discrete events that will be happening at the same time. For example, if hyperinflation takes the price of everything up 1,000,000%, gold will go up 40,000,000%. But only gold. Everything else, silver, cans of peas, etc... goes up 1,000,000%. So gold's FREEGOLD rise (that extra 40x rise) is in REAL TERMS because it is relative to everything else REAL. While everything else only rises in NOMINAL terms. Can you see the difference?"

So the question comes down to how specific collectibles (since they are not fungible wealth like gold) will perform. I don’t think there is an answer for collectibles in general. I think some will perform WORSE than silver and cans of peas. I think some will perform much better! And I have a hard time imagining any that will perform as well as gold or better, but perhaps a few will.

Some of the most-rare pieces are already being revalued upwards now. Freegold will not necessarily deliver a dramatic revaluation, but the years prior to it may. Others will be overvalued in the run-up and therefore may perform worse than inflation. Real Estate may be one of these since it is generally priced with leverage. However the best of the best pieces of real estate, those that trade with no leverage today, will likely do as well as inflation.

And then the next question is would it be worth trading an extremely rare item for an abundant one like gold for a profit from the transition? I cannot answer that question for you. “It depends!” On many things. I think it would have to be analyzed on a case by case basis for each and every item. And then think about the liquidity of those items. Will the people that would buy them today be in gold through the transition so that they would still be able to buy them tomorrow? Lots of things to think about. Read my old post
Mona Lisa or Ben Franklin. But try to imagine it as “Mona Lisa or gold?”

Of course these are only my guesses based on intuition. I hope they help!



Thank you so very much for your extensive and thoughtful reply; of course intuition has to play a large role in any such analysis.

The sort of items I am talking about can see seen at http://www[redacted] .

Once I've really been able to mull over your thoughts, I may get back to you on them, if that's OK.


Hello J,

Well that looks like quite a collection! What a nice and rare [redacted]!

A couple thoughts come to mind initially. The first is wondering if you are a dealer first and foremost and a collector second. Or are you a collector first and dealer second? This goes to the enjoyment factor of owning such precious artifacts. And also, probably, the discount at which you obtained the items since dealers are more particular about their purchase price.

Also, I would have to look at collectables like this in a similar way to numismatic coins, which I personally stay away from. The reasoning is that I view numismatic prices as having two distinct value components: the melt value of the metal, and the premium on the art, history, age and scarcity of the piece. Freegold is a revaluation of the melt value component only. And in the case of many numismatics, I expect the premium component to actually shrink in real terms. This can already be seen happening in some cases as the price of the metal rises transferring pressure to the premium component. But only in more common numismatics. Not in the most rare.

Another lesser consideration is that ANOTHER was writing more for people holding their wealth in paper, not in real things. For these people gold bullion is a much more urgent consideration than for someone like you.

Consider the scenario of the dollar’s purchasing power falling 90% while gold revalues 40x upwards. For the average saver in an average pension fund or 401K, that is a differential of 400x. Whereas your items may only face a differential of between 7x (for gold-based items) and 40x for other metals. (That's the difference between keeping what you have now versus trading it for gold bullion before the punctuation. Just a very rough guess of course, but in any case much less of a factor for you than for the paper bugs.)

The point being, if people like you were all ANOTHER was going to reach, he probably wouldn’t have bothered to come forward. Of course that is no reason for someone like you not to optimize. But because you are already in a much much better position than 99% of the rest of the people, careful consideration should be given to your decisions.

If it were me, I would probably aim to start reducing inventory in favor of bullion. But I probably wouldn’t sell the stuff at fire sale prices. I would simply make it a “policy decision” of sorts to reduce inventory, and for new items I would want to start acting more as a broker rather than growing my inventory. In fact, I might even expand my business into the “rare bullion” sector. You can often find rare and “antique” gold bars at no premium to the melt value, that could then be presented to the same clients that like your other artifacts! And that’s the kind of inventory you wouldn’t mind sitting on through a Freegold transition!

Anyway, just a few “off the cuff” Thoughts.



Thank you so very much for another outstanding reply. Some comments:

1) Whatever I was before, I am now a dealer first and foremost and a collector second, in light of the gravity of the economic situation. As middle class life melts away, (with the attendant risk to social/political stability) there is no such thing as having too much gold; thus, conversion of more illiquid assets into more gold is my top priority; at issue is the timing, etc. of Freegold.

2) Regarding your last few paragraphs about my situation:
I am indeed already in a much better position than 99% of the rest of the people. But much hinges on the magnitude and speed of the social/political upheaval which will result from the collapse of paper assets, with its likely attendant explosion in the violent–crime rate. Will it be necessary to have enough gold to afford a fortress, or at least some bodyguards? (Presumably the Giants have such defenses all lined-up!) Or at least enough gold to be able to purchase safe havens in other countries, assuming that any will be any safer than the US?

Given society’s current prospects, everyone ought to be thinking about how they stack-up regarding the following sorts of considerations:

I am in my late 50s, hence I’m long past the peak of my ability to “mix it up” with gangsters. At first glance, I might present something of an imposing figure (being 6’2”, now 220 lbs., with a booming voice) but, at some point I will start to look old, I cannot be everywhere all the time with all of my loved ones, and these loved ones clearly do not present imposing figures.

I have already (since '07) started working quite hard to reduce my collectibles inventory in favor of bullion, obtaining very much indeed above fire sale prices. But I still have many fewer “dollar worth” of gold than of the collectibles (particularly if these are measured by what I view as their potential worth, rather than by my cost). And, considering these items' illiquidity (particularly at the higher prices), getting such prices tends to require patience, luck, or a fair amount of (preparation) time and work (which I generally quite enjoy doing).

[In recent months, I have been concentrating on improving the chances of a major haul from [redacted]; but this figures to be a relatively long-term project. Thereby I have neglected other possible pursuits, e.g. rushing to get auctioned items of vastly lesser magnitude and value; this because I feel that I am (regarding financial potential) “top-heavy” into the [redacted]. Were it to sell, I would be then diversified in various genres of historical objects/groups. Were I to expect Freegold within months rather than years, I might reverse course and prioritize auctioning of whichever lesser items I could. Seek Home Run later or bunt singles now?]

3) Regarding your comments about coins (insofar as they are analogous to the items I hold) , esp. your view that "the price of the metal rises transferring pressure to the premium component. But only in more common numismatics. Not in the most rare".

Do you mean only that this is happening now, or do you expect the rare ones' premiums to continue to evade the pressure which is affecting the more common ones? (For esoteric reasons, I doubt that this premium- stability will continue to hold for most rare coins, depending on the definition of “rarity”; more on this later, if you’re interested.) This matters insofar as my key items are all, by significant measures, quite rare indeed, although of course far less liquid than are many rare coins (which have a large established market-infrastructure).

Enough for now. I eagerly await your thoughts.


Hello J,

1. Regarding the timing of Freegold – The way I approach it is that it is already overdue by ten years at least. So I think of it kind of like “the big one” (earthquake analogy) that could come at any time. How you prepare for an overdue earthquake is how you prepare for Freegold. That said, once a certain amount of sufficient preps are done, the rest can be executed a little slower so as to aim for optimization. If Freegold happens before you are done, you will still be fine. If it takes a little longer, you will have optimized your excess.

2. Regarding security – The best security is secrecy, bar none. Beyond that, I have bought a number of firearms, I have a CCW (concealed carry permit) and I bought a concealable bullet-proof vest which I have never worn. Cheap insurance for $250.

If I was in the $10m net worth range or above I might look to a second home outside of the country, probably Canada, Switzerland or New Zealand. Below $10m, I wouldn’t worry about it. I’m staying put. Did you see the Richard Maybury piece I posted in the comments about “leaving the country”? If not, you can read it

Regarding the [redacted] versus “bunts”, I understand your juggling act. Unfortunately I think only you can properly weigh all the pros and cons. I doubt you could ever give me enough information to be helpful in that analysis.

3. Yes, I mean that is happening now. I do not expect any premiums to expand like the bullion itself in its new monetary function. There is no reason why they should! It is gold bullion that is changing in both form (physical only) and function (global monetary store of value). I can’t think of a reason why such a unique change would bestow its increase on anything else.




Thanks much FOFOA, I just donated $200 via PayPal and I added a comment to the blog thread. As much as you detest having to write the latest, some of us do need reminders, and I do appreciate the note that you are not amassing physical - just protecting it. I think as time goes on here (near the end), you will have more and more opportunities to connect the freegold foundations with current events (similar to what you did recently with GLD). I'm looking forward to it!

I was wondering if you might do some paid consulting for us by giving us your opinion and Thoughts regarding some IRA and regular investments in CEF, GTU, etc. My concern lies in the future tradability of these as we move closer to reset. These are by no means the only PM investments we have but they are substantial.

Let me know what you think.

Thanks FOFOA,

Hi L,

I’m not sure what you had in mind, but I’m happy to answer questions by email for free. I’m not in any way a financial advisor, just a logical thinker. But if I can help, I am happy to. Then if you feel that I gave you something you would have paid for, you can always donate more at the end. ;)

To be honest, I don’t know that much about CEF and GTU. Are they exchange traded like GLD? Are they closed end funds? Etc. Also, I have another supporter who just switched to a self-directed IRA (SDI). In it he can buy physical and store it at Brinks. His question was whether it would be better to take the hit to close out the IRA now and buy physical discreetly, or to get twice as much physical through his SDI with big, taxable paper trail.



Let me give you some more background so you know better the situation. My brother, Mother, and myself have self-directed IRAs. A portion of my IRA was in Gold AE’s stored in a vault (Delaware). I took the “hit” and had this delivered to me last year because I simply do not trust this method of storage through reset due to the vast corruption “out there”. For the remaining amount, I searched for other G/S vehicles that might be considered next best to the physical. I first heard of CEF from a Rickards interview. Rickards and others consider CEF, GTU, and Sprott’s funds as very good (when compared to GLD/SLV, etc). CEF (Central Fund of Canada) has been around since the ‘60s and they are also managing GTU (gold-only, CEF is 50/50 G/S), and the bullion is independently audited each year, self-allocated, and acts as a store of value to stockholders that cannot be called for delivery. No lending, leasing, trading or funny business – just stored metal.

So, I helped get them into these funds and all are happy with the performance, but my concern is what is likely to happen to these as we progress through reset. So far, I trust these funds far more than an IRA custodial vault, however I have doubts about how a brokerage account will fare through reset. One option is to have the stock certs (available from CEF only) sent directly to us, ride out reset, and see what happens. The more painful option is to liquidate now and buy physical (with all the attendant storage issues and tax hits). I think you have a far better idea than I what the process of reset might look like. So that is the core of my question – and I might even not know enough to put the concerns in the right place.

The CEF website is:
GTU is:

If you feel the need to do a bit more research on these funds, I’ll make the donation commensurate.

BTW, attached is a ppt of pics I put together of the family farm operation we are getting going here in [redacted]. We are doing organic/biodynamic and promoting a diverse environment in which the animals can express themselves naturally and contribute to the diversity. We fear that there will be great need soon for truly nutritious food for folks. And we intend to be able to provide it. Hope you enjoy the pics.

Thanks FOFOA,

Hi L,

Thanks for the pdf. Great pictures! Where did you move from?

I’ll give your question some thought and take a look at the CEF/GTU websites. I don’t like to tell anybody what to do with their money. Instead, I like to enable people to decide for themselves. It is only when you take your own financial advice that you can truly have peace of mind.

What it comes down to for me is liquidity during and after the Freegold transition. I believe that physical gold will be the most liquid form of gold, and your most liquid market will be the millions of people physically within your reach. As paper gold fails, I can imagine people panicking out of even full-reserve funds because they don’t know the difference. You may know, but not everyone does. So I can imagine that even the best funds might track the paper gold price down, and then be taken advantage of by a few big players that have the ability to redeem those for physical at a discount. So I will have to look at the redeemability of those funds. And even if they are redeemable for the individual investor, they are still up in Canada. So that would be a factor to consider as well.

After Freegold, why would someone pay the same amount of money for an irredeemable Canadian share as they could pay for a little wafer bar of physical at the bank? That’s another thought. So even at full reserve, I can imagine funds trading at a discount to physical. Furthermore, we don’t know what the public markets in which these funds trade will look like after a big shock and exodus of investors.

Anyway, those are just a few of my initial thoughts.



We came together from [big cities, leaving our careers] across the nation – [redacted]. Back in ’09 we all decided to come together to do the farm thing recognizing the need for nutritious food and the need for a choice relative to big Ag. We also recognized what is coming and that this (the farm) is probably the best way to help in the long run. If we are going to jumpstart productivity, it better start on the local small farm.

I’m not asking you what to do – just thoughts about the considerations involved in the coming reset. I know that the bottom-line ultimate answer is physical in possession (buried or whatever). And if that is the route we take, then it must be soon. But it’s a matter of making an informed decision with as much realistic likelihood of what to expect down the road. In other words, it would be nice to shine the flashlight down the road as far as possible before heading out. And to some extent this does require an examination of CEF/GTU in the context of reset. There will always be unknowns, but before all is done, I’m expecting the absolute worst from the current “system” (forced annuitization of all IRAs, for example). If there ever was a concentration of psychopathic anti socials it would be in today’s corporate/government/financial structures. This I have researched over many years.

I understand the redemption prob associated with the Sprott funds and I may be incorrect in assuming that the same could not happen with CEF/GTU. And even if they survive, they would certainly trade at a discount. And there are potential political probs since the gold is in Canada. And there could be such decimation to the trading structure/system (as you say) that nothing really trades like today. These are all the things I need to weigh while the fiat can still be converted to physical.

There is one aspect related to that last point. It doesn’t change Freegold – just our collective expectations. If we are headed for a period of worldwide chaos, anarchy, and destruction (a la the psychopaths), then the world asset side of the equation may be far less than that currently represented by debt fiat. In other words the starting point for Freegold may be an environment of much destroyed wealth. Any corporation/system can handle a minority of psychopaths if these individuals are recognized for what they are and prevented from rising to top level positions of “leadership”. We as humans, have collectively failed at this task of reality discernment in our governments/corporations/systems/etc and are likely to pay a very stiff price. If there are any benevolent giants out there, now would be the time to step forward.

Thanks FOFOA,

Hi L,

I’m a little buried in email right now, so just kinda stopping by to say Hi! Thanks for the updated pdf.

As far as gold having a lower value because of destruction of wealth, that is not the case. First of all, the fiat “matrix” disappears and leaves the underlying real world intact, just like the real matrix in the movie being turned off. Yes, there can be a depression and whatnot, but gold has this strange ability to stretch its value out into the time dimension rather than just a snapshot of our 3D world. This is a result of the giants having an intergenerational proclivity for the stuff. Has nothing to do with us shrimps, except to the extent that we get to go along for the ride. This post talks about that time dimension. It’s how gold can have a higher gross value than all paper wealth in existence today. And how gold can keep its value even in times of recession:



Just read your Victor post. The “Cleaner” pic matches so well after reading Victor’s response, LOL … Paper gold must have reached a kind of status of currency (fiat) by now. A currency that varies in value with respect to other currencies via the paper spot price of gold. So there must be some higher level trading strategy between Forex, paper gold, and oil, (and maybe other commodities) that I don’t understand and that is not shrimp-friendly.

Anyway on the question of CEF/GTU, it might be better to ask the question in the form of which bullion institutions are likely to survive reset intact assuming that reset does not entirely decimate the current financial trunks and major branches of the system. From what I can tell, CEF/GTU are well-managed, the people are good, and the audits are good. The prospectii are geared to the current system but other than that, and the uncertainty of what the post-reset system will look like, they look OK wrt commitment to the shareholders. I realize that much bizarre can happen in many arenas and there is no crystal ball. I am a bit reluctant to take on more physical but on the other hand, none of us like the idea of our IRAs turning to vapor. I’m not asking you to analyze CEF/GTU beyond your own curiosity, but to look at it as to how such an institution might fair through reset. Your idea of how that might proceed is far and away better than mine – so any Thoughts are much appreciated by all here.

Thanks FOFOA,

Hello L,

I took a quick look at the websites for CEF and GTU. I couldn’t find anywhere that it said shares could be redeemed for bullion at any level. Assuming this is the case, the best hope I would have for the success of such a Trust is that its model catches on in Freegold and more of this type of Trust emerge. But for many reasons I doubt that will be the case.

I cannot point to a specific reason why either of these Funds shouldn’t trade at close to their NAV, other than that the holder of a share will not have the same freedoms as the holder of a gram of physical. On the other hand, I can think of a whole host of scenarios in which the shareholders end up getting screwed relative to the outcome for physical gold holders. And if you bear these in mind, you might see how they could become self-fulfilling in the end as more and more people become able to think things through in this way.

1. Freegold represents gold undergoing a change in both form and function. Form: Physical only, no paper gold. Function: Main international monetary and financial system’s primary reserve asset and international settlement medium. The divergence of the value of gold away from other things like silver and oil will be a snap! or a gap on the charts as this change takes place hidden from the markets. It will not be a matter of the trading markets shifting to value gold vastly more than other things. It will be a simple monetary reset. And with this may come any number of strange occurrences.

The thing to keep in mind, no matter what happens, is to ride it out! Don’t act rashly. Just relax and let your gold lie very still.

For example, some politicians may attempt a confiscation of some sort. I’m not focusing on the USA because this could happen anywhere. But it will be very short-lived because it will cause massive capital outflow and will net very little for the offending government. Wherever it occurs it will have devastating short-term effects and be quickly repealed. That’s what I foresee. And that’s why it is important to understand in advance, so you can just sit back and watch the show.

However, the victims of such a move will likely be those whose gold is stored by a third party. These will be the easiest targets for stupid politicians. Even the most honest and upright fund manager will quickly hand over your gold rather than face any kind of legal or criminal threat. When I say offending governments will net very little, that very little will come from places like GLD and CEF. And it won’t be returned once the law is repealed because you will have already been compensated in cash at the paper price of gold while the physical price was in hiding.

2. As I have written about it is likely that the new IMFS will not allow the lending of gold in any way, shape or form. This is not a requirement of Freegold, but it is the logical conclusion we can expect from rational lawmakers. This would likely invalidate such funds as CEF or GLD since the shares can be lent and sold short. This will be seen as deleterious to the newborn monetary system.

So the question then becomes how to dispose of unsecured creditors like the shareholders. If you are really lucky they’ll melt down all those 400 oz. bars into little bits that can be divvied up in share-sized baskets. But I wouldn’t count on that outcome.

3. Depending on how long the “gold in hiding” period lasts (which I have guessed could be between a week and 6 months), there may be a concerted effort to cash out all fund shareholders during this time. There will be a significant incentive to do this! Any fund manager that can either close down the fund or force a buy-back of the shares will see a huge windfall on the gold.

This may seem like something only a dirty rotten scoundrel would do. But I can imagine that things play out in a way that even the best of them end up doing this.

4. On the other hand, you may be sitting on essentially worthless shares for up to 6 months, hoping everything turns out in your favor once the BIS Freegold market opens for business. Imagine, if you will, the paper price of gold crashing to $200/ounce for 6 months. No physical is trading anywhere because no one knows the price. The dollar is undergoing hyperinflation.

On paper, your entire IRA is wiped out. The Canadian government offers a premium payment to shareholders of 100%. The offer is $400/oz. for your gold shares while the paper price is sitting at $200/ounce month after month. Do you take the offer? What if it doesn’t work out in the end? What if you don’t get the Freegold price for your paper shares? Then you would have been a huge fool not to take the Canadian offer. So what do you do? What decision will you make at that moment in time, not knowing how the future will play out?

5. I could go on, but I don’t think I need to.

Larry, you have gone to great lengths to move your life [except for your savings] off the grid and onto a place where you are in control. I tip my hat to you, sir!



Thanks much for your response and insights, and I much agree with your points and the picture painted. So the plan here is forming. The subject might make a good future post since I suspect there are many more in a similar position.

I never got to any more pdf pics, but here are some of the latest ones that we put together.

Take Care,

Thanks FOFOA, Here is another donation from us. Thanks for the insights. I know what we are going to do. Take Care, L

Dear L,

Thank you once again for your generous support!

I’m happy that you found my email to be helpful! And once again, great pictures. It must be fun starting a new life of farming, although I imagine it’s also a lot of hard work!

Just out of curiosity, which of the four arguments did you find most persuasive (in my last email)? I personally thought #4 was the most powerful. Because it sets up a situation in which you may be faced with a tough decision in the future in which you would have no way of knowing the final outcome or the best choice. Avoiding those kinds of potential future conundrums is what preparation and peace of mind is all about, wouldn’t you agree?



Yes, I think point #4 was the most powerful along with the last para of point #1. I think this had the most impact because #4 suggests a scenario that strikes an intuitive chord. And the easiest route is always taken by politicians always in favor of their own skin. So, everyone resonated with this. And yes, everyone agrees that peace of mind in that arena allows us to concentrate on much more timely concerns as all this plays out. And preparation it is.

On the farming, much of our motivation has stemmed from an understanding that our food quality (both animal and plant) has been degrading for a very long time and has become the driver in chronic disease today. All of this has much of its source in the loss of soil fertility for producing healthy plants and animals. Human health depends on these two, and thus, the soil. Good men have been sounding this alarm for a long time, but Big Ag and Big Pharma have gained dominance through politics. You will understand this deeply if you read Albrecht’s “Soil Fertility and Animal Health” I have attached. And this was written in 1958! (I know how you appreciate the early warnings) What we hope to achieve is to provide at least a small pocket – truly nutritious food in a time where it will be sorely needed – aimed at helping those that can, in turn, help others. There are many of like mind scattered around the country.

I’ll add you to the list for periodic pic updates so you can see how things progress.

Take Care,


And last, but certainly not least, here is a bonus email exchange from just last night:

So... I've been reading through a few interesting threads on the Bitcoin forum today. I'm starting to think this crash over the weekend may be a much bigger story than the allinvain story that initially drew my attention. And I haven't seen a single person raise what I think is an entirely likely scenario. There are many theories floating around. But I think everyone there may be missing the real story. So I'm wondering what you think of my theory. I'll repeat, I haven't seen this, or anything even close to it, mentioned anywhere. Perhaps it is, but I haven't seen it. It's a theory I just now came up with.

The generally accepted story is that someone hacked MtGox and took control of 500,000 bitcoins and put a sell order in for all of it at 1 cent. Everyone accepts that it must be a hacker that did this, because who in their right mind would do it voluntarily, with their own funds? This is where my theory comes in. I can see EXACTLY why someone would.

The owner of MtGox claims that all 500,000 bitcoins came from a single account that was hacked. That would have been over $8 million worth before the crash. So some of the forumers are questioning whether MtGox is telling the truth. Was it really just one account that was hacked? Who would keep $8 million on an exchange like that, in an account that could be hacked? Seems pretty unlikely, and I agree.

Just before the price hit 1 cent and trading was stopped, one kid scored HALF of those bitcoins by putting in a buy order for $.0101. He happened to have $3,000 cash in his trading account as the crash was happening and he, being a smart kid, bought 259684.77 bitcoins for $2,613. Here is how he describes it on the forum:

I’m Kevin and I'm the guy who bought 259684 BTC for under $3000 yesterday. I really wanted to keep this as quiet as possible, but I don't feel I can anymore. Here's my side of what happened.

On an exchange like MtGox, there are typically hundreds of standing "buy orders" where people are offering to buy bitcoins at various amounts and prices. When a large sell order comes in, an exchange will start with the highest priced buy order, match up the buyer and seller, then move down to the next lowest buy order. This repeats until the entire quantity of bitcoins being sold have found buyers, or there are no more buyers at the minimum price the seller was willing to accept.

I was watching, like many of you, a gigantic sell order burning through the bids. Mt Gox doesn't execute trades very quickly, so we were watching this huge order slowly eat up every buy order on the books. The price started at around $17.50, and within minutes was below $10. At this point, I realized this wasn't merely a large seller willing to accept some losses. This was someone attempting to crash the market by selling a huge percentage of the market's total bitcoins at once.

I had around $3000 USD in my Mt Gox account, from earlier sales I'd made. I looked at the market stats, and realized that there were tons of orders to buy BTC at $0.01 that would likely eat up any remaining bitcoins this seller had on the order. I figured if I put a buy order in for $0.0101, my order would execute first and I could buy a huge amount of bitcoins from this seller before it hit the bottom. The only problem was that Mt Gox was running slower than molasses at the time, and everyone was saying that it wasn't accepting trades. I had to try several times, but eventually I got a buy order in, offering to buy as many bitcoins as I could for $0.0101.

The site stopped responding completely for a while, probably from so many people hitting refresh to see what was going on. When I got back in, I saw in my account:

06/19/11 17:51 Bought BTC 259684.77 for 0.0101

I had just purchased over 250,000 bitcoins for $2613. At the trading price immediately before this large sell order happened, that number would have been worth nearly $5 million. After I regained my breath, I tried to figure out what to do. I wasn't sure what was really going on.


To make a long story short, the owner of MtGox has accused this kid of being the hacker and reportedly reported him to the FBI. The kid says he's not the hacker and MtGox is not telling the whole story. Like, who is the "victim" with 500,000 bitcoins in his account? I happen to believe Kevin, the kid.

The debate now seems to be on whether or not MtGox should reverse the trades. It seems fairly obvious that the "victim" who lost his 500,000 would want the trades reversed. I'm not so sure.

He hasn't been identified, but we can assume MtGox knows who it is. We can also assume this "victim" is asking MtGox to reverse the trades. But here's the thing...

I think he's probably hoping that they DON'T reverse the trades, because he just cleaned out every single US dollar cash buy order on the largest Bitcoin exchange, all in one fell swoop. He could have NEVER cashed out 500,000 for $8 million USDs and he knew it. And the allinvain story showed him that Bitcoin is not long for this world. So how much $$ did he get? Well, let's assume Kevin cleaned out the last half at $.0101 since he didn't use up his whole $3K. Our "victim" got $2613 for that half of his chips. The other half would look like a sloping graph from $17.50 down to .0101. That means it is likely he got an average of $8.50 per bitcoin for the other 240,000 bitcoins, or about $2 million dollars.

Is that a "loss" of $6.5 million? Or a GAIN of $2 million? Definitely the latter!!!

Granted, this is a bold move. Which is why he is now presumably playing the victim, asking for a roll-back, but hoping it is not done. If it's not rolled back, he walks away with the $2 million after cleaning out most of the USD cash on MtGox and everyone, including the owner of MtGox, thinking he is a victim.

So who could this be? Who has 500,000 bitcoins? Well, Satoshi Nakamoto, who reportedly has 25% of the bitcoins, only has about three times that many. So it's got to be a pretty short list. Either it is Nakamoto or one of two or three others. And if it is one of the others, then it was likely his whole wad. If it was Nakamoto, it was a $2 million payday for only 30% of his stash. He's still well hedged to the upside if Bitcoin recovers. But at least he got paid for all his work over the last two years, before BTC hit FOFOA's target price.

So what do you think of my theory? Any holes in it?


PS. I should also mention that there is a real chance the trades will not be reversed. There are good arguments for them not being reversed, not the least of which is MtGox's own policy as well as the fundamentals behind bitcoin. It's supposed to be irreversible. If you start reversing trades, liquidity will dry up as people will pull their profits from the exchanges ASAP. And this is now a debate, even though some think reversal is imminent. I'm not so sure it is. And even if it is, Nakamoto would still be in the clear with all his Bitcoins restored.

Just like the Giants and gold, he who panics out of the dollar first gets the most gold.


Why dump the whole wad at once, which you know will overwhelm the market? This would be a poor way of cashing out, no? Could "he" not dump like 20K a day (or whatever based on knowledge of the volume he could move through the market) to max his return?

He threw away so much money if he did this intentionally, no? It seems clear it wasn't:

"I realized this wasn't merely a large seller willing to accept some losses."

It had to be something else:

"This was someone attempting to crash the market by selling a huge percentage of the market's total bitcoins at once."

Exactly, it had to be a hack, no one would sell a huge percentage of their orange tickets..ohhh wait


1) it seems mtgox volume (and bitcoin in general also in context of other exchanges as well) is light, so maybe even 20K or whatever smaller dumps a day become suspicious, and he can't slow dump. In your scenario he has the cover of "OMG" it was a hack, it was not a dump by a ponzi insider, and by dumping half or whatever at like 1 cent, the hack ruse looks even more credible, because, from above "he threw away so much money of course it was not intentional?" so the story is as you say, what he "lost" not the 2 million or whatever he pockets

2) who has that many bitcoins??? - only weak hand/ponzi insiders - how could the sell order be from multiple accounts, right?? - clearly they didn't hack 500 accounts and sell from them all in one order, right? this is one guy!

3) why they keep all that in the account there??? - the amount sounds way outta line to keep all that on a site where it's obviously an amount quite disproportionate to the volume trading there

4) whoever had that much coin on there had to see the *slow motion train wreck,* he would have to be a computer guy way way way into bitcoin to have all those bitcoins, so why is it that "Just before the price hit 1 cent and trading was stopped" - doesn't he step up earlier- he has like all these coins and the whole community is going nuts watching this crash - he had to have known and it appears he didn't act - why would he want to watch it fall that far??

because you indulged me, -

"Over the last few weeks the currency's value rose 30-fold
[a ***HUGE*** reason to get out now, 30 FOLD] to more than $30 before falling back to $10 and rising again to $20 late last week. But Bitcoin
prices fell to pennies this weekend following a security breach that allowed as much as $8.75M worth of Bitcoins (at pre-crash prices) to be (temporarily?) stolen.[the story's an easy mainstream media sell, as it passes the common sense sell test - no one would dump all that money right...8.75m...but...]

This follows last week's news that 25,000 Bitcoins were
illegally transferred from accounts on the currency's largest exchange "allinvain's" computer, a heist then valued at nearly $500,000.[hmm, that wouldn't be the mysterious guy and mysterious event of mysterious timing that *just recently* sparked the public debate that ultimately raised the profile of and reaffirmed the whole "we need to take a hard stand and recognize that bitcoin's decentralized ideology means no reversals when you get robbed on an exchange", there is no Mr nice guy fed to take your shoebox of burned money too, we have to say tough shit. Well timed precedent to lend credence to the "real chance the trades will not be reversed," in keeping with speculation that "he" doens't want the sale reversed]

Following Sunday's mess, trading has been suspended and Mt.Gox is
currently down as is competitor TradeHill (where prices closed at $13). Both sites allowed users to trade Bitcoins to and from U.S. dollars and Mt. Gox accounted for nearly 90 percent of Bitcoin's average daily trading volume…

Yup, there it is, no other way out, he could not sell a little a day or whatever, 90% of the market at mt gox - that's the whole game there, it makes no sense to keep that much on there given the volume, and that info crushes the common sense reaction argument I first posted:

"Why dump the whole wad at once, which you know will overwhelm the market? this would be a poor way of cashing out, no? could "he" not dump like 20K a day (or whatever based on knowledge of the volume he could move through the market) to max his return?

he threw away so much money if he did this intentionally, no? It seems clear it wasn't:

"I realized this wasn't merely a large seller willing to accept some losses.""

Actually, maybe it was, except to call them losses is maybe not the best way of looking at it - they were gains above FOFOA's target price - huge gains in fact! he got a bunch out, more than he could any other way, and he also has a cover to hide his tracks and help to keep the ponzi going/keep the balloon from deflating!

Pimps and slingers don't take bitcoins. Who would *not* want the opportunity to indulge oneself in the finer comforts of the moment while also keeping a few "orange tickets" in the "raffle"? After all you can get a yacht if you have enough money.


If it was Nakamoto, it was a $2 million payday for only 30% of his stash. He's still well hedged to the upside if Bitcoin recovers. But at least he got paid for all his work over the last two years, before BTC hit FOFOA's target price.


"Yeah, It's been a ride...
I guess I had to go to that place to get to this one
Now some of you might still be in that place
If you're trying to get out, just follow me
I'll get you there…"


Just in, from Santorini, Greece:


«Oldest   ‹Older   401 – 437 of 437
radix46 said...


So, you've been reading for two years and it's only now that you think things have become a bit heated around here?

I guess you don't read all that regularly huh?

radix46 said...


Did you actually read the crap that was in that link to Ash's Simple Planet article that I posted? Have you seen some of the other skirmishes that have happened on this blog? How about Art? And *that* was your biggest disappointment? Hmmmmm, something smells fishy.....

People who spout that kind of sh!te can be dismissed. Time is too precious.

Franek said...

No, not at all. I’ve seen heated discussions here before (I’ve seen the unholy ), I remember Art and others as well, but this time the exchange here has passed certain threshold. It seems it’s all about talking past each other. Not only that… it’s completely counter-productive and quite disappointing, honestly. As I said, many of the regulars are few light years ahead of my understanding, but it pains me to hear personal attacks instead of substantive discussion.
Ash or whoever may be wrong but the way you guys are conducting this exchange helps nobody, not me. I’d love to hear the actual rebuttal of Ash’s nonetheless well-organized logic. The nature of the topic is very much subjective at this point and we can only try to guess the most likely result. Why antagonize each other, though? I have a feeling that there may be many more like myself here, still somewhat lost at the complexity of the subject, that can gain a lot more from structured and logical argument then from a noisy and pointless barking.

Franek said...

I know this may not be the place or time, and I don’t insist, but in few words, what about that article? Is it too dark, perhaps too unreal? Or is it because it’s Ash? It’s a “story”, take it for what it is. Imagine.

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

Hello Franek,

You wrote,

"I can’t help but sense that some resident FGA’s are getting unnecessarily, I hate to say, fanatical about the subject of Freegold."

-Not really. Quite a few posters here are long since fed up with SIR Ashhole's act. At this stage the subject of RPG has little, if anything, to do with it.

"I truly think that Ash’s presence here is beneficial if only because he keeps everyone in sort of a check."

-Do you? That is the sort of comment that almost makes me wonder if you aren't, in fact, a construct of you know who. But let's, for a moment, assume not. The poster in question, by definition, can not be a beneficial presence when the amount of disruption he causes far exceeds any other putative positive effect you (or anyone else) allege.

"I never for a moment felt threatened by any of the many opposite views that I’ve seen on this blog before. I don’t understand why would anyone else here either. I think we could easily drop that name calling, trolling accusations, ad hominem, etc.; they only show how insecure or falsely secure we feel about ourselves or our views."

-That formulation's just a bit too pop psychology for me. The animosity you speak of and its various manifestations are, from where I sit, well earned. If you haven't somehow grasped why then I think you owe it to yourself to read more thoroughly.

Consider that one must be a very particular sort of person to insist on sticking around when one's presence is as obnoxious (as it clearly is) to so many regulars.

Would you not leave a social scene if you were so reviled?

Consider that some people are very good, even expert, at driving others to fits of pique while simultaneously maintaining a seeming air of civility about themselves. Certain on-lookers, upon cursory examination, are then fooled as to the source of all the rancor. Have you ever encountered such people in life, literature, on stage, or in film? If not, then I suggest you strongly consider that you are now here on this blog.

Texan said...

The real problem, IMO, is that blogger for comments is the absolute worst because it doesn't allow comment threads to develop. Among other problems.

Fofoa it's just a suggestion, but as you gain popularity and viewers you may want to look into something like what they have at zerohedge.

Because I think what is most frustrating for me at least is having to scroll through all these comments to find new threads. It might reduce the overall noise factor as well as post and counter posts will be in a nice tight thread to read, or ignore.

JR said...


"What strikes me, though, is how civil, composed and balanced his responses are in comparison to what’s coming from the other side."

Of course they are, that's the *WHOLE POINT.* In his apology, Plato wrote:

Here, then, the sophistry is rather in form than in substance,...

Sophistry is form over substance...hmmm...You applaud the form while admitting to not understanding the substance...You say:

"I can’t say I completely understand the why’s and how’s, I sense the deeper “truth” of Freegold concept and I long for it on many levels."

I'd suggest maybe you should focus a little less on the form and look into learning some substance, because substance - the stuff you admit you don't understand - is what people are chatting about. But given you have already showed your hand...

"… I may not understand all the intricacies of economic theory, but I can spot a valid argument."

I'll temper my expectations. How can you know what a valid argument is if you don't understand the topic in discussion? How can you dismiss the notion of a "strawman" when you don't know whether its a strawman or not, because you don't understand what is in discussion?

I can help you with those answers - you can't.

Cheers, J.R.

Ashvin said...


Both you and I know exactly why you are correct, but I'm afraid your just wasting your time with the other posters... they have publicly committed themselves to a certain unproductive style of argumentation and deeply flawed attacks against my character, and no amount of reason will change that for them. They will always find some convoluted way of returning to the "sophist" argument, so they can avoid any substantive discussions.

That's just some how commenters here operate, I have come to find out. A hundred people like you could come out and say the exactly same thing you did, and they would tell them all that they just don't have enough understanding to see the wisdom in their non-substantive attacks and misrepresentations. I guess you stop commenting with them on this topic, as I have decided to, because it only gives them more justification to avoid the substantive discussions we are interested in hearing.

PS - I'm glad you made the comment, though. The Radix/Edwardo/JR comedy trio really pulled off some gut-busting jokes in their responses to you. Now, stop posting, before anyone else realized you are actually my construct!! Haha, good one Edwardo.

Indenture said...

Franek: "I’d love to hear the actual rebuttal of Ash’s nonetheless well-organized logic. The nature of the topic is very much subjective at this point and we can only try to guess the most likely result."
Who the hell talks like this? Seriously? I repeat the second sentence over in my head and I get no where. I'm just a simple potato farmer but even I can place a few words together to form a coherent sentence that points to a direction of understanding.

"The nature of the topic is very much subjective at this point and we can only try to guess the most likely result." Uhm... nope. I still don't get it.

costata said...

Part A - Debt Deflation Theory Revisited

(Part B – A Deflation Thought Experiment)

Part 1/3

Many of the deflationists use Steve Keen’s work to support their claims but there appears to be some inconsistent logic in the conclusions they draw from his work and the conclusions he comes to. Not unexpectedly there appear to be a few contradictory perspectives in the deflationist community as well and it’s disappointing that the deflationists don’t seem to be able to identify the interesting questions that their rhetoric hints at.

It would be easier to understand their case if we could get them all “on the same page”. Perhaps we could help Rick Ackerman out at the same time (since he appears to be having second thoughts) and, fingers crossed, resolve that conflict with Gary North as well. It appears that we can’t rely on the deflationists to do this. So I guess Team Freegold-RPG will have to do the heavy lifting and attempt to resolve these inconsistencies etcetera. We will also test the logic and wisdom of the advice from TAE’s Team Photocopier with a thought experiment in Part B. (The you-know-whos need not be alarmed. No white metals will be defamed in this thought experiment.)

Let’s begin by looking at the basis for Rick Ackerman’s original belief in the resolution of the excessive debt build up through deflation. It was based on the dictum of C. V. Myer: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” FOFOA discussed this in his blockbuster post Deflation or Hyperinflation? and pointed out that there was a third way. The “hit” (losses) could be socialized. Rick Ackerman discussed his reaction to that post here.

Gary North is well known in Austrian economics circles. At the risk of oversimplifying the Austrian position they point to debt as one of the fundamental causes of the boom bust cycle. Their praxeological approach doesn’t provide them with the tools to time these events with any degree of accuracy. This has led to them being the butt of jokes along the lines of “they predicted all six of the last three recessions”. Personally I think that vastly underestimates their contribution to the field of economics.

Gary North pounced on Rick with this harsh piece on Rick’s apparent conversion to the “inflationist camp”. Frankly I thought Gary North was connecting the wrong dots. The argument was about hyper-deflation versus hyper-inflation not inflation versus deflation. As anyone who has read that post should know FOFOA’s perspective on HI and ordinary monetary inflation are chalk and cheese. So Rick had apparently “converted” to hyper-inflation (HI) based on FOFOA’s arguments not to an Austrian perspective of “inflation” as Gary North attempted to claim.

RA responded to Gary North with this post and later he amended his stated position to something akin to neutrality on the arguments. RA pointed out to Gary North that he had focused on asset deflation. He also pointed out that he had a great track record in picking markets and asset classes that were overvalued. Thus allowing Rick and his subscribers to make good profits. The animosity in this exchange between North and Ackerman was palpable. I suspect that attempting to mend their fences would even defeat the eloquence and charm of Charles Hugh Smith (”Of Two Minds” fame) who was also engaged in the debate on this topic a few months back.


costata said...


Part 2/3

I discussed Steve Keen’s work in an earlier comment. Steve Keen has built on the work of Minsky, Fisher and others to construct a “multi-sectoral model” that the deflationists often put forward as proof that we are in, or are going into, a period of debt deflation. In most recessions over the past several decades this is more or less exactly what happened. The recession ended when debt began to expand again. Of course many of us at this blog view the current situation as being anything but an ordinary recession. We see it as the closing stages of the “life” of the $IMFS. But let’s put that aside for the purpose of this discussion.

Keen has a leading indicator that he describes as follows: “change in aggregate demand is the sum of change in GDP plus the acceleration of debt”. Steve describes the importance of his indicator thusly:

".... the sheer scale of debt, its rate of change, and whether it is accelerating or decelerating, have very significant impacts on the macroeconomy. If Bernanke, Krugman and other neoclassicals were correct, the correlations between the acceleration in debt and the change in unemployment should be insignificant."

"Instead, the correlation is highly significant, large, persistent, and causal, since it leads changes in employment and GDP by about 3 months. The correlation during the Great Depression was -0.72; over the whole post-WWII period from 1955 the correlation was -0.59, and since 1990 it was -0.82 (see Figure 31)."

Let’s ignore the issues raised by JR here for a moment (basically that Keen, Mish et al are misinterpreting the intentions of Ben Bernanke by focusing on the broken “money multiplier” rather than the “price” of US dollars). That is an analysis issue but not necessarily a problem with the indicator. We wont take issue here with Steve Keen’s simplistic view of HI and his apparent ignorance about the potential roles for gold in monetary systems. We are just going to focus on debt right now.

Rick Ackerman is fond of saying that we are all “ruinists” at the core of this inflation, HI and deflation debate. Now the thing that all of the individuals mentioned earlier have in common is that they point to debt (and the issues that surround it) as the core problem. How can we bring these parties together?

I think Steve Keen may be able to offer part of the solution. He could stop promoting his debt deflation theory in terms that simpleminded folk interpret as meaning it will have the same impact across the board. How about a more nuanced presentation, perhaps as a ” multi-sectoral debt deflation” instead? (It might even improve the model if he went on to treat the debt funded “stuff” differently to “stuff” that people generally pay cash for.) If he makes this modification to his presentation then all of the individuals mentioned earlier might find room for their perspectives to contribute to the economic analysis.


costata said...


Part 3/3

I suspect that unless Steve Keen can find a better way to present his theory (eg. as a “multi-sectoral debt deflation”) I expect that he will unintentionally encourage people like Nicole Foss to continue to “jump the shark” with nutty statements like this one (link to full transcript in Part B):

”…. the purchasing power of that cash will expand as consumer prices and asset prices fall because they’ve been the subject of speculative bubbles….”

A “speculative bubble” in “consumer prices”? Maybe Nicole saw a rice bubble in recent years but oatmeal looked pretty tame to me. Seriously, how can you make a blanket statement like that? The NASDAQ has been on life support for close to 10 years. The disinflationary impact of all of those cheap goods from China has been widely documented. Sure residential RE was (is?) the subject of a massive speculative bubble in many countries. No argument on that one but “consumer prices”? So step up to the plate Steve Keen and give us a “multi-sectoral debt deflation” presentation of your work.

There is one more issue that I want to delve into in more detail than I did in that earlier comment about Steve Keen’s work. It goes to the heart of Steve Keen’s indicator/model and the debt deflation theory. There appears to be no differentiation between base money and bank credit money in his model. This might sound like it makes sense, treating this “money supply” as one pool but the two components are quite different.

Clearly physical cash is what it is but the bank credit money is a different animal entirely. It is denominated in currency but it is a notional claim on currency, an IOU for currency that functions as a "perfect money substitute". Presumably this is why the debt deflation camp think that this component of the money supply will contract "sharply", because in theory it could, while the supply of fiat base money can be expanded at will. The argument boils down to “borrowers wont borrow and/or lenders wont lend” so the money supply will contract.

Some may argue that this validates the debt deflation theory but it does the exact opposite in my opinion. It is a de facto argument that, in the case of the USA, the USG will allow up to 95% of their existing money supply to go to money heaven when they have already telegraphed that they wont permit this to happen.

Steve Keen and the debt deflation camp seem to think because the amount of bank credit money is so disproportionately large in the overall pool that this argues in favour of their theory as well. On what grounds? Logistics? What’s the impediment to replacing the notional guarantees of purely fiat currency for deposits with explicit guarantees? This wouldn’t even be inflationary, let alone “HI inducing”, because this pool is already the existing total money supply. Who receives a guarantee, and for how much, simply requires an act of will by a government.

The ratio of bank credit money to base money is around 20:1 in most Western un-developing countries. Now I think that the citizens of other countries might notice if there was a hyper-DEflation in the USA. They might run down to their local banks to withdraw their "cash" too. A lot of these simple souls don't even understand their money isn't "in the bank" at all. They think it's there "somewhere" - that's why bank runs happen, just like Northern Rock in the UK. Sure logistics might dictate a bank holiday in some jurisdictions but in most I suspect it wouldn't require anything more than a government guarantee.

In conclusion I think the debt deflation camp needs to differentiate the fiat base money from the bank credit money and present their case as to why it wont be backed by fiat base money as and when needed to keep this system operating.

costata said...

Part B – A Deflation Thought Experiment)

Part 1/4

Now let’s conduct our thought experiment starting with a return revisit to Team Photocopier’s advice. In that interview with Jim Puplava (see An Honest Deflationist here) in addition to her “shark jump” Nicole Foss gave the following advice:

On a personal level I always tell people get out of debt, don’t rely on credit, hold cash and cash equivalents by which I mean actually mean real physical cash under your own control and short term Treasury bills because you really need liquidity to ride out a deleveraging.

Meanwhile Ash the advocate writes (here):

Debt deflation is typically good for the value of cash or cash equivalents, and perhaps 1-10 yr treasury bonds, but nothing else.

For the purpose of our thought experiment let’s take the advice offered by Team Photocopier and see where that takes us. We will conduct this experiment in the USA while using US dollars exclusively (which is a shame for reasons I will discuss at another time). We are therefore going to:

1. Pay off our debts.
2. Hold physical cash in our own possession.
3. Store our savings/wealth in US Treasury securities.

Having followed all three elements of their advice we will now assume that debt deflation has the impact on the money supply which Nicole Foss predicts:

when credit starts to contract, and credit is in excess of 95 per cent of the money supply, when credit starts to contract the money supply ends up contracting very, very sharply with it.

As a result of this contraction the US dollar’s purchasing power has increased “very, very sharply” too as you would expect when the money supply contracts. Let’s take a look at our situation now.


costata said...


Part 2/4

Firstly having paid off our debts before the physical US dollar’s purchasing power increased sharply we may find ourselves regretting that decision precisely for the reasons Nicole Foss pointed out above. The creditors (banks presumably) we owed money to are now desperately short of cash. The law of supply and demand would rule here to, would it not? Those creditors who are desperately short of cash might offer us a discount for early repayment of the principal instead of waiting patiently for the loan repayments to trickle in.

We cannot assume that everyone takes the deflationists advice and pays off their debts of course. That is the core of their debt deflation concept. Due to the “Ponzi lending” regime Minsky described our overall indebtedness has reached a level where default is the only option.

However, we can assume that everyone who has cash on deposit somewhere tries to obtain physical currency. So let’s assume that everyone tries to do that. Under a fractional reserve system the banks don’t have enough currency to pay back those deposits. Presumably that’s why Nicole Foss recommends holding “real physical cash under your own control”. According to this report from Jim Jubak which I quoted in this comment:

Deposits at U.S. banks exceeded loans by a record $1.45 trillion in May, according to the Federal Reserve. (In the 10-years before the financial crisis in 2008, loans exceeded deposits by an average of $100 billion.)

Wow! A few big problems emerge straight away don’t they? Right off the bat that advice is great provided the holders of no more than 5 per cent of the claims on that currency supply attempt to act on her advice today. Otherwise we launch immediately into bank runs and systemic collapse if the bank credit money isn’t redeemed for base money.

Those deposits were denominated in US dollars but the banks don’t actually have the currency to back them. So where will they get it from? By calling in their loans perhaps. No joy for them there, this is a debt deflation and those loans are being defaulted en masse as the “Ponzi lending” regime collapses.

As Nicole Foss pointed out “the money supply ends up contracting very, very sharply” in her debt deflation scenario so it would be reasonable to assume that the banks would be desperate for cash now. We are really regretting paying off those debts now aren’t we? We might have had the deal of a lifetime on an early repayment to those supposedly* fractionally reserved banks that we borrowed from.

The bank credit money which represents “95 per cent” of the money supply is created out of thin air but it is denominated in US dollars. It represents a notional claim on physical currency. So once a deposit is recorded in a bank account how can you tell whether it was derived from base money or bank credit money? So in practice these bank credit money claims stand equal to base money once they are “deposited”. Now all of these deposits are either guaranteed by the FDIC/USG or if those guarantees had lapsed before debt deflation hits experience tells us the USG and every other government (who can) will put them back in place at the slightest hint of a bank run.


costata said...


Part 3/4

It seems to me that there is only one way that those requests to withdraw currency can be resolved without a bank “holiday” turning into a bank “early retirement” that sees every bank in the US fail. They will have to print the money. (Perhaps there is another way but I confess I’m at a loss to come up with an alternative.) Steve Keen claims that money printing (presumably Zimbabwe style) is what causes HI. If they print all of that money wouldn’t that cause HI? No it would not if you follow the logic in Part A of this comment.

There’s another problem here as well. The “tickets” we were holding in a much smaller base money lottery have been increased by multiples through the deposit guarantee for all deposits. Any advantage we had by holding “physical currency in our own possession” has been massively diluted.

Having followed the advice delivered in point three we lent our savings/wealth to the same guys who are guaranteeing all of those deposits. If we listened to Ash we are going to have to wait for up to 10 years for those debts to mature so that we can get our capital back in the form of physical currency. We could always try to sell them on the secondary market of course. But will that market be liquid when there is huge demand for base money cash?

Having bought Treasury securities we are a creditor to the same folks who could be printing currency to supply all of those depositors. If we are a forced seller on the secondary market the only buyers might be those same TBTF banks that are holding reserves with the Federal Reserve. Will they be kind to us? Or will they demand a steep discount on the face value of those Treasury securities? Quite likely I imagine if interest rates have climbed sharply right along with a money supply that has contracted “very, very sharply”.

Alternatively if we don’t have to sell those Treasuries securities and we decide to hold them to maturity what will be the purchasing power of the currency we get 1-10 years from now?

But let’s assume that we followed Nicole’s advice and we stuck to “short term Treasury bills”. We can put those back to the government in exchange for currency over the next few weeks and months. Damn. I just thought of another problem. Can you see what it is? Those debt instruments aren’t backed by physical currency either. If we don’t roll over those T bills in exchange for new T bills they are going to need to print fresh currency to redeem them. A real flood of the dreaded base money that Steve Keen believes to be the cause of HI.

(BTW in case anyone is tempted, spare me a lecture about how the FRN and Treasury thing operates. I understand it. Congress still has their constitutional “money powers” and only a fool would argue (and he probably will) that they would not override the Fed legislatively if the Fed “refused” to print.)

Now I have to wonder what the rest of the world is thinking watching this unfold. Are they feeling a little nervous about the US dollars and dollar denominated debt securities they are holding? What will they do? They could try to bring those dollars to the USA in order to exchange them for something tangible as quickly as possible. That would dramatically increase the money supply in the USA. The ROW could also try to redeem their USG debts for currency as well.


costata said...


Part 4/4

I suppose that the USG could impose capital controls as FOA hinted they would. That would make those US dollars “stranded assets” in countries where they are not legal tender. Now that would make for an interesting situation. Since the USA runs a trade deficit who is going to export to the USA and accept US dollars that no one wants outside of the USA which they are not allowed to bring into the USA?

But somehow I can’t see the USG succeeding in keeping the existing dollars around the world from coming home. I think it would be no more successful than interdiction in the drug trade.

Where has our deflationist thought experiment taken us? Let’s revisit Team Photocopier’s advice:

1. Pay off our debts.

2. Hold physical cash in our own possession.

3. Store our savings/wealth in US Treasury securities.

Following each of these pieces of advice has:

1. Caused us to miss the opportunity to attempt to negotiate a discount for early payment of our debts to banks (etc) who are desperate for cash due to the contraction in the money supply.

2. Holding physical cash in our own possession may have done us some good for a while until the USG stepped in with guarantees for all deposits. That multiplied the de facto base money supply and as a result diluted any premium our physical currency commanded. It increased the competition for those bargain basement “consumer prices” and “asset prices”.

3. Storing our savings/wealth in US Treasury securities really shot us in the foot (both feet actually). Even by holding near maturity Treasury paper we probably lost out. The base money printing to cover all of the deposits cost us but at least it wasn’t inflationary overall. But the printing to cover the unbacked Treasury paper with currency sure as hell was. Just to add insult to injury it also expanded the base money even further and increased the competition for those bargains we were anticipating.

So at the end of the day Team Photocopier’s advice didn’t help us to position ourselves to come through a debt deflation in good shape. And if those folks over at the FOFOA blog turned out to be right Team Photocopier would have put us in a perfect position to become road kill from a hyper-inflation “road train” if confidence in the currency “deflated”.

*Fractionally reserved according to those who missed the fact that the enabling legislation for TARP suspended all reserve requirements for US banks. Of course that may have changed in the meantime. The Federal Reserves has been rather generous to the TBTF banks over the last couple of years. They may actually be reserved to some degree nowadays.

julian said...


that was very lucid and you kept it short and simple

that was a gripping read!

thought to myself, ya, i'll read it tomorrow

but started reading for a moment

couldn't stop

well done to flourish the discussion

the best part is that you've expounded something that i've come to understand quite well through FOFOA

JR might even provide supporting quotes from ours truly

such a nice sensation, when something i've grasped conceptually, is verbalised through thought experiment and argumentation like this


- julian

@mortymer001 said...

For any discussion to have a solid grounds its important that definitions are set correctly in the very beginning, for those who think here this is just thew only blog about monetary issues from the freegold perspective:

What happened to GoldSubject articles? Anyone has a copy of them?

Ashvin said...

First off, I am glad this important discussion of debt deflation and HI, though not the only issue presented in my series (the others being likelihood of Freegold and the potential roles/values of gold outside of Freegold), has taken a sharply substantive turn. Regardless of what one thinks about the theories underlying either view, that can only be for the best, and things should get a bit more interesting (academically, not American Idol style "interesting") from now on.

CRA has written 3 posts in Part A, on Dr. Keen and and the Fisher/Minsky theory of Debt Deflation, accurately identifying
it as the root of most arguments for near-term dollar deflation. They are all somewhat substantive posts, so I would like to respond to them in order.

Part 1/3

CRA starts off discussing Rick Ackerman, Gary North and the squabble they had. While it was quite an interesting back and
forth, I think it's also very much tangential to Dr. Keen's debt deflation model and the dollar deflation argument, so I will not comment on that beyond saying this - I think we all agree that the legitimate debate is between hyper-deflation and hyper-inflation, and that the latter is in no way the same thing as a gradual inflation in the money supply and consumer prices. Following that logic, HI is a sociopolitical loss of confidence in the ability of a nation's currency system to generate future economic growth, and its tipping point will occur before the actual UST/Fed money printing begins in "full earnest", as a response to "inflation" growing out of control. No disagreement there.

Ashvin said...


Part 2/3

This part focuses on describing the fact that Dr. Keen as developed a dynamic "multi-sectoral" model of a pure credit money economy (similar to, but not exactly what we have), which can simulate a process of debt deflation and economic depression under the right conditions (excessive levels of speculative debt). CRA also correctly points out that Keen had identified the acceleration of debt (the change in the change in debt) as the primary leading indicator of economic activity (and measures of that activity) in a debt deflation, such as GDP and unemployment. He also correctly, yet somewhat hesitantly notes that Ben Bernanke's intentions have very little to do with the underlying economic argument of debt deflation (and as I pointed out, BB's intention to influence yields/prices of debt-dollar assets was only clearly revelaed in late 2010, well after much of Keen's research had already been published):

CRA: "That is an analysis issue but not necessarily a problem with the indicator.

He then throws this statement in for... good measure?

CRA: "We wont take issue here with Steve Keen’s simplistic view of HI and his apparent ignorance about the potential roles for gold in monetary systems."

Presumably, he reached these conclusions based on Keen's testimonial remarks about hyper-inflation, and perhaps some other
remarks not yet disclosed, but since he does not want to make it an issue yet, I won't address the statement either. CRA then concludes this part with a suggestion that Dr. Keen's model may be more useful if it was modified:

CRA: "How about a more nuanced presentation, perhaps as a ” multi-sectoral debt deflation” instead? (It might even improve the model if he went on to treat the debt funded “stuff” differently to “stuff” that people generally pay cash for.)"

I am not sure if he realizes this fact or not, but Dr. Keen and other Post-Keynesians, building on the ideas of Karl Marx (yeah, that guy again) and John Maynard Keynes, have acknowledged that there are "dual price levels" in the economy, one for your everyday commodities (typically purchased with "cash") and one for financed goods. This reality, in fact, is quite critical to the Fisher/Minsky debt deflation theory, because the level of consumer price inflation at the time a speculative bubble bursts will play a large part in determining how severe the debt deflation will ultimately be (higher inflation = less severe debt crisis). So while these dual price levels may not yet be incorporated into Dr. Keens dynamic multi-sectoral model, it is very much a part of the underlying theory.

Dr. Keen [A Marx for Post-Keynesians]: "An essential part of Davidson's and Minsky's analysis is the proposition that there are two price levels in a capitalist economy: one for commodities, based largely on the cost of production, and one for financial assets, based on the cash flows the assets were expected to generate...

Consequently, asset prices are determined by expectations of profit, while commodity prices are determined by the cost of production, so that there are two independent price levels in capitalism. The former will be far more volatile than the latter, and debt will be incurred to purchase them. The Post Keynesian emphasis upon expectations and uncertainty in general, and the fundamentals of Minsky's Financial Instability Hypothesis in particular, thus flow easily from Marx's Commodity Axioms."

Ashvin said...

Part 3/3

CRA starts this part by attacking the logic of a statement made by Nicole Foss in a Financial Sense interview with Jim Puplava:

CRA: "A “speculative bubble” in “consumer prices”? Maybe Nicole saw a rice bubble in recent years but oatmeal looked pretty tame to me. Seriously, how can you make a blanket statement like that?

When you think about it, it is quite easy to see how a speculative bubble in the "independent" price level of financial assets could influence the price levels of commodities used in the production of consumer goods, making the two not so "independent" anymore. As a simple and relevant example, we can look to the construction and renovation of homes during the sub-prime housing (speculative) asset bubble. As the speculative ramp of housing prices (and prices of related debt instruments) gets fully underway, an artificial demand is created for every industry tied to the housing market, such as construction, retail furniture, RE brokerage, financial advisers, etc., etc. Those industries that actually make "real things" will therefore be demanding more commodities to meet their production "needs" over relatively short periods of time. That invariably sucks up the relevant commodities into the speculative bubble, as many of them lose "independence" and merge with the price dynamics of financial assets.

Of course, these ponzi dynamics were not just limited to the OECD housing markets, and eventually had almost every single sector of the global economy running in over-drive with multi-trillions in debt obligations and not nearly enough productive capacity to support those obligations. In the Summer of 2008, we saw oil get up to $140/bbl before the Lehman Bankruptcy event that led to a systemic crash of financial, equity AND commodity markets. Therefore, it is not in the last bit inaccurate for Nicole to say that we experienced a "speculative bubble in consumer prices" as well as financial assets. So while it is true that, theoretically, cash commodities and financed assets initially (and theoretically) have their prices set in an independent manner, this fact becomes practically much less relevant during an unprecedented speculative
mania, such as the one have just witnessed.

CRA then proceeds to criticize Dr. Keen for his failure to differentiate between "base money" and "bank credit money" (BCM)
in his model. It is true that Keen's original model only incorporated BCM, but the reason is because Keen and other Post-
Keynesians (or MMT followers) do make quite a big differentiation between the two. Unlike Neo-classical and Austrans, PKs
say that most of the money in our economic system is endogenously created through the generation of private bank loans and deposits, with very few "fractional reserve" restrictions as to how much can actually be generated. Empirical data suggests that the loans are made first, followed later by the banks securing whatever reserves they can get their hands on, whether that be through deposits, private investments, calling in other loans or the Fed's seemingly limitless generosity.

However, I do believe Keen has recently expanded his model to include the USG and Fed as economic actors which can print and spend money into the private sector. Their ability to do so is strictly limited, however, by the structure of our economic/monetary system. The Fed can essentially print money to its member banks or the UST, but that's it. THe UST can spend money into the economy via fiscal programs, but those expenditures must come from tax revenues or from financed sales of Treasury bonds.

Ashvin said...

Cont... Part 3/3

So that brings us to CRA's question for the deflationists, which is one commonly asked by many in the HI
camp, of why those limitations on the UST/Fed are sufficient to prevent them from reversing a "sharp" collapse in BCM, or why those limitations cannot simply be abolished?

Those questions are really at the heart of this debate, so I will address them in further detail as a part of my responses to CRA's Part B "deflation thought experiment". It's time to pass out now, but I have read Part B, and I believe the discussion will get even more interesting on those points of contention (although, much of it still relies on a flawed understanding of investment analysis vs. investment advice). There is a critical difference between the two, and I believe CRA's thought experiment only makes that all the more clear.

@mortymer001 said...

Speech by Christian Noyer, Governor of Banque de France; Helsinki, June 6, 2011

The Financial Crisis: How are we doing?

"...Most euro area and EU countries entered the crisis with significantly deteriorated fiscal positions, very far from the "structural balance objective", which is the core of our fiscal framework and also the commitment made by Member States that adopted the euro. With the crisis, fiscal imbalances increased, not so much because of a rise in expenditure, but essentially through a massive loss in revenue. The IMF has shown that, in all advanced countries, including the United States and the United Kingdom, these losses accounted for around two thirds of the deterioration in fiscal positions observed during the crisis. Fiscal deterioration was compounded, in some countries, by the size of implicit blanket guarantees, which materialized as the crisis unfolded through public money injections in the financial sector..."

costata said...

Hi julian,

Thanks for the feedback.


As usual great link. Thanks.

@mortymer001 said...

Costata, imagine, a month old doc! :O)

Sources updated:

As Victor Hugo said
"All the forces in the world are not so powerful as an idea whose time has come."
"Il n'est rien au monde d'aussi puissant qu'une idée dont l'heure est venue."

@mortymer001 said...

Yes, as we are getting older and we think slower but deeper...

I hope you read it even if there is a new post.

Bron Suchecki said...

"asset prices are determined by expectations of profit, while commodity prices are determined by the cost of production, so that there are two independent price levels in capitalism. The former will be far more volatile than the latter, and debt will be incurred to purchase them"

I'd contend that futures markets and hedge funds playing in commodities and the further fincialisation of commodities via ETFs are making commodities (and PMs) just as volatile and influenced by debt as "assets" are.

Franek said...

Thanks for responding. That was sort of my point that as you said “At this stage subject of RPG has little, if anything to do with it”. That’s the problem because it should have everything to do with RPG and only RPG. And with all due respect, it’s kind of funny that you bring the idea of me being Ash’s construct. Just makes me think if you’re taking it perhaps a bit too personally… . But anyways, as a sideline observer, I guess it’s just little bit hard for me to understand that people of your understanding and conviction about RPG would not be willing to approach and confront the opposing POV in a calmer and more confident manner. I see your frustration, but I also hear Ash’s frustration with nobody willing to address his arguments on the merits and without resorting to the personal noise. I would hate to see RPG discussion turn into a self-congratulating circle of mutual adoration, if you know what I mean. But, unfortunately, that’s how it starts to feel to one casual reader.

Ah, Indenture, don’t be so hard on yourself. True, you may be a simple potato farmer, but boy if you ever underestimated the size of your … you know… ego, of course. You can relax; I come in peace and assure you I have no quarrel with FG; I dig it. I saw injustice and I spoke up. But thanks God for FG’s simple advice ‘cause thanks to that perfect example of you accommodating teaching style I get a shiver down my spine at the thought that you instead of FOFOA could be our Trail Guide. I hope I’m reading too much from the few words you so cordially sent my way.

In the defense of those yet with limited access to the higher echelons of intellectual prowess, I must say, with few exceptions, you guys don’t make it any easier. But who am I to complain?

Thanks for advice.

Ashvin said...


I'd contend that futures markets and hedge funds playing in commodities and the further fincialisation of commodities via ETFs are making commodities (and PMs) just as volatile and influenced by debt as "assets" are."

I'd say that, during periods of speculative manias and proceeding debt deflation, you are right. In "normal times" (when debt levels are relatively low), the "independent price levels" hold to a certain degree. However, as the financial sector has generally expanded its influence in our global capitalist economy over at least the last century, I think almost every part of society has gradually become more dependent on it (which would include the "productive economy"). That is a central theme of Part I in my series.

The Future of Physical Gold, Part I - Dialectic Foundations

"The point of the above theoretical musings is to help the reader begin thinking about what it means for something to have a "fundamental nature", and how that nature can change as systemic complexity increases. Specifically, with regards to gold as a "monetary" asset, we can ask ourselves what its fundamental role has become in our highly inter-dependent systems of societal organization, and what it will ultimately be.

...Readers of this article who adhere to the concept of "Freegold" may notice that the theoretical distinctions between it and what I lay out are very subtle. That is certainly true, but subtle differences in such a broad context can spawn vastly different implications for global society's future path. Are we really watching the monetary, social and political systems around the world siege the global financial system and take back a large portion of the value lost through years of imaginary capital creation and wealth concentration? Or are we simply watching them respond in kind as mechanical parts of an unholy and inseparable union?"

DP said...

Franek: I would hate to see RPG discussion turn into a self-congratulating circle of mutual adoration

+1. Disagreement has a useful purpose.

Ashvin said...

My last comment to Bron naturally brings me to CRA's Part B "thought experiment".

Part 1/4

I have a major issue with the setup of the experiment, as I have expressed several times before.

CRA: "For the purpose of our thought experiment let’s take the advice offered by Team Photocopier and see where that takes us."

What proceeds is not necessarily my specific "advice" to anyone, but the most general guidelines I could give you without knowing anything about your personal situation (and even with that, #3 is misleading). I have noted before that sometimes Stoneleigh (Nicole Foss) and Ilargi do not make this distinction as often and as clear as I believe they should, but I know for a fact that they generally agree with my view on this matter.

CRA: "1. Pay off our debts.

2. Hold physical cash in our own possession.

3. Store our savings/wealth in US Treasury securities."

#1 and #2 would qualify as parts of my most general investment guidelines for near-term dollar deflation, but #3 is questionable at best. While I wouldn't be surprised in the least bit if the value of Treasury bonds and notes (3-30 year durations) increased in value for a good part of a deflationary episode, I would generally only recommend them as very short-term investments that can be easily liquidated (so, perhaps a mutual fund that allows simple online transactions). For the most part, I would recommend short-term Treasury bills as "cash equivalents", if you want to invest in Treasuries at all.

That being said, I will address CRA's thought experiment as it is presented in the next 3 parts, after debt deflation has once again accelerated and the dollar has spiked on exchanges and in domestic purchasing power.

Ashvin said...

Part 2/4

CRA: "Firstly having paid off our debts before the physical US dollar’s purchasing power increased sharply we may find ourselves regretting that decision precisely for the reasons Nicole Foss pointed out above. The creditors (banks presumably) we owed money to are now desperately short of cash. The law of supply and demand would rule here to, would it not? Those creditors who are desperately short of cash might offer us a discount for early repayment of the principal instead of waiting patiently for the loan repayments to trickle in."

It is very unlikely that the benefits from paying off debt and having a decreased real interest burden after the dollar has spiked would be outweighed by the benefits of holding onto debt and hoping your creditor gives you a "deal" on the principle when things get hairy. While the latter is certainly possible, it is not something you would generally want to bank on (pun intended), because if you are wrong (or the "deal" isn't much of a deal), then you will find yourself with much less affordable debt burdens.

CRA: "Wow! A few big problems emerge straight away don’t they? Right off the bat that advice is great provided the holders of no more than 5 per cent of the claims on that currency supply attempt to act on her advice today. Otherwise we launch immediately into bank runs and systemic collapse if the bank credit money isn’t redeemed for base money."

The bolded statement is true (when "isn't" becomes "is"), and a major reason why the advice to hold physical cash is good in the first place. Nicole has analogized it to a game of musical chairs, and you don't want to be one of the people scrambling for a chair when the music stops. The nature of complex, irrational financial markets is that most investors will remain invested in the debt-dollar asset ponzi until it is too late, and they will all be rushing for the same narrow exit at the same time (as we saw in 2008). The advice doesn't become bad simply because it would "crash the system" if everyone acted on it, because the system will crash no matter what... the only question is when, and that is one which is fundamentally impossible to answer in the short-term. Better safe than sorry, and all that.

CRA:"We are really regretting paying off those debts now aren’t we? We might have had the deal of a lifetime on an early repayment to those supposedly* fractionally reserved banks that we borrowed from.

Once again, this will not generally be true. While the some of the banks may offer debtors discounts on their loan principles, there are many other factors which make it foolish to rely on that, instead of paying off debt right now when you can still afford to do so. For example, they may only give deals to those with very large outstanding loans, or the largest creditors may be subsidized for a significant portion of their losses (again), or they may simply choose to foreclose on your assets and take the loss (which may be less than currently expected, because “non-recourse” jurisdictions could become “full recourse” in the blink of an eye).

Ashvin said...

Part 2/4 Cont...

CRA: Now all of these deposits are either guaranteed by the FDIC/USG or if those guarantees had lapsed before debt deflation hits experience tells us the USG and every other government (who can) will put them back in place at the slightest hint of a bank run.

As stated in my earlier comment to Bron, experience tells me that the federal government is very little more than an enforcement arm of the super-wealthy financial sector. If paying out full value to depositors becomes more costly than implementing a "bank holiday" in certain locations for some time, then I imagine the latter is what would occur. As we saw in 2008, even a bank as big as Lehman Brothers or Bear Stearns is not immune from being sacrificed for the "greater good" of other financial institutions. I expect that the next time around (which, given the situation in Europe, may be quite soon), the "blowback" will be more severe, but the response will be as well, and that response doesn't necessarily = all out "money printing".

Responses to next two parts coming later in the day.

Ashvin said...

Part 3/4 and 4/4

CRA: “Steve Keen claims that money printing (presumably Zimbabwe style) is what causes HI. If they print all of that money wouldn’t that cause HI? No it would not if you follow the logic in Part A of this comment.”

Without getting into too much of a debate about what Dr. Keen did or did not say/imply, I think we can all agree that money printing is a necessary condition of HI. That doesn’t mean it is the root cause, or it is sufficient by itself, but it must happen somewhere along the way.

CRA: ”The “tickets” we were holding in a much smaller base money lottery have been increased by multiples through the deposit guarantee for all deposits. Any advantage we had by holding “physical currency in our own possession” has been massively diluted.”

When we pre-suppose deposit guarantees for all dollar-denominated deposit accounts, it is difficult to see how HI could not proceed to take place (although there are a number of “shadow banking” debt-assets that essentially serve as money within the financial system, via “repo” transactions, so the extent of their conversion to “base money” would depend on the extent to which institutions holding those assets as collateral are subsidized for losses). Basically, it comes down to whether US political authorities will be forced to make those guarantees and make good on them, or whether they will instead be forced to “reneg” on many of their promises.

CRA: If we listened to Ash we are going to have to wait for up to 10 years for those debts to mature so that we can get our capital back in the form of physical currency. We could always try to sell them on the secondary market of course. But will that market be liquid when there is huge demand for base money cash?

Not true, for reasons stated in my response to Part 1/4. There are several risks associated with T-bonds that are not present with physical cash, including the liquidity risk CRA mentions, and those must be considered in conjunction with their ability to maintain or increase in value over the short to medium-term.

CRA: “But let’s assume that we followed Nicole’s advice and we stuck to “short term Treasury bills”. We can put those back to the government in exchange for currency over the next few weeks and months. Damn. I just thought of another problem. Can you see what it is? Those debt instruments aren’t backed by physical currency either.

Now this brings us to some interesting discussion, IMO. We must remember that not all government spending, including pay downs and servicing of specific debt obligations, is purely a function of deficits. It does, after all, still collect about $1-1.5T in tax revenue. The question is, how much of that revenue will be re-directed from other expenditures towards servicing of debt, and also how much foreign capital will be willing to support deficits. As many Europeans can tell you right now, there is a decent amount of wiggle room for corrupt governments beholden to the financial sector to keep their bondholders afloat. That is even truer in a relatively larger US economy, when Europe and Japan are in relatively more precarious financial positions.
CRA: “Congress still has their constitutional “money powers” and only a fool would argue (and he probably will) that they would not override the Fed legislatively if the Fed “refused” to print.”


Ashvin said...

Parts 3/4 and 4/4 Cont...

CRA is right… I will. Only someone who hasn’t studied Constitutional Law would argue that the Constitution is worth the paper it is written on. The history of the United States has been one in which the Constitution is consistently interpreted to benefit those with extreme wealth/power, with few exceptions, and that has become especially true in recent years after 9/11. Politicians who wish to be “populists” invariably figure out who their real boss is, and if they don’t play ball, then they don’t last very long in office. While the entire federal government has certainly increased its power over the states (and people) since this country’s creation, the executive has come to dominate the legislative (as it almost always does throughout history), in no small part due to its structural ability to act in a faster and more flexible manner.

Since CRA’s Part 4/4 is largely a sumamry of his arguments from earlier parts, I will treat the new component within this response.

CRA: “ I suppose that the USG could impose capital controls as FOA hinted they would. That would make those US dollars “stranded assets” in countries where they are not legal tender. Now that would make for an interesting situation. Since the USA runs a trade deficit who is going to export to the USA and accept US dollars that no one wants outside of the USA which they are not allowed to bring into the USA?”

I imagine that by the time the US is forced to impose those levels of capital controls, the HI process will be well underway. Which brings me to my final point – the real “capital control” is to suck as much capital as possible into the system, by maintaining the value of the USD and stability of the Treasury market. I was going to quote myself on this topic, but I just came across this comment by “Steve from Virginia, who is a blogger and a regular commenter on TAE, and I think it provides a very interesting perspective:

Steve: “No euro equals no petroleum: of course the banks will be bailed out. Someone in euro-landia will print and print some more: either the ECB, some consortium of EU central banks or some country's treasury. Maturing assets will be 'married' to instant 'liabilities' cooked up in some closet then locked away to be (hopefully) forgotten.

The US cannot default, either. The debt/dollar/banks are sacrosanct. To risk default means the US ceases to exist as an industrial state, literally overnight. The US imports 2/3ds of its petroleum from overseas, you see ...

This is why the dollar plug wasn't pulled by Bernanke by way of QE. No (somewhat) valuable dollar, no petroleum. How do you spell starvation in a world whose food- and water supply and distribution is absolutely, completely and totally dependent upon petroleum?

What is taking place is energy conservation by other means, like it or not.

“Energy conservation by other means” is a very interesting way to frame it (and something followers of Freegold may connect to), and reinforces my argument that the “Debt-Dollar Discipline” will be both the first true global order to exist and, most likely, the last to fall. CRA says that the rest of the world is “feeling a little nervous about the US dollars and dollar denominated debt securities they are holding”. That may be true to some extent, but nervousness is merely an outgrowth of fear, and systemic fear leads to extremely irrational behavior, such as giving countries oil and finished goods for “worthless” pieces of paper. What do people fear more right now, the collapse of the Euro, the Yen or the Dollar? A shortage of “tangible assets”, or a shortage of liquid paper? These are the questions that I believe we must continue to consider without bias, and to some extent, it depends on who you are and where you live, but I generally believe that many dollar-holders would be wise not to divest themselves of that paper just yet.

Ashvin said...


I am anticipating some may take issue with my last post, and specifically "Steve from VA"'s quote about oil/energy, by saying "yes, BUT... that's why the system of Freegold will be implemented", or at least, "the implementation of Freegold will alleviate the issue of swapping energy for worthless paper".

That's correct. If Freegold were to be implemented as envisioned (and assuming away any issues of Peak Oil), European countries would most likely have relatively cheap access to imported oil. And although the US economic entity would be lower on the food chain, it's new dollar backed by the reserve asset of gold would also be accepted for imported oil.

Which raises a question in my mind that I'm curious to hear answers to, if anyone is inclined:

If you had never read or heard about the concept of Freegold, how would you feel about the near-term dollar deflation argument? Would your opinion change at all, or would still expect HI in short order?

«Oldest ‹Older   401 – 437 of 437   Newer› Newest»

Post a Comment

Comments are set on moderate, so they may or may not get through.