Friday, February 3, 2012

Glimpsing the Hereafter

Welcome back, Ari!! If you don't know ARISTOTLE, that's probably because he took a brief hiatus of 7 years and 3 days from posting comments about Freegold. And that was after 6 years of posts and comments prior. So needless to say, I'm THRILLED to have him back!

Ari wrote me an email the other day including this: "In the meanwhile, I'm happy to note that Bill Gross has (yet again) stepped up to the challenge of carrying some water for us today. Begins folksy and ends golden. Now that's what I call having a worthy waterboy(!),,, he being manager of the largest mutual fund on the planet (i.e., PIMCO's $242 billion Total Return bond fund)."

Here's the quote with which Bill Gross begins his latest and greatest, Life and Death Proposition:

Where do we go when we die?
We go back to where we came from
And where was that?
I don’t know, I can’t remember

Virginia Woolf, “The Hours”

With this lead-in he draws a comparison between death and the hereafter, and the death of our financial system built upon the lending of real savings to debtors with what comes next. He goes on to explain, "The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter." But at least he gives it a shot with a little help from Virginia, ending with, "Where does credit go when it dies? It goes back to where it came from."

Now, while I can't help you very much with the pearly gates, I can indeed help you imagine the monetary and financial hereafter. It matters little to me if you believe me or not, because I still think there is value in sharing this vision either way. Someone (who incidentally named his band Third Eye Blind) once remarked, "I don't really believe in crystal balls, but I respond to the need for them." And so now I'll dust off my own very special crystal ball with a wink and a nod to a few of you who understand this need.

I do recommend reading Bill's entire piece as he lays it out nicely how hitting the zero-level floor in USD interest rates is inevitably leading to a "liquidity trap" for earned savings. It sounds to me like the inescapable gravitational pull of a black hole singularity that, perhaps, creates similar difficulty in trying to see through to the other side.

Bill Gross is in the business of helping savers lend their savings to debtors through the use of bonds. And he has done very well in this business, which is why he is acutely tuned in to the implications of zero interest. With zero interest, you can't earn a yield or a capital gain as you can when interest rates are high and falling. And so there is no reason for savers to lend money to debtors for the longer terms necessary in order to run an economy. In fact, it is terribly risky for savers to do so in a zero rate environment.

The New Normal

There is no "fiat management" solution for the problem Bill describes. The savers simply cannot lend their savings to debtors anymore in a way that is beneficial to both the economy and the savers. Even the King of the bonds himself is sounding this alarm. But there's another trend in this new normal that should be even more alarming to savers still holding longer dated debt. Whenever and wherever push comes to shove, the savers will be and are being forced to take losses while the system protects itself on a nominal basis. Just look here:

Obama to Use Pension Funds of Ordinary Americans to Pay for Bank Mortgage "Settlement"
"[P]revious leaks have indicated that the bulk of the supposed settlement would come not in actual monies paid by the banks (the cash portion has been rumored at under $5 billion) but in credits given for mortgage modifications for principal modifications. There are numerous reasons why that stinks. The biggest is that servicers will be able to count modifying first mortgages that were securitized toward the total. Since one of the cardinal rules of finance is to use other people’s money rather than your own, this provision virtually guarantees that investor-owned mortgages will be the ones to be restructured. Why is this a bad idea? The banks are NOT required to write down the second mortgages that they have on their books. This reverses the contractual hierarchy that junior lienholders take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administration’s instigation."

Please allow me to translate. If you or your pension fund bought any kind of fixed-income securities (also known as bonds), you loaned some of your savings to debtors. Private debt is created by banks expanding their balance sheets. Some of it remains on the bank balance sheet and some of it is sold to savers like you. Securitized and sovereign/public debt is the $IMFS proxy for gold. But when the debt defaults, the savers take the loss. The system will be protected at all costs. It may make you angry, but that's just the way it is and always has been.

So it appears that the system will write down the debt held by savers before that held by the banks in this case, to protect the system. When debt defaults, SAVINGS are destroyed because debt is the proxy for a store of value in the $IMFS. Wherever possible, earned savings will be forced to take the losses first. But if too many losses happen at once, they will be socialized to protect the system. The system always protects itself, first by sacrificing the low hanging fruit, then by sacrificing the currency itself.

I'm sure that by now you have all learned the two new buzz-terms, "the ISDA" and "the credit event". If not you can read about them here. Basically, a group consisting of bankers has the job of deciding whether the banks or the savers will take the loss on Greek debt. The deck is stacked against us wherever we turn.

I'm not here to cast judgment on this systemic inequity between banks and savers. I have long followed in FOA's (and ARI's) footsteps in pointing out that this is simply the way it has always been. That's a pretty good reason to not save within the system, wouldn't you say? When push comes to shove, the system will protect itself and force losses onto the savers. Ultimately, inevitably, today's dollar will lose so much real value that it will save the banks nominally while putting all systemic losses onto everyone holding dollars, regardless of the default of debtors.

Here's a quote from an article that caught my eye the other day:

"It’s tough for risk averse savers but that is what US monetary policy has been about—forcing them to buy risk, and higher returns. That policy is working but trillions of savings still sit in cash or bonds."

Savers are not investors, traders or speculators

This little concept is something ALL Westerners are going to relearn one way or another. Mark my words right here and now. In The Studebaker Effect I wrote:

"A saver is different from an investor or a trader/speculator. A saver is one who earns his capital doing whatever it is he does, and then aims to preserve that purchasing power until he needs it later. Investors and traders aim to earn more capital by putting their already-earned capital at risk in one way or another. This takes a certain amount of specialization and focus. But this difference is a big topic for another post. And anyway, it doesn't matter so much in terms of the gold thesis for today.

Today the system is in transition, so you can throw your ideas about these differences out the window. There is no safe medium for simple preservation of purchasing power when the entire system shifts from the old normal to the new normal. When systems implode, the safest place to be pays off big time!"

That second paragraph denotes the difference between stasis and punctuation in monetary evolution. Today we are approaching a period of punctuation, but in the hereafter stasis we will all understand that savers are not investors, traders or speculators.

I have refined my best advice for buying gold over the last few years. Here it is, quoted from a recent email response I wrote to someone asking if his parents, serious savers, would do well to take on as much debt as possible in order to "save" more physical gold:

"Firstly, let me say that I never recommend anyone taking on debt to buy gold. That is what speculators do and savers are generally not equipped with the necessary tools it takes to be a successful speculator. There are too many potential pitfalls for savers to do something like that. In general, my advice is to get out of debt and put at least 5% of your savings into physical gold coins or bars in your possession (or at least under your immediate control). I believe that 5% is a no-brainer. You don’t really need to understand much about gold to go in 5%. But I wouldn’t do it in any kind of paper gold or even paper products claiming full physical backing. Paper gold is for ease in trading, not for saving. I say do it in physical and 5% will at least keep you whole come hell or high water.

Beyond that, I say buy only as much gold as your understanding allows. For many who have read my blog for years, understanding has led them to be 90% to 100% in physical gold. I, myself, am very close to that. And I know a few that have been 100% all in since the late 90s, with $millions in physical gold. But you don’t do that unless you have complete understanding of what you are doing and why. Only buy a percentage of gold equal to your understanding. 5% is a no-brainer and anything less than 5% is reckless pigheadedness with what's happening today. That’s my best advice."

You see, a saver is still just a saver, even today, even when we are in the punctuation phase. And that's not a put-down. The greatest giants in the world are savers. When we look at what it is to be a Capitalist, it is completely separate from the act of saving. The primary definition of a Capitalist is one who has capital invested in business.

There is a difference between preserving purchasing power and trying to increase your purchasing power by navigating your way through risk. As the quote above correctly describes savers, they are "risk averse". That's the very definition of a saver. Any deviation from full risk-aversion and a saver becomes something else; an investor, a trader or a speculator.

My point is that the header for this section is a deep concept, a timeless truth, a little bit of wisdom from the ages. Savers are not investors, traders or speculators. And since this post is about glimpsing the hereafter, give me a few minutes while I consult my crystal ball. Here's some music while you wait…

After The Transition

One of the things I have found that people have a hard time grasping is that ALL savers will want to be in gold after the transition, even though it won't deliver ANY real gains like we've had over the past decade. This is a difficult concept to wrap one's head around. People seem to think that they are in gold only for the big 30-bagger revaluation and then they'll want to find something else in which to put their little dollar soldiers to work earning a yield. Either that or they imagine that Freegold will be an environment of perpetual real gains for gold holders. It will not.

Freegold will be simple purchasing power preservation, and you'll love it! No gain, but also no risk and no loss. That's what savers need and want. And most of us are savers whether we admit it or not. This is a really big idea we need to contemplate if we don't want to be run over in the end.

Any financial advisor in today's $IMFS can explain the reasoning behind investing in fixed income securities also known as bonds. They are for risk-averse investors looking for a constant and secure nominal return on their investment. In theory, the safest bonds will deliver a nominal return equal to the purchasing power your principle investment loses to inflation over time. So, in theory, the safest bonds are supposed to do what gold will in fact do in Freegold, perfectly preserve your purchasing power over time.

How can gold perfect the preservation of purchasing power you ask? It's quite simple really. It will come from a global shift in perception as to the very reference point for purchasing power. What is the benchmark for purchasing power today? The Big Mac? Ha! Think about that one and get back to me. In the meantime, check out my post Reference Point Revolution!

So in today's system, securitized debt is the way various tranches of debtors bid savings away from the savers. And over the three or four decades in which this has been the norm, a strange concept has grown into nearly universal acceptance. That is the idea that savers have a moral obligation to society to lend their savings to the debtors, and that by hoarding gold instead, you are somehow depriving society of your vital net-production. An absolutely ridiculous, bass-ackward notion!

Charlie Munger said it this way:

"Oh, I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me, that's not optional. That's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk."

To Charlie I responded with this:

"So Munger and the Dingbat are wrong wrong wrong! You're a jerk if you save in paper, enabling the destruction of Western Civilization. Rational people everywhere have a moral obligation to buy ONLY physical gold with their savings. If you're capable of understanding the REAL world, you have a moral obligation to become rational. And I don't see how you become rational investing in Charlie Munger's paper. Even if it works, you're a jerk, just like ol' Chuck."

Imagine I produced 50 million iPhones for the marketplace. And through that net-production I was able to save $10 billion. If I buy gold with my $10 billion rather than lending it, am I depriving the economy of my iPhones? Of course not! Have I deprived the economy of my accumulated purchasing power? Nope. I simply gave it to another saver who was ready to end his consumption deferment. And, amazingly, the credit money system still allows the debtors to borrow purchasing power to buy my iPhones. But the best part is that hoarding gold does not deprive the economy of anything. You can read more about this concept and my response to Charlie M. in my post A Winner Takes the Gold.

Before and After

My long-time readers are aware that, beginning with All Paper is STILL a short position on gold in March of '09, I have been refining a conceptual model of the $IMFS stasis and punctuation periods based on the inverted pyramid developed by the deflationist economist John Exter in the 1970s.

Exter put gold at the bottom of the liquidity pyramid, just below the dollar. He said that gold was the most liquid asset. And in the end, he envisaged a rush down the pyramid to liquidity in which we would see the dollar and gold rise together for a time. As Gary North wrote in 2009, "So far, his theory has yet to be tested. We have not seen a rising dollar and a rising price of gold."

But I will note that ANOTHER wrote something in 1997 that seems to back Exter's view:

Date: Wed Nov 05 1997 20:33

The price of the metal in currency terms will be made for all to see as it moves quickly upward for a very short period of time ( 30 days ) . After that only black market traders and third world noones will understand its price! When is this going to happen? I have no idea. Is there anything to look for that will tell us when the problems have started? At first the US$ and gold will go up together against all other assets!

Interesting, huh?

8 months after the "All Paper" post I wrote Gold is Wealth in which I built an upright pyramid under Exter's, representing the physical plane of goods and services, and forming a kind of hourglass shape:

10 months later, in Just Another Hyperinflation Post - Part 3 I used this model to illustrate the flow of capital during a currency collapse:

And now, what I'd like to do is to take a stab at modeling what this might look like after the transition to Freegold. All modeling up until now has been before and during transition. But presumably things will look a little different hereafter, don't you think? Costata and I have been discussing where gold should go in the "after" model for a while now. Should it be in the monetary plane or the physical plane? Should it be parallel but off to the side of the currency, or what?

While we have not come to an agreement on the nitty gritty details of the "after model", I'd like to put my general thoughts out there because I think that you will find them useful (and my crystal ball says so too). So here's the very basic before and after. I have put gold up where the financial system collapsed in the old $IMFS. But don't worry, I'm not going to leave it there:

The placement of gold in the "before" really doesn’t matter for our purposes right now. It could be in either plane or both. But in the "after" it has filled and replaced the arena formerly occupied by derivatives, securities and paper trading wealth in general (securitized debt).

So what’s the purpose of this exercise? Here’s what I’m thinking. Everyone uses the bottom pyramid, both debtors and savers. And everyone uses the currency portion of the monetary pyramid. But only the savers utilize the top portion of the monetary pyramid. The debtors are no longer the counterparty to the savers so they have no business up there. The only way to get up there is to produce more than you consume so that you have some excess capital with which to buy gold. Then you are a saver. So it looks something like this:

(If you'd like to see these in full size,
right click on the image so you can
open it in a new tab or window)
Side Note:

Yes, I do realize that there will still be investors, traders and speculators willing to risk capital in search of a yield, even in the hereafter. But once you come to terms with how much of that investing and trading world of today is actually filled with savers who think that's the only way to preserve purchasing power, you'll see just how tiny by comparison it will be after the transition.

We ALL exist in the physical plane. That’s where we produce and consume. Currency facilitates the flow of value in the physical plane of production and consumption. Some consume amounts equal to their production, some consume more than they produce, and some consume less than they produce. Only this last group ventures above the currency line. The rest all exist comfortably below it.

Currency’s main purpose is to lubricate the flow of value. Gold’s main purpose is to store or stockpile value. Stock and flow. Gold and currency. Currency will also store value for periods of time, but that is not its main purpose. If currency happens to behave as a temporary store of value, that’s only a secondary effect created by its suitability to its primary role. Mises said as much (which is in my Honest Money post):

Mises: Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.

It’s probably best to replace Mises' use of the term "money" with "currency" for the purpose of my new model. It comes down to the whole semantic issue of whether Freegold is DEmonetizing gold as FOA said, or REmonetizing it as Moldbug says. Potato po-tah-toe semantics IMO. FOA's demonetizing really means de-currency-fying, or removing any sort of link between gold and currency that would cause a direct correlation between their prices. Moldbug's remonetizing means gold moving from a commoditized role into a wealth reserve or store of value role, which is commonly thought to be one of the three functions of "money" today (although Mises might disagree as in the above quote).

So that whole gold section of the top pyramid is like an exclusive country club for savers, like the men-only clubs of yesteryear, where we savers all sit around smoking cigars, practicing secret handshakes and agreeing that we'll only buy gold with the excess left over from our net-production and deferred consumption. And if there was an actual club, the savings medium could theoretically be anything we agreed on, like baseball cards. But because there’s not an actual club nor a secret handshake, we rely on the focal point and network effect principles to identify and optimize that singular item.

All gold transactions are essentially from saver to saver. The debtors need not be involved nor concern themselves with our exclusive club interactions. When a saver produces some excess and leaves it on the proverbial table at the economic fair, he buys gold from another saver (either inside or outside of his zone) who has decided to dishoard some of his gold in favor of consumption. It is the changing purchasing power of gold that determines how much gold (by weight) changes hands. (Please review my post The Debtors and the Savers if you are unclear about my novel demarcation.)

Debtors net-consume on a sliding scale ranging from consuming exactly in proportion to their production on down to consuming as much as they can get away with borrowing. So netting it out, all net-exports from a zone come from the savers. The debtors consume their own production plus some of the savers' production, and if there’s anything left over it is exported. That’s what happens in the "surplus ex-gold zone". Gold is flowing into that zone. So the debtor's actions do have an influence on the balance of trade even though they don’t contribute to exports.

But when the debtors are borrowing too much currency and consuming too much in the physical plane, there is a mechanism in Freegold that ultimately slows them down. That mechanism is the purchasing power of the currency. When the debtors are consuming too much they'll experience price inflation which will force them to consume less. So it is the purchasing power of the currency that regulates the debtors. But changes in the purchasing power of gold within the exclusive savers' club is not linked to the mechanism which limits the debtors.

The purchasing power of gold can be rising or falling regardless of whether currency prices are inflating or deflating because gold is like an isolated circuit. Savers choose to hoard or dishoard (produce more or consume more) based on the changing purchasing power of gold, not currency. So the savers' savings is circulating in a closed circuit where it can be experiencing the same or opposite effects as the currency. It is truly an escape option like OBA's Maglev.

So we can cut gold off of the pyramid structure if we want to, and we can put it wherever we want. We can stick it back in the physical plane since gold is physical, just like baseball cards, or we can set it off to the side, or we can just ignore it and cut it off, like this:

Where’s gold? Who cares? It is a closed, isolated circuit for the savers only. Now (above) we are dealing with only the parts that involve everybody. And it is no surprise that the monetary plane is so relatively small. At least it is no surprise here. A little currency goes a long way. From Gold: The Ultimate Wealth Reserve (2009):

Imagine an island of 100 men with a money supply of 1,000 sea shells. That's 10 sea shells for each man. But over the course of a year each man on the island works and earns an annual salary of 100 sea shells. So the total economic power of the island over a year is 10,000 sea shells. We could say that the GDP of the island is 10,000 ss. We could also say that the demand for sea shells is 10,000 over the period of one year and that demand is met by a supply of only 1,000 sea shells.

Now imagine that ownership of a piece of real estate on this island costs about 2 year's salary, and that there are enough pieces of land for each man to either own or rent one. So each piece of property might cost about 200 ss. The entire island's worth of residential real estate would be in the ballpark of 20,000 sea shells, twice the GDP. Yet the money supply still remains at 1,000 sea shells and that limited supply somehow meets demand.

The reason this works is because sea shells are the currency. They circulate and pass from hand to hand over a short timeframe. This is called velocity and it has the exact same effect on the value of a single sea shell as does the size of the money supply. On our island 1,000 sea shells change hands 10 times per year creating an island GDP of 10,000 ss. If they changed hands 20 times a year the GDP would be 20,000 ss. Or if we doubled the money supply to 2,000 sea shells that changed hands 10 times per year it would also yield a 20,000 ss GDP. So velocity and money supply of the currency have exactly the same effect.

So we can have a physical plane whose total net value is much greater than the total amount of cash. That’s because "The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things." (quote from Moneyness, a must-read post IMHO!)

Same goes for gold. All the gold can be worth many multiples of all the currency. There is no need for any correlation. Gold (in size) circulates slower than homes. It circulates on a generational time scale. So the currency denominates the value of everything else without needing to have any quantitative correlation with all that stuff. Can you imagine if there had to be $500,000 cash sitting in a vault somewhere earmarked specifically for your house in order for your house to be worth $500,000? No, of course not! Your house is worth $500,000 because that's its value relative to other things with known prices.

So now let's talk about the debtors.

What they like to do is indenture themselves for the future in order to obtain purchasing power in the present. They can only spend that purchasing power once and then it's gone. It has gone from them to someone who earned it. So the next person who spends that "borrowed into existence currency" is someone who already contributed to the economy and earned it. The borrower gets to spend it once and then he has to work it off by contributing to the economy over a period of time.

In the previous section I told you that price inflation will be the automatic governor of any consumption binges undertaken by the debtors in the hereafter. But while price inflation will limit the debtors' ability to perpetually consume, it will not affect the purchasing power stored in gold by the savers. In fact, my crystal ball informs me that it is the savers lending their excess production directly to the debtors that allows for the perpetual deficits we struggle with today.

I think that if we look closely at how the debtors use the fiat money system with and without the assistance of the savers, it will become clear that we will all be better off with a bifurcated monetary system. And it will certainly be clear that the savers have no business taking debtors on as the counterparty to their savings.

It would certainly be massively inflationary if we went from no debt to all of a sudden everyone borrowing at the same time. But in reality, there is someone working off his past debt whenever a new debtor goes into new debt. Of course old debtors and new ones don’t precisely offset each other, but that’s okay, because gold savings first float against the currency, and then they also float in their isolated circuit of choices made by savers based on the changing purchasing power of gold (not its currency price, but its purchasing power).

So gold has kind of a double float. It floats with the inflation/deflation of everything else. And then it also floats in a closed circuit consisting only of savers (and their "hoard/dishoard" choices), of whom the majority (measured by value stored) are intergenerational giants.

Now that I've hopefully established that in the hereafter a) "a little money (currency) goes a long way" and b) the savers are sufficiently protected against any inflationary mayhem the debtors may cause, let's zoom in on that small "monetary plane" and think about how it works.

In a future post I plan to delve into the vital and delicate relationship and balance between base money and bank credit money and how it affects the value of our money in terms of its ability to lubricate commerce. But for now, I have a couple of questions for you to ponder.

In thinking about the money supply (cash and credit inclusive) that is actually in the economy, would you count cash that is stacked up inside an ATM as part of that supply? Here's a hint: That cash is not in the economy until someone withdraws it from the ATM. If you count it while it's still inside the ATM then you are double counting that money.

Is it a positive sign for the future when there are $Trillions in savings sitting in cash and near cash equivalents? All that money must mean we are loaded, right? It must mean our cash dollar is strong which implies the market thinks it will be that way in the future, right? If $Trillions are good, wouldn't $Quadrillions, $Quintillions or $Sextillions be that much better? And with this thought in mind, does a rising amount of savings crowding into cash and near-cash equivalents represent a positive or negative view of the future?

Those super-low rates at the short end of the yield curve represent really big money, too big for FDIC protection, that just wants to save itself. It is big money that, like Bill Gross says, is far more concerned about the return of money (purchasing power preservation) than the return on money (yield). That short end is an awfully crowded place in the land of ZIRP forever and monetary evolution, especially when you consider the time factor. (H/T OBA)

Of course, what I have described above is a simple model. The reality will be a bit more complex. For instance, gold will have some competition although it will be tiny in comparison to today. Some government debt will likely compete for your savings. But the US government, for example, will have to compete just like the Greeks do today. And we will still have a much more limited menu of investments and trading opportunities to lure you into putting your hard-earned savings at risk.

Like I said at the top, I can't help you much with what it will look like after you die. My crystal ball ain't that kind of crystal ball. But I can tell you that somewhere, some way, some day we will all find out. Fortunately though, my crystal ball does work for the monetary and financial future. It paints a nice, clear picture, yet on timing it's still a little hazy. But one thing it does make perfectly clear is that it's just a question of time.



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JC said...

"I've got to get to you first
Before they do
It's just a question of time"

Front running TPTB!

Nickelsaver said...


Anonymous said...

Jim Rickards probably wants to sell more copies of his book and now gives interviews to anyone. But that's not the cool aspect. The cool aspect is he says this:

The Libyan gold is probably somewhere under US military control - I don't want to claim that I know, I don't, but this is my guess. [...] The war in Libya was not only about oil. It was about gold, too.


Anonymous said...

Here is the link:

Nickelsaver said...


With each post you make the picture clearer. I do have one observation though.

So we can cut gold off of the pyramid structure if we want to, and we can put it wherever we want.

I understand what you are saying here. And it really brings home the point of how Gold will be taken out of the debtors area.

But, it would always need to find its place back on top of the pyramid in order for it to be utilized, would it not? Or in other words, currency will always be the gateway for gold into the physical plane.

Anonymous said...

Comments; and welcome, Ari!

DP said...


Dante_Eu said...

Great post as usual FOFOA! But that "Future" video from 1992(!)...scary and unreal.

Pete T said...

As ever,spot on! Class! Priviliged to be able to share again in Ari's wise insights. Thank you.

Motley Fool said...


...and Iran has about 900 tonnes, in addition to their oil.


AdvocatusDiaboli said...

awesome post what the crystal ball shows.
okay does not tell the timing, but I guess we can live with that.
But: What would be of much more interest is how the transition itself happen or look like and what conditions are obligatory on that path.
e.g. Bullion banking breaking (which I personally think can not happen)? which currencies will HI, or saved at what point?...just wondering.
Greets, AD

MnMark said...

I can see the sense in the Freegold understanding of the world, though I am still struggling to apply that understanding to a particular issue I am dealing with: housing choices.

I've been renting for many years now and have saved much of my savings in physical gold. I was put off from buying a house because I felt the housing market was in a bubble, and it turned out I was right.

Now I have watched housing prices decline by 35% or so and mortgage rates decline to levels I've never seen in my lifetime.

I do not have any intention of selling my physical gold to buy a house. But they are raising the rent again on the place I live in, and I am tempted to buy a very modest house with 20% down and the rest in a 15 year mortgage at these very low interest rates. I could theoretically sell some of my gold and buy the house outright, but I don't want to give up my hard-earned gold savings as Freegold approaches. On the other hand, I wonder if I am missing out on a historic opportunity to buy a house with a mortgage at a very, very low interest rate and then pay it off completely after Freegold with just a few one-ounce coins.

It seems to me there have been FOFOA posts over the last several years that touched on these issues. Can anyone point me to them? I am interested in readers' opinions on whether this would be a good time to buy a modest home, or whether it would be better to continue to weather the rent increases and wait until after the Freegold transition to buy. Thanks in advance.

Boefke said...

Very nice post.

Don't know whether it is due to my personal understandings or not, but your latest posts seem to be more clear as before.

Maybe it is because of the one-step-at-a-time way of writing.

Looking forward to the follow ups!

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


Edwardo said...

Well done, FOFOA. If I were going to rely on
one epistle, and only one, to make the case for owning physical this would be it. Most savers, or those who seek to save, should understand that they have been, and are, being pushed to engage in very risky financial propositions that have little to no chance of performing as advertised. For those who haven't achieved such a realization your post is an excellent vehicle towards jogging the unconscious into awareness.

Robert said...


I have no advice for you, but I understand the dilemma. Long before I ever heard about freegold, I decided to buy a home, even though I was convinced that it is a terrible investment. In my mind, housing is an expense, not an investment, at least when you are talking about the house you are living in. My idea was that if I own the home outright, with no mortgage, then in the long run it pays off not only because my biggest monthly expense can then go into savings, but also because I no longer need to deal with the uncertainty of dealing with banks and landlords. I scrimped and saved and paid of the mortgage early. Now I feel free. I will never sell my house now unless I am forced to. Do I think it is worth what I paid? No way. Do I think it will go up or down from here? I honestly don't care. It no longer matters to me.

After I paid it off I bought other real estate, which I am now in the process of selling to move into bullion. I have learned that the banks are like leeches, and I will not miss them when I no longer need to deal with them.

Bottom line: The bank is never your friend. You also need to think about taxes, insurance and maintenance if you buy a house (maintenance charges for condos are even worse). I do not live in the U.S., but if I did, I would never buy a home unless I lived in a state with consumer protection laws like the California anti-deficiency legislation that lets you mail in the keys and walk away. Otherwise your relationship with your lender is a ball and chain until you have paid off the loan.

If I had to start over from scratch, I think I would probably rent in the beginning, put the first $50,000 savings into bullion (and some short term cash), then start saving to buy a modest house (but remaining watchful and ready to redeploy that cash into bullion if necessary), then put at least 50% down and buy the house, then pay it off, then start saving in bullion again. But that's just me.

julian said...

Nice, a new post!

Fresh weekend reading on top of the "return to honest money" that i printed out yesterday.


I found the following article exciting too. Apologies if it's already been posted/discussed.

States seek currencies made of silver and gold

It's always nice to see evidence of Freegold emergence.

Quote from the article:

"...the new law allows the coins to be exchanged at their market value, based on weight and fineness."

Secondary media of exchange marked to market value. I revere those who saw this coming from miles away. That's some high quality critical thinking skill!

sean said...

Julian, if all currency is made gold/silver, what would we save in?! Gold-savings are just one side of the coin, with fiat being the other. With a fully gold-backed currency, we deprive those who would rather take loans, spend now, and work later. Unless of course you would be happy to loan them your hard-earned savings! A gold-backed currency is a world with perpetual zero-interest rates (or close to it). From above: "With zero interest, you can't earn a yield or a capital gain as you can when interest rates are high and falling. And so there is no reason for savers to lend money to debtors for the longer terms necessary in order to run an economy."
Freegold solves this, by resolving the perpetual battle between Spend-it-first-and-work-later (debtors) vs work-first-and-spend-later (savers). Under FG, the two will reside on separate planes. An elegant solution. And a great song (DM)! :)
I have one question FOFOA - you mentioned that purchasing power of gold will float on its own amongst savers, but what will determine that purchasing power of gold? The demand for savings? - itself a consequence of net positive production? But purchasing power of gold must be the same universally, no? Competition with other means of savings such as government debt?
Everything counts !

DP said...


Gary Morgan said...

As usual, the FOFOA archives are full of little treasures. I'm delving through 2009 at the moment, currently in April.

But a link of Fofoa's lead me to Gary North, and I decided to read his latest offering, which is truly fascinating.

It covers how the 'superclass' maintain their power, and also why that power is always undermined by the market. And it ends with a delcious little nugget that all trail followers will read with an 'ah-ha' moment.

I won't give it away, but yet another little piece of the puzzle is filled in for me!

Anonymous said...

Excellent as always, FOFOA. Thanks!

MnMark, I used to think the very same way as Robert. To be mortgage free = freedom...but does it? Remember it is an illiquid asset. My producing orchard and home is paid for, and for a time(3 years ago) I was content with my situation. I've been trying to sell it now for over a year so I can move into the All Inn. I reached the point of total frustration about 2 months ago, waiting for this thing to sell. I'm now in the process of refinancing it at these historically low rates so I can move my "savings" INTO gold. If your savings are limited, as mine are, you might want to think twice about having everything tied up in an illiquid asset such as real estate.

I can throw a few hundred ounces in a backpack and go wherever I choose right now! At least I could if I didn't own this F'n property... I can't toss the orchard and house in a backpack. Not to mention the housing bubble in my country. Will the value collapse to pre-bubble prices? Will it possibly collapse to even lower levels? I remember when I bought my first home at 24, ten years ago, it was about %40 less than what they're going for today.

Nickelsaver said...


I think that purchasing power of gold is determined by its exchange rate to currency. The exchange rate is a function of the management of currencies relative to other currencies.


As the gold supply within a "deficit ex-gold" nation dwindles (think: USA), each piece remaining will become more and more dear in terms of other goods and services within that zone. In other words, the purchasing power of gold will rise in the "deficit ex-gold" zone vis-à-vis goods and services in that zone. Likewise, the purchasing power of gold will begin to fall in the "surplus ex-gold" zone (think Germany or China) versus goods and services in that zone because of the large and growing accumulation of gold.

Nickelsaver said...


Real Estate may still be in a bubble, but if you own outright, it can be a "real income" producer.

One of the things I have found that people have a hard time grasping is that ALL savers will want to be in gold after the transition, even though it won't deliver ANY real gains like we've had over the past decade. This is a difficult concept to wrap one's head around. People seem to think that they are in gold only for the big 30-bagger revaluation and then they'll want to find something else in which to put their little dollar soldiers to work earning a yield. Either that or they imagine that Freegold will be an environment of perpetual real gains for gold holders. It will not.

Now look at your Real Estate "After the Transition". People will still be buying and renting homes. I have to believe that rental income will be one of the stronger if not the strongest investment vehicle. Although it would probably be better labeled as goods/services.

Victory said...

FOFOA, prolific as always! what a pleasant sat morning treat


Anonymous said...


I would agree with you there. I can certainly always buy a place again post-freegold, though, if I so choose. The point is that my limited savings are better utilized in gold at this stage of the game.

I guess what I was saying is to think about putting a little down on a place( if you want to own ) and mortgaging the balance at the currently low rates, and put your, "newly-liquid savings" into gold for the transition to the new system.

Why not take advantage of the future system right now with our knowledge? We know there will not be perpetual gains for gold holders after freegold, but there is potential for a big gain before.

One Bad Adder said...

What a pleasure it is to read your latest erudite commentary ...and finding reference to my meagre offerings that the good Sir Nickelsaver migrated to MY OWN BLOG (woo-hoo!).

Bill Gross is but one of several "mainstream" commentators picking up on the Born-Live-Die angle lately, the implications of which (systemically) have ...or are about to have a HUGE impact IMHO.

As we transition into the "future" (whatever it may bring) I feel the thing to focus on with GOLD ...apart from any future role it may play in Systemic Architecture, is that it's "currency evaluation" TODAY needs to be totally discounted.

Currency-minded Goldhearts should TRY TO (and believe me it's a hard thing to do) disassociate their stash from it's Currency Price I feel $PoG (in transition) MIGHT scare the be-jesus out of even the most committed Gold-advocate.

Once again also - Welcome Home Ari!

and PS: I heart Page One "comments" ;-)

Motley Fool said...

This reminds me of FOFOA

Domninant species

"I drop knowledge so heavy it leaves the world unbalanced..." ^^

KindofBlue said...


It never ceases to amaze how you are able to stretch a few essentially simple concepts to a further level of understanding about money! Well played, sir.

I started saving in gold intuitively in '03 but didn't really understand 'why?' until I encountered (early '09) and more fully understood your writings. That you understood the importance of the contributions of Another, FOA and Aristotle among others is a testament to your level of comprehension.

Side note: Aristotle, your phrasings on these issues rises to the level of poetry. I eagerly anticipate your musings.

AdvocatusDiaboli said...

Listening to people here stacking gold in order to (quote FOFOA) "more wealth forthcoming." is kind of sad.
Do not become a Waiting for Godot!
Taking up debt on e.g. your house in order to stack gold, is just like taking up debt to leverage on gold directly. You will still carry the load of a serf indefinitely, being eaten up by waiting that questionable freegold dream might come true. Question yourself what has value: a free life or a disappointed dream of forthcoming wealth while being a serf, or should I say nightmare?
Greets, AD

Anonymous said...

AD, why are you here again? Freegold dream? Your posts are becoming a nightmare.

Speaking for myself, I own everything in my possession... everything. I'm simply exchanging my PAID FOR home for gold. Using the equity (savings) to secure something I may not be able to get in the future. I would prefer to sell my property outright and rent for a couple years, owning my home doesn't mean much to me. I'm 34, even if I lose everything, it's no big deal. I can make it back.

Did you say something about Smurfs? You may feel like a serf, I sure don't. I wouldn't mind surfing, though. In my world, I'm whatever I want to be. Free.

AdvocatusDiaboli said...


"I'm simply exchanging my PAID FOR home for gold."

So you are exchanging real wealth for a wealth reserve. In order of what? To gain in nominal terms? When? For what?
Just wondering...
Oh, maybe I understand, you want to be a gambler and your house is your pool on that gamble? This interpretation fits with what you say: "even if I lose everything, it's no big deal". I am happy that you really see it that way.
Greets, AD

Your question about "why are you here again?". In order to learn (thanks @FOFOA for providing that), not in order to hail some belief.

Aquilus said...


Haha - waiting for Godot!

Actually Godot (the $IMFS debt mathematical limit ) is here, and the question is "Oh, s..t, now what? My drama teacher said this guy was not supposed to EVER arrive!"

Now don't go generalizing from one or two comments, that people are here on this blog to become wild eyed speculators - that's not proper.

Even this article tells you to do 5%, and only more if you understand what you're doing. And you're an intelligent guy, so be the true devil's advocate, don't stoop to low-blows.

In the past year and a half since I discovered FOFOA, for the few that I have seen describe their buying strategy, it's been very conservative, with only 1 or 2 using credit they cannot cover.

And after all, that is their prerogative, they listen to all arguments and make their decision as free people. No nanny needed!

So my take: it's helpful to have a garden-variety devil's advocate in the discussion on this blog to "keep us honest", but keep the quality high please! (LOL)

P.S.: if you care to tell us, what nationality are you? I would guess either german, swiss, austrian or dutch. Am I close?

burningfiat said...


I think your right. It's a gamble to loan money to increase ones gold stash. But if one thinks it through, the pot-odds could be hugely in favor of taking the bet. If the odds are totally with you, why not take the bet?

On the other hand, I've contemplated taking a loan to buy phys. gold lots of times myself, but I've always ended up deciding against it. Don't think I have the nerves to sit through "Pretchers 15 min. of fame ~= official gold price very low" , knowing I'm hugely under water on the loan and knowing this period could perhaps last up to 30 days. That takes huge balls and enormous faith in the Freegold-theory.

But respect to those who seek their luck. FWIW I believe the odds are with you.


DP said...

"up to 30 days" huh?

AdvocatusDiaboli said...

Hi Aquilus,
I am native german. Excuse everybody who feels that I stereotyped him or generalized him with the above. I did not mean to do so (and rereading my posts actually I think, I did not do so), but that OT discussion (credit on house...) came up here.
I hold more gold than I can carry, invested with ~60%, that should tell everybody that I am not opposed to gold as a wealth _reserve_ and my posts are not about trolling. BUT: I also take the lessons from FOFOA and aristoteles serious. Gold is for the surplus, your _indefinite_ saving!!!
e.g. Why I hate and do not believe in silverbugs? Just look at those folks: When tough times or nominal gains will show up, those will be the first to liquidate physical: METAL FOR THE WEAK HANDS. And IMHO seeing that kind of folks in gold I dont feel comfortable. Still I also hold silver, because it is a good stackable commodity, besides other real wealth.
Greets, AD

P.S. Your drama teacher was a nut;)

henq said...


* country club for savers = bitcoin p2p network

* secret handshakes = cryptography

* baseball cards = bitcoins (unique numbers)


Anonymous said...


When you say things like "freegold dream" it shows you don't quite get it yet. It's also kinda disrespectful when you have all of FOFOA's writings right here to read and read again if you have to. If you can kindly explain to us why you're so sure it's a "dream"... please do. I know you have tried, and you have failed. Maybe I should have asked you why are you still commenting?

Yes, I'm exchanging one form for another. you may call it gambling, but I would disagree. I've spent hundreds of hours studying Freegold here, and many more studying throughout the economic spectrum. I believe I understand where we are going, "when" we get there is of no real concern to me. I firmly believe freegold is the natural way, and I'm putting my money where my mouth is.

Now I'll shut that mouth so the kind folks here can get back to the conversation at hand.

Anonymous said...

AD sez:

"I'm simply exchanging my PAID FOR home for gold."

So you are exchanging real wealth for a wealth reserve.

Real estate is real wealth you say? Kind of... but not when you have to cough up 5-10% of its value to the collective each year in the form of property tax... and in these times of sovereign debt crises governments can and will jack up taxes even more based on your home's imagined value, and there's nothing you can do about it. I personally prefer to have an unencumbered, more discrete form of real wealth i.e. gold.

AdvocatusDiaboli said...

"If you can kindly explain to us why you're so sure it's a "dream"... please do."
As the opposite to others, I am not saying that a dream might not come true, nor that it does come true. Who knows, maybe tomorrow (honestly, everybody reading this, how often do you look at the PoG), maybe in one year, maybe ten years, maybe 100yrs, maybe never.
Sorry for the word "dream", this is a parable: AN IDEA, a theory (I admit a good one, but still to be proven, which is actually not posible). I chose the word to illustrate. On the other hand: Ask yourself, why is it that you are so upset about that different observation/description?
Greets, AD

mr pinnion said...

Nice one FOFOA.
Long may you continue to deconfuseify the subject of money.


AdvocatusDiaboli said...

Hi poopyjim,
"Real estate is real wealth you say? Kind of... but not when you have to cough up 5-10% of its value to the collective each year in the form of property tax"
yep, welcome to socialism&serfdom :)
even my car has a fixed tax, no matter how much I drive it.
Still this does not change the difference between wealth and a wealth reserve.
Did you know that even in Switzerland you had property tax on a wealth reserve (aka gold)?
Greets, AD

KJ said...

AD, you wrote:

"...Question yourself what has value: a free life or a disappointed dream of forthcoming wealth while being a serf, or should I say nightmare?..."

My first thought for some reason was Charlie Munger :)

If I infer correctly, I do understand your point from your comments - get some physical gold and then live your life as it should be lived. That reminds me of comments Aristotle often made.

The issue may be that knowing we are likely reaching the last inning of the ballgame, and yes, perhaps the game will go into extra innings in the sense the game will go on longer than one would imagine, the question may then become: how do I want to spend my additional paper dollar savings where such savings are above and beyond what I need to live day to day, emergency fund, etc.

What one does with these paper dollar savings is for each free person to decide. Some might choose to use the dollars as a downpayment on a property and take on a mortgage. Others might not.

And it may or not have anything to do with 'greed'. Is it 'greed' or common sense? Does one want to take on all the expenses/fees associated with ownership? What if one's career is affected by the ongoing financial crisis? Where will the income come from? How much can one save by renting vs. buying? What will happen to the value of the property in a collapse? what will happen to my mortgage? Will I essentially own the home free and clear or will the rules be changed so that a new mortgage is drafted up in the 'new' system? Would I instead prefer to buy physical gold with the downpayment dollars and remove all counterparty risk? And retain the flexibility and freedom under this system and into the new system?
Is this perspective one of greed or common sense? both?

One Bad Adder said...

Off-topic: -

For those who enjoyed the MagLev in the Dragons post for what it IS ...rather than in analogy, this came accross my desk recently ...and I thought I'd make it my first offering at OBA Blogspot.

costata said...

Excellent post FOFOA (as usual).

Real Estate

As the saying goes read the fine print. The word 'mortgage' can be translated as 'on death terms'. How many people have read a home mortgage contract? Do they know the terms and conditions?

This quote is from a piece by Bob Moriarty linked in an article on silver volatility by Antal Fekete (link below if anyone is interested):

Most people don't know this because they don't read the small print but if you have a savings account, the bank has the right to withhold payment for up to 90 days.

And all mortgages are essentially 90 notes at their heart. That's right, the bank can demand full payment within 90 days if they wish and during the 1930s that's how thousands of Americans lost their homes even when they were paying their mortgage.

The rest of the article will really annoy the silverbugs but I thought this snippet was instructive. Read that mortgage document before you sign on the dotted line.

Another thing to consider is the potential for restructuring mortgages after HI by government decree as happened after the Weimar HI.

There are ways and means of protecting yourself but it requires detailed investigation, a carefully thought out strategy and really sound legal advice.

Anonymous said...


Excellent post.

I don't think i've read anyone write more clearly about money than you.


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

Thanks for the link costata, I recall reading this in the past. I don't understand how this relates to mortgages in the event of HI. The article discusses the historic gold/silver thing?

costata said...


That quote from Moriarty about mortgages was the only relevant passage. I only included a link because that's the source.


Motley Fool said...


Thanks for the link. I enjoyed reading it.


In this time of uncertainty, it should not be that difficult to sell a producing orchard (with house). Location is of course key, but perhaps you should widen your audience of prospective buyers.


Dante_Eu said...

Interesting article at kingworldnews:

February 4, 2012
Pento - Bond Bubble to Destroy US Dollar & Restore Gold.

Once the bond bubble explodes here, as it did in Southern Europe, it will destroy the dollar along with it. That’s because the sellers of U.S. debt will be forced to abandon dollar based holdings completely. That will mark the end of the U.S. dollar as the world’s reserve currency and the restoration of gold as the global store of wealth .

sean said...

Thanks for the reply, Nickel.
I was looking for an explanation which excludes gold’s exchange rate to currency, since FOFOA said that gold’s purchasing power would be able to vary independently of the monetary plane. (“The purchasing power of gold can be rising or falling regardless of whether currency prices are inflating or deflating because gold is like an isolated circuit.”) In fact, the quote you found does explain well how the purchasing power of gold can vary, with balance of payments. Note that this balancing occurs irrespective of its price in fiat currency.

Nickelsaver said...


I understand. It appears that we are asking FOFOA the same question in a different way.

"So we can cut gold off of the pyramid structure if we want to, and we can put it wherever we want. would always need to find its place back on top of the pyramid in order for it to be utilized, would it not? Or in other words, currency will always be the gateway for gold into the physical plane.

mr pinnion said...

Thanks Costata, that is a very interesting snippet about the mortgages.I m surprised that fact isnt mentioned on the web a lot more.Is that just in America or applies across the western world?
As for reading the mortgage document.I m not sure it would do you much good ,as interpretation of the rules seems to be what matters nowerdays.
So all those buy to let 'investers' could have it all taken away in just a few months.Fascinating.

Piazzi said...

fofoa has been diligently following and keeping us updated on ECB gold reserves

Anyone knows what would be a rough estimate in percentage terms of ECB's gold divided by its entire holding?

many thanks

Wendy said...

Piazzi, I believe you'll find what your looking for in the first post of this year:

Party likes it's MTM time

Piazzi said...


many thanks

so, if I not making a mistake, ECB has a 15% gold holding to total assets (423,458 / 2,735,628)

There, if ECB wants 15% to be a player, come hell come heaven, then why would I not want that percentage at least?

If I am making a mistake reading that balance sheet, I would very much appreciate being told so

In actuality, I favor 20-30% and that is based dow/gold ratio but, if ECB thinks 15% is good enough now, then that is a minimum as far as I am concerned

dojufitz said...

i don't know if it just me but the messages wouldn't show more than 200 in your last upload....that was after you fixed it due to all the complaints....

Wendy said...


15% was the value of the ECB's gold at the time the Euro was launched. Over the years it has grown far far larger as a percentage of the total researves.

If you want to find more information, look at FOFOA's posts that are published at the beginning of each quarter, he usually speaks about the ECB's quarterly revaluation of it's gold researves.

Piazzi said...


I went to this post

and saw on this pic

gold / total assets = 420,005 / 2,288,571 = 18%

so, according to that pic, 18% of what they have as assets is gold

am I reading the wrong data?

I am merely looking at ratio to gold to assets

first item on the left side of the ledger divided by sum total of left side of the ledger

As I said, I personally think 20-30% of one's assets based on historical dow/gold ratio for capital preservation purposes but if I am reading the ECB balance sheet totally wrong, or if I am looking at wrong data, I would very appreciated getting corrected

Maybe FOFOA can kindly include something abiut this next time he discusses ECB's gold holding

Robert LeRoy Parker said...


I will correct you before I leave for the superbowl party. You are looking at total assets as opposed to only reserve assets. Reserve assets are the focus here at FOFOA.

What is a reserve asset? From the IMF:

a. General definition
6.64 Reserve assets are those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing
needs, for intervention in exchange markets to affect the currency exchange rate, and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign
borrowing).4 Reserve assets must be foreign currency assets and assets that actually exist. Potential assets are excluded. Underlying the concept of reserve assets are
the notions of “control,” and “availability for use,” by the
monetary authorities.5 The composition of reserve assets and reserve-related liabilities is shown in Box 6.5.


Foreign exchange reserves in COFER consist of the monetary authorities’ claims on nonresidents in the form of:

* foreign banknotes,
* bank deposits,
* treasury bills,
* short- and long-term government securities, and
* other claims usable in the event of balance of payments needs.

Foreign exchange reserves in COFER do not include holdings of a currency by the issuing country. For instance, the U.S. dollar assets of the Federal Reserve and the euro assets of the European Central Bank and member countries of the European Economic and Monetary Union are not foreign exchange reserves. The definition of foreign exchange reserves in COFER is the same as that in the IMF’s International Financial Statistics (IFS).


From Table 6.5:

Reserve assets
Monetary gold
*Gold bullion
*Unallocated gold accounts
Of which: Monetary gold under swap for cash collateral
Special drawing rights
Reserve position in the IMF
Other reserve assets
*Currency and deposits
*Claims on monetary authorities
*Claims on other entities
**Debt securities
**Equity and investment fund shares or units
**Of which: Securities under repo for cash collateral
*Financial derivatives
*Other claims

FOFOA said...

Hi Piazzi,

Reserves are what we are watching on the ECB balance sheet. Reserves are CB scale savings. Reserves are the rainy day fund that can be deployed to defend a currency against its foreign peers. Other assets cannot. Reserves are either gold or foreign currency-denominated claims against non-residents. So we simply look at the ratio of Line 1 to Lines 1+2. This is all explained in that post you mentioned, RPG Update #4. Since the launch of the euro, Line 1 (gold) has gone from 30% of the Eurosystem's reserves to 63%. Eventually I expect it to be more than 90%!


PS. Oops, I see RLP beat me to it!

Robert LeRoy Parker said...

One more definition for good measure:

21. Monetary gold and SDRs issued by the IMF are financial assets for which there are no corresponding financial liabilities. Monetary gold consists only of gold held by the central bank or government (or by others subject to the effective control of the central bank or government) as part of official reserves. Gold holdings that are not part of official reserves are classified as nonfinancial assets.

Now it's superbowl time.

FOFOA said...

Hello Sean,

"But purchasing power of gold must be the same universally, no?"

The price of gold in currency terms will rise and fall roughly in line with other goods and services. In this way, gold will sufficiently define the concept of purchasing power with one simple reference point.

But when I say the purchasing power of gold, I'm obviously talking in terms of goods and services, not currency. As I say, the currency prices of goods and services (and gold) could be going in either direction or holding steady, but the purchasing power of gold (in goods and services) will be moving with regard to the supply and demand dynamics of gold (a wave within a wave). Supply coming from the dishoarders and demand coming from the new hoarders. If new hoarders outnumber dishoarders then the amount of gold by weight you'll get will be falling. This represents a rising purchasing power environment for gold, with more new hoarders than dishoarders.

But at some point the purchasing power of gold will rise high enough that it will lure more savers into becoming dishoarders. So the purchasing power of gold will rise and fall and then rise again based on the hoard/dishoard choices of savers. This is a closed circuit because the direction of change in currency prices is irrelevant. Currency is just a momentary medium of exchange for those who are not dealing in debt.


Piazzi said...

Many thanks

much appreciated

FOFOA said...

FunGold in a Super Bowl ad!

And of course the headline:

"Giants Win"

Anonymous said...

Wendy, Piazzi, RLP, FOFOA,

I think Piazzi is right to include more assets than those that are explicitly labelled as 'reserves'.

For example, the bonds that the ECB purchased outright function in exactly the same way as a reserve because the ECB purchased them with created base money.

I suppose we agree that there are good reserves (gold) and poor reserves (US$ and Greek and Portuguese bonds). But on the ECB balance sheet they behave in the same fashion. When the ECB buys them, they pay with base money. When they sell them, the ECB acquires base money that they can then cancel. In this way, the reserve operations can be used to regulate the amount of base money.

In addition, one should include all those assets that were repoe'd onto the ECB balance sheet for which a commercial bank officially carries the risk, but for which it is rather likely that that commercial bank will default. I have a couple of banks in mind, in particular. All those assets will eventually be on the ECB balance sheet with a portion of base money on the liabilities side, and so they will eventually become 'reserves', too.


Wendy said...


if you say so, I believe it, unless someone else comes up with a rational argument against your remarks, because this is NOT my area of expertise. But thank you , I enjoy learning.

FOFOA, that ad was astounding, the gold/millionaire connection was a surprise. The ad did not portray an expensive car, or boat, etc., it showed gold. I don't watch the superbowl, but I understand that even if I did, we don't get the same commercials in Canada as you do.

costata, thanks for the response last night, I missed it. I had thought I was missing something in the link.

jeb said...

Victorthecleaner, I understood that base money couldn't be cancelled, and that commercial banks payed for bonds with credit money. Is there any posts by FOFOA on this subject?

costata said...

mr pinnion,

As far as Australia is concerned the contracts the banks use give them very wide latitude to protect themselves against loss.

And standard mortgages here are full recourse (although this is often waived to some degree in a foreclosure - presumably for PR reasons).

So all those buy to let 'investers' could have it all taken away in just a few months.

If Moriarty's information is correct then it would appear that this is the case. There are, of course, a host of other ways mortgagors can be screwed.

Anonymous said...


base money can indeed be cancelled. The ECB just needs to sell one of the assets that they actually own (i.e. those items on the assets side of their balance sheet that are not part of another contract, swap, repo, etc.). For a CB, these are often called 'reserve assets', but also the QE1, QE2, QELite, OT2 purchases by the Fed and the SMP purchases by the ECB are in that category.

When the CB sells one of these assets, they are paid in base money. When the asset is deleted from the balance sheet, the corresponding liability has to be deleted, too. That would be base money.

In a freegold world, one of the basic methods to manage their currency, would be for the ECB to engage in gold open market operations. If they buy gold from the market, they pay with base money. This would devalue the Euro with respect to gold. If they sell gold and receive base money, this would increase the value of the Euro with respect to gold. This is a new degree of freedom for them that they can use, for example, to control the general price level (assuming that the real price of gold is determined by the market).

When a commercial bank buys a bond, they can pay with whatever they want. This could be credit money (created by another bank for them) or base money.


jeb said...

Thanks for your insights VTC

FOFOA said...

Hello Victor,

"I think Piazzi is right to include more assets than those that are explicitly labelled as 'reserves'."

I'm sure you do, and you've got lots of company in the online hard money camp which gets its currency theory from gold bugs who think central bankers are either stupid or evil. But that doesn't change the fact that in central banking there is a strict definition of reserves and how they are distilled from other assets. It's not simply a matter of opinion.

You won't find much about this subject at ZH or GATA, but you will find some here.

You might want to start with my July 2010 post Gold: The Ultimate Wealth Consolidator:

International Liquidity

There is one type of liquidity that is of absolute importance. And that is "international liquidity". It is the kind of liquidity that lubricates the cross-border flow of real, essential goods…



Reserves is another tough word that means different things to different people...


2. Funds set aside for emergencies or other future needs.

But the definition I will be focusing in on is closest to #2, because that is how central bankers define reserves and it is how we as individuals should as well. It is also the definition most closely related to the aforementioned and most critically vital "international liquidity".


…central bankers have a very quick and easy way to tell the difference between their normal, everyday assets and their reserves. The regular assets are all claims denominated in their own currency... and the reserves are not. One is internal (domestic) and the other is very decidedly foreign/external (international).

With the key exception being gold, credit is at the very core of the phenomenon we call "money". And insofar as credit on any balance sheet is concerned, a liability is when another entity has a claim on you, and an asset is where you have a claim on another entity.

Those credits can be denominated in various currency units, and it is the goal of the balance sheet to help a bank keep score on itself to ensure that it doesn't overextend itself by emitting more liabilities (claims against itself) than it can balance against its own assets (its claims upon others).

At the central banking level, like the ECB, institutional liabilities largely take the form of issuance of currency and deposits held at the CB on behalf of commercial banks (such as those to meet reserve requirements and to facilitate check-clearing between institutions). These liabilities are denominated in its own domestic monetary unit (i.e., the euro.)


FOFOA said...


…The assets to balance against these liabilities are largely in form of euro-denominated claims on commercial credit/banking institutions. As these claims are often collateralized by government bonds, at the very end of the rope it is fair to say a large portion of assets held by the central bank take the form of government bonds even though they were (largely) acquired indirectly through typical financing operations to extend credit (liquidity) to the commercial banks.

Euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do NOTHING in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a net (positive) position in foreign currency assets, IMF SDR's and other assets denominated in "reserve currency" units, meaning mostly the US dollar, the pound, the yen, and (outside the Eurozone) the euro. It is this combination of gold and net foreign currency assets that constitute the official "reserves" of any central bank.

The proportion of RESERVE assets among the central bank's TOTAL assets is usually a judgment call. Generally, the more unstable or insecure a central bank deems its national government and economy to be on the world stage, the larger the proportion of assets it will hold in the form of reserves. (Recall the expansion of reserves among Asian countries following the 1997 Asian Contagion crisis.)

And regarding the make-up of the reserve assets specifically, it is ultimately a central bank's own internal management decision that determines what proportion of reserves are in the form of gold versus foreign currency. Of course, there is often a political component as well, such as "good will" or crude attempts at bilateral exchange rate intervention -- akin to playing pick-up-sticks while wearing oven mitts.

You'll find much more in the post. And then, a year later, I touched on this subject again in Euro Gold:

Since 1993, the last word in international reserves has largely gone to the IMF as set forth in the Fifth Edition of its Balance of Payments Manual which can be found on the IMF website here. Under 'Structure and Classification' you'll find chapter XXI: Reserve Assets, paragraph 444 on Valuation…


Recognizing this particular valuation/accounting shortcoming (along with "a few" others), the ECB has been at the institutional forefront implementing useful deviations. Essentially acknowledging the IMF's own admissions of ambiguity within the manual, the ECB tactfully says, "the definition of reserve assets included in the 5th edition of the IMF Balance of Payments Manual leaves some room for interpretation," setting the stage for its own definitive refinements as put forth in its "Statistical Treatment of the Eurosystem's International Reserves" formally published October 2000 and found on the ECB website here…


costata said...

For the China and energy market watchers:

Nonetheless, Israel is making an offer out of the massive oil and gas reserves in the Levant Basin province in the eastern Mediterranean. The area, encompassing approximately 32,000 square miles, covers onshore and offshore territory including the Gaza Strip, Israel, Lebanon, Syria and Cyprus.

The US Geological Survey estimated in 2010 that the area holds a mean of 1.7 billion barrels of recoverable oil and a mean of 122 trillion cubic feet (tcf) of recoverable gas.

My emphasis - h/t Ed Steer

Robert LeRoy Parker said...

Hi Victor,

You say "I think Piazzi is right to include more assets than those that are explicitly labelled as 'reserves'."

Right in what sense? Sure, Piazzi is correct in his calculation of gold as a percentage of total assets. But you say yourself that "we agree that there are good [assets] (gold) and poor [assets] (US$ and Greek and Portuguese bonds, [MBS, various other toxic assets])." Should Piazzi first makes sure of his toxic asset allocation when determining his gold allocation? Is Piazzi responsible for maintaining price stability in the Eurosystem?

The ECB will attempt to maintain price stability by printing Euros and taking on toxic assets, but at the same time they attempt to impose austerity and reduce future profligacy. Expansion of the balance sheet is just part of meeting their mandate in these times of debt deleveraging.

The importance of the distinction between reserve assets and non-reserve assets is realized in times of currency crisis (hyperinflation). That is where secondary mediums of exchange can halt inflation in its tracks. If the Euro is hyperinflating, then toxic assets denominated in Euros will not function as a safe alternate medium of exchange, whereas gold, or US dollars can.

If non-reserve assets are performing as well as reserve assets, then times are likely good and Piazzi probably isn't asking FOFOA about gold allocation. But when times are bad and people begin to focus on secondary media of exchange, it helps to allocate appropriately. The ECB marking to market is one way of telling the people, our reserves are prepared for deployment in the advent of catastrophe.

So like FOFOA encourages, Piazzi's allocation should be based on his understanding of what is coming. Nobody knows for sure, so 20% is a pretty damn good place to start imo.


And as I preview this, I see I will probably interrupt FOFOA's much better response.

FOFOA said...


And then again, in RPG Update #4:

In addition to the distinction I just explained, another key definitional aspect of CB reserves is that they are "readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes… the concept of reserve assets should encompass those assets over which authorities exercise direct and effective control." (my emphasis, quote from the IMF BOP Manual)

So aside from being either gold or foreign currency-denominated claims on non-residents, the two main criteria for assets to qualify as reserve assets for central banks are availability and control.


There is one other nuance in CB reserve reporting standards that I should mention. The reason the ECB makes its "net position in foreign currency" (claims minus liabilities regardless of residence) so prominent in the commentary portion of its ConFinStats is explained in Chapter III of the ECB's Statistical Treatment (Oct. 2000):

"Since the monetary crises which took place in most of the Asian countries in the late 1990s, international organisations have gradually become more concerned with the availability of reliable information on the capacity of a country to contend with potential financial crises. Consequently, the IMF ... requires additional details on international reserves and other foreign currency claims and drains from those presented so far in international standards, addressing, for the first time, the compilation of figures on reserve-related liabilities."

In other words, taking the liability side into account for the "net position in foreign currency" came into vogue thanks especially to the experiences of the Asian contagion crisis wherein it was shown how quickly and easily a nation could be stressed by its liabilities denominated in foreign currency. So the net position in foreign currency is now a fundamental part of any CB's overall Health-O-Meter. And so with this view in mind, it is clear that a value shift away from foreign currency reserves toward gold, the universal reserve asset, is also a shift in the overall quality of a portfolio.

But the strict definition of reserve assets within the Eurosystem is simply the GROSS total of the qualifying asset items and foreign-denominated claims on non-residents of the euro area as summed from the asset side of the balance sheet, without any further adjustment for items on the liabilities side. In other words, the official reserves are calculated through the simple addition of asset items #1 plus #2, which is what I use in these updates.

Rather than designing your own currency theory, it might be more useful to consider why reserves are defined this way. Foreign currency and universal (gold) reserves act as a kind of rechargeable battery of value for a currency manager. That battery can be charged or discharged as needed. Internal liquidity operations have other purposes.


FOFOA said...

Hi Wendy,

Here's another Super Bowl ad also featuring gold… but implying that platinum is even better than gold. :-/

Anonymous said...


I see that one could actually misread my initial message: I do not want to recommend a low allocation of gold to you. Quite the contrary.

What I wanted to say is that the effective allocation of the ECB is in fact lower than the 60% that are sometimes advertised here. And


thanks for copying all that material. My comment above was actually because I had already read this material when you originally wrote it, and not although I had read it.

You are basically countering your own complaint when you say 'internal liquidity operation' in your reply part 3/3. If you read my initial remark, I deliberately did not include liquidity operations in what I suggested to take into account. I included only what is in effect solvency operations, printing money for the government(s) to spend. The very theme that you assert will eventually destroy the dollar when the Fed practices it.

Finally about the use of the reserve. When freegold is in operation world-wide, there is no need for the CBs to hold gold, except perhaps as a short-term buffer and, of course, in order to inspire confidence in the currency. In times of normal operation, the CB gold will not need to flow.

CB held gold is in fact not required for international settlements! If a German car manufacturer sells cars to Chinese consumers, the Chinese credit them with Renminbi in the car company's account with a Chinese bank. In that future time, nobody will save their surplus in debt assets, and so the German company will quickly sell the Renminbi that they don't need for their operations. The exchange rates adjust automatically. No need for any CB action.

When eventually the German factory workers get their paycheques and some of them wish to save their surplus, they will just buy gold for Euros in the open market. Again, CB gold is not needed to flow.

Conversely, a Greek family who may not have earned a significant surplus, can always sell some gold for Euros and then spend these Euros on some Chinese made electronics. Again, gold and currencies (Euro, Renminbi) all flow in the private market. The CB gold lies very still.

So what the heck is the CB gold needed for?

Firstly, the ECB has the mandate to maintain price stability. And so they may occasionally need the gold open market operations I sketched above. I doubt this will be very common though.

Secondly, as long as the gold reserve is there, the ECB has the option to engage in gold open market operations, and this is what gives people confidence that they will be able to deliver price stability even in the unlikely event of a serious crisis.

Now assume there is some panic (perhaps because the British pound keeps dropping and keeps losing value and people wonder whether the Euro is any better at all).

Now the ECB says, don't panic. No need to stock up on groceries and gas. You can always get gold from us if you are worried. Fine. As long as I am confident that I can get the gold whenever I wish, I need not panic. It's just another liquidity issue really.

But what if the ECB says, hey, if you have doubt about the Euro, we could sell you some Greek government bonds as an alternative. You'd politely decline and line up at the pump.

You see, it is even possible that a CB stores their surplus, their reserve for a rainy day, in a stupid medium. The Fed does it all the time with the QExyz.

By the way, in order for the ECB to maintain price stability (as in preventing both deflation and inflation of the general price level), I do not see that it would be necessary to purchase Greek and Portuguese government bonds. And as far as I remember, the Euro zone wide consumer price inflation was just under 3% annually - not quite that deflationary. If the ECB are serious about their job, they will not want to prevent deleveraging (as the Fed does). They only need to prevent deflation.


AdvocatusDiaboli said...

since this post is called "Glimpsing Hereafter" and you are starting that Euro-La-La, let's take a look at the close future inside the euro-zone:
Okay, it is no secret that the german population hates the euro, but their bureaucracy dictates them they have to obey. Since germans are condempt to accept anything due to their eternal everlasting guilt, they might swallow that one.
Apparently french people are not so obidient and stupid.
Did you know that in every french shop and supermarket all prices are still marked in french franc? And most of the time in bigger letters than the value in Euro. Ask a french what is his salary, most of them tell you in Franc, not euro. Even on your bank account statement you got often franc!
So I really wonder, if those CB bureaucrats can neglect the social political tsunami building up.
Apparently everybody has different crystal balls, but mine tells me that the euro is the first to break up. Either the old EMU mechanisms will be installed early enough or a complete collapse will end this crappy euro project.
Greets, AD

Anonymous said...


Evans Pritchard does not understand the Euro and what it is good for. I expect that Germany and the other creditor countries do not want to give up the Euro because it is their buffer for the time in which the US$ collapses (although they might threaten to withdraw in order to get the others in line - as a political manoeuvre), whereas the debtor countries from Greece to France are effectively trapped and cannot leave the Euro anymore. They would get wiped out instantly.

I therefore guess that Greece and perhaps Portugal and Ireland will be more or less officially bankrupt and will restructure their debt, i.e. pay back only a part of it. What I don't see is why this has anything to do with the Euro. When General Motors was bankrupt, would that threaten a break-up of the US$? I don't think so. No, Greece and a few others will restructure their debt, people will learn that debt is not risk-free, and they will all stay in the Euro zone.


Anonymous said...

Further on my previous comment, I think it is high time that those who run the show in the Euro zone (Germany, ECB) create a precedent and demonstrate that a government (the Greek one) can go bankrupt, that this is not the end of the world, and that of course that country can stay in the Euro zone.

Somehow the US doctrine that government debt is risk-free has confused journalists all over the planet to think that a government default would affect the Euro as a currency. No, it won't (well, up to the fact that the ECB will have to clean up quite some mess in the Greek banking system - but that will happen sooner or later anyway and so they may as well practise it now).


AdvocatusDiaboli said...

sure, kicking the can down the road by monetizing through the ECB.
How far and how long can you kick it? Sure for the FED it is no problem. In Europe you have the problem, that the local/national economies in the PIGS(F) are being wipped out and with each bail out it is ACCELERATING (check out TARGET2 balances). Even a 100% haircut does not change that.
You just need in one country a government finally saying , enough is enough, we will not pose austerity to eternity on our people, or another countries saying no more QE. BANG!!! that's it.
Greets, AD

AdvocatusDiaboli said...

and to add to your quote:

"think that a government default would affect the Euro as a currency. No, it won't"

Okay so the currency is fine, but in exchange the underlying physcial plane to burnt down. Great Job.
If farmers in Ireland release their horses to starve, because they can not effort to feed them, or when latin families in greece give away their children into shelters because they can not feed them anymore, or when spanish youth unemployment reaches 50%, or greece pharmacies accept cash only, not to talk about suicide rates, some EUROcrat tells the people: Oh everything is fine, our currency is stable, nothing to be concerned about.
Sorry that is STUPID, do never underestimate the cutural backslash, some morons and bureaucrats did that almost 100 years ago. Remember: history does not repeat, but it rhymes.
Greets, AD

Anonymous said...


I think you are contradicting yourself. So far, the ECB has not monetized that much, and they have definitely not suppressed interest rates in the same was as the US or the UK. You are getting austerity precisely because they are not monetizing the new, additional debt.

Another fallacy in your argument is that you suggest that leaving the Euro would solve the problems that Greece or Spain face today. It wouldn't because most of the problems are in the physical plane. How did FOFOA put it: If you think austerity riots are bad, wait until you see hyperinflation riots.

What would happen when these countries leave the Euro?

Firstly, they would be bankrupt immediately as well. Who would lend a single New Drachma to the Greek government for less that 20% annual interest? Bang. Lights off. Even more austerity.

Secondly, why are Spain or Greece suffering today? Because of the misallocation of capital during the previous decades. Why is unemployment in Spain so high? Because five years ago, more than 20% of all Spaniards worked in residential construction. Sure, you can print money and keep them building empty cities, but it should be quite evident that this would not increase the wealth of their country (they already have enough houses plus empty ones for all the Brits who never came and who will soon have their own problems).

Same in Greece. Sure, you can print money (New Drachmas if you like) and give it to the Greek government. What will you get? They will just continue misappropriating these funds.

By exiting the Euro and devaluing, they can certainly prolong the status quo. But what use is this if the original problem was that the status quo is unsustainable?

Yes, you are right, the world is full of examples on how you can destroy an economy by creating a credit bubble, simply because these bubbles misdirect so much capital. But this has already happened. It is the past. The real question is how to best rebuild all these broken economies. Just because Feta Cheese is dead cheap on the international market, does not mean people will eat more of it. What you need is people who invest in these countries. With which currency can you do this better? Euro or New Drachma?


AdvocatusDiaboli said...

I never "suggested" anything in my post at all. I only stated like it is: a catastrophe and there is no way out of that mess with the current arrangement. Start to see the world as it is, not how you want it to be.
In that way I am not so moronic to say "Hey, greek families, sell your gold for euros and problem solved". Thanks to the Euro, balancing/managing currencies for the benefit of the physical plane inside the euro countries is not any longer possible. So the EURO is the OPPOSITE to the Freegold, especially since the "healthy" countries are both: major exporters&creditors inside AND outside the Euro-zone and the debtor countries are also major importers inside AND outside.
If you ask me what I suggest just from my personal opinion: Germany to get out, but than the politians would need to tell the people that their Euro-savings and AAA-retirements are completely gone (which they already are today, but nobody wants to touch that issue), not something nice to hear for an aging nation. So that's why I think, there is no way out, but to buy PM like crazy if you are german (as a wealth reserve, the euro is the opposite).
Greets, AD

Oh @FOFOA: I am missing the end of the storry with Ben&Chen (AFAIR "Focal Point Gold") on the island, when Ben runs out of gold coins, or when Chen wants to take his retirement, no matter how many of that gold he finally gathered.

AdvocatusDiaboli said...

Oh and about "investing" in those countries, be sure that as a german citizen, I would not even consider to go to Greece on holidays, the way the regular people are pissed over there.

tristramboris said...

First the Bristol pound, next the Euro?

AdvocatusDiaboli said...

Puzzles me a little bit:
Looking at the chart, overall gold reserves are not rising, still shrinking...
Explanations? How can those charts look like in 1,5 or 10 years? How much deeper can gold fall?

Edwardo said...

Mr. Pinnion,

"Thanks Costata, that is a very interesting snippet about the mortgages.I m surprised that fact isnt mentioned on the web a lot more."

That may be because it might not be a fact. As a mortgage holder, I'm looking into this claim presently and will let you know if I turn up anything that confirms it. So far, in my very limited research, I haven't.

Yannick said...


"Did you know that in every french shop and supermarket all prices are still marked in french franc? And most of the time in bigger letters than the value in Euro. Ask a french what is his salary, most of them tell you in Franc, not euro. Even on your bank account statement you got often franc!"

Please, this was like waaaay back, at the beginning. Prices are non longer marked in francs. And *nobody* will tell me his salary and whatever in francs. Same for bank statements.
For all people I know, the french franc is now this "old thing from the past", a bit like gold in a way :)

Anonymous said...


If you ask me what I suggest just from my personal opinion: Germany to get out,

As I already said, I think this would be possible technically, but I also think this would be foolish. One day presumably during the coming five to ten years, the US$ will start its terminal decline. If Germany was alone at that point, as a net exporter they would be fully exposed and might get under serious pressure to join the devaluation race of currencies. Inside the Euro zone, it will still not be a piece of cake, but since their exports go mainly into the Euro zone, they have at least some buffer and the Euro as a whole may not be under that much pressure to devalue along with the US$. If I was in charge of Germany, I would not want to give up the Euro.

The same argument applies to countries such as Spain or Italy. If the Euro need not join the dollar in its race to the bottom, this means that resource imports stay cheap for those countries in the Euro zone that are net importers.


AdvocatusDiaboli said...

especially for you I went to my folders and looked at a bank statement. I found one, dated September 2011, from Crédit Lyonnais-SA SIREN 954509741. Still had "SOIT EN FRANC", I dont have a newer one (yet), but three month should not make the difference.
Greets, AD

Desperado said...


I am Swiss and agree with everything you are saying. Don't expect Americans to really observe, let alone understand, whats going on outside of their bubble. I argued the same points you (perhaps not as effectively) are and accomplished nothing except messing up the blog-wa. FOFOA is hopelessly pro-CB. The blog is dedicated to Another, likely a member of that elite CB club.

And ditto arguing the merits of silver. If you even get close to proving your point they will call you names and accuse YOU of being nasty. And for what?` They will never concede even as simple a point as that the Euro by design is evil and from the beginning it was being used as a tool to enslave the Common People. Just like the fiat-dollar I might add.

I think this is also why Dork of Cork rarely shows up here either. All the pro-Euro blather is too much for an Irishman to stomach after what the EU has done to them. It's like banging your head on a gold brick wall.

BTW, I agree that Germany and the Nordics should leave. The southern lands need their sovereignty and a united currency block in order to avoid the subjugation that the CB's of the north are trying to force on them.

Motley Fool said...

Hey Desperado

Nice to see you are still alive. And still tenaciously clinging to the idea that paper money is evil. :D


DP said...

^ :)

Yannick said...


Ah! Seems some banks haven't updated their templates for a while! To be sure, I checked my statements from BNP Paribas && Caisse d'épargne, no francs in them. Probably the very last remnants.

In light of the current events, I have still to hear one fellow frenchman mention the return to the franc. But well, I don't have acquaintances in the full sprectrum of the population.

AdvocatusDiaboli said...

I would not go so far to say that the Euro is "evil". It is just one of the most stupid designs, the regular dumbass socialist can come up with. problem is that most europeans are forced into AAA-€-crap by social secrurity laws.

What really starts to annoy me here are morons telling my "oh, you just dont understand, mommy knows whats good for you".

Must be an american attitude, similair to MMTs, Krugmans and Merkels of the world.
Greets, AD

Aristotle said...

AdvocatusDiaboli's comments @ February 6, 2012 4:31 AM

"... I am missing the end of the story with Ben&Chen ("Focal Point Gold") on the island, when Ben runs out of gold coins, or when Chen wants to take his retirement, no matter how many of that gold he finally gathered."
- - -

AD, as with any allegorical discourse, you must bear in mind that simplifications are present in hope that a basic insight into a much more complex concept can be conveyed to the audience. To discuss parameters beyond the simplification is to inevitably cause us to exit the limited allegorical training arena and reengage more directly with the complex reality. Shall we? Let's,,, but we shall for now endeavor to stay within easy eyesight of this familiar landmark.

But first, a point of order... Please revisit the parable and understand that FOFOA clearly specified the dynamic in which a floating/increasing valuation of gold within that simple allegorical arena ensured that "...Ben would never run out of gold, and his lines would always and forever be exchangeable for gold coins. Finally, a sustainable accounting system!..."

Now, given that you have climbed to the upper seats and yearn to grasp at life beyond the training ground, it is indeed fair to contemplate "Ben" spending/exporting the very last of his treasure. Thus wondering about the end of the story, you ask, essentially, "What then?"

In the real world, "Ben" would either become a charity case -- relying on an inflow of generosity from others; or absent that, he faces the cold reality that he will likely wither and die... UNLESS... he is finally willing to roll up his sleeves and toil out of dire destitution. And if the choice is for toiling, his first choice is a matter of ethics: does he choose to toil at acts of warfare (attempting by force to take what he needs from a neighbor), or does he choose to toil at productivity. And if his choice is the ethically appropriate path of productivity, his next choice is a matter of economics: to assess the landscape and set upon procuring what he needs either directly by acts of self-sufficiency, or indirectly through trade with a neighbor,,, or some combination thereof).

And also you ask, what of Chen's wishes for retirement? In a simple allegorical arena, as in a person's life, a man may indeed like to look to a final period of retirement. But outside the confines of this simple tale, out in the realm where "Chen" is not merely a mortal man but is instead an ancient and enduring nation, it is not a rational extension of the allegorical discourse to speak of a formal/final period of "retirement". Perhaps, rather, you mean a temporary "period of relaxation" as a reward for the prior period of toil? And if so, how is that any different or more difficult to imagine than the early period of ease that "Ben" had been seen to enjoy within the confines of the allegory? And to be sure, beyond the simple allegory exists a wide world of other global participants amongst whom "Chen" will more assuredly find for his golden accumulations a mutual respect that far exceeds anything he could expect to receive for any number of those sandy lines offered ad infinitum by a leisurely Ben.

Gold. Get to work... and get you some. --- Aristotle

Motley Fool said...


I believe I am really going to enjoy having you around to share your thoughts.


Ps. If you don't mind... Stepping out of the allegory it is obvious that there are more than two players, and Ben will at some point spend his last gold, if he so chooses, since it is not a simple system limited to two individuals. The introduction of a merely a third person , who affords Chen more respect, would limit the value of gold (so as to be dissimilar from the allegory).

AdvocatusDiaboli said...

Hi Aristotle,
thanks for the explanation. Let's say, Chen was just happy to have a brother named Warren B., who told him to take any kind of real wealth, land, food, steal, arms, tools, slavery contracts... instead of any kind of tokens?
Can we agree that Chen would be in a better situation, either way of outcome you explained?
Thanks again & Greets, AD

Motley Fool said...


You are messing that analogy up so badly I want to cringe. xD

Of course real stuff is better than tokens that would never be repaid. What do you think China is doing with their tokens at present?

In the analogy however, we had reached the stage where Chen was receiving gold, and not tokens anymore.

Gold is better than most real stuff (beyond what you consume).

Marginal utility and all that. What does one do with a bag full of hammers?


Aristotle said...

To Motley Fool (10:53 AM)

"...limit the value of gold..."

That's right! The real world would not bear witness to such a strictly bi-polar (two-party) system in which an extreme point could be reached where the final indivisible atom of recognizable gold in the hands of Ben must do battle with the unresolvable mathematical singularity by which its value is asked to approach infinity as it is halved and quartered and so forth on the road toward hydrogen and then quarks and whatnot...

We certainly don't expect anything nearly so lofty or hypothetical. The rational limitations upon value within a multi-participant world will be quite high enough.

To AD (11:38 AM)

As implied by FOFOA in the original story, Chen did exhaust the options of accepting/buying/importing from Ben all the available fruit (to the point where the surplus sadly rotted) and tools (to the point where Ben's productive capacity had been effectively exhausted, to say nothing of his uncertain willingness to work), and therefore it all came down to gold as the final focus point -- the final outlet for settling the economic score after all other avenues of bookkeeping and barter had been taken to their practical limits.

Gold. Because you've met your immediate needs, and then some. --- Aristotle

sean said...

Perhaps Warren B. could work for Chen, as ticket inspector on his Maglev...

One Bad Adder said...

sean: - That's NAUGHTY ;-)

Aristotle said...

victorthecleaner's comments @ February 6, 2012 12:16 AM

"... Finally about the use of the reserve. When freegold is in operation world-wide, there is no need for the CBs to hold gold, except perhaps as a short-term buffer and, of course, in order to inspire confidence in the currency. In times of normal operation, the CB gold will not need to flow."

Victor, I confess that I am bewildered by the purpose of that passage. This is not much unlike saying:

"Finally about the use of the air. When oxygen is present world-wide, there is no need for the lungs to hold their breath, except (except!!!) perhaps as a short-term buffer and, of course, (of course!!!) in order to provide conditions suitable for continuation of life. In times of normal operation, the lungs will not need to breathe."

Is it not?

And yet delightfully -- almost paradoxically -- after that attention-grabbing Chevy Chase-esque pratfall (yes, I can almost hear it... "Live from New York, it's Saturday Night!..."), the bulk of that post's following commentary made a worthy reiteration of the basic premise at play in the transition of the international monetary system's very U.S. Dollar&Bond-centric HERE to a much less sovereign-reliant THERE. . . . . . . So at the end, I'm left scratching my head about why you elected to frame it all up front as being more or less contradictory to the premise largely advanced through FOFOA...

But whatever the case may be on that, your several points to AD were well made at 1:08 AM, 1:13 AM, and 3:58 AM.

Gold. Get you some. --- Aristotle

One Bad Adder said...

AD: -

I find myself agreeing with you re: the Euro ...and have done for several years ...however,

It may well be said the Euro "IN the current system" is naught but the poor cousin of the mighty $US.

What Ari and FOFOA are elucidating (and very eloquently I might add) how said Euro will make the transition "into the hereafter".
Poor cousin she "currently" may well be HOWEVER, by design, she's destined to receive a GOLDEN inheritance on the much-heralded death of the regime du-jour ...IMHO.

Anonymous said...


Victor, I confess that I am bewildered by the purpose of that passage.

Me too. It wasn't quite Saturday night but rather Monday morning ... where was the coffee?

Good night.


Edwardo said...

Regarding Warren's employ on the Maglev, shouldn't that train loving old faker be serving in the Buffet car.

costata said...

Return Of The King ('s Less Than Successful Cousin)

And ditto arguing the merits of silver. If you even get close to proving your point they will call you names and accuse YOU of being nasty. And for what?

They will never concede even as simple a point as that the Euro by design is evil and from the beginning it was being used as a tool to enslave the Common People. Just like the fiat-dollar I might add.

I believe one of the conventions established during the silver open forum is that the word evil should always be in capital letters - thusly - EVIL.

And perhaps a tantalizing hint of something we can look forward to from Desperado now that he has once again rejoined the discussion:

If you even get close to proving your point...

Lead on, Sir Desperado!

Gary Morgan said...

We are getting some very insightful and illuminating nuggets of information on the blog's comments section these days to guide us along the trail, I appreciate them all.

I have been wondering around the practicalities of world trade under a freegold system.

As trade imbalances are the total of all of the bilateral trade between countries, and specifically many different entities (most of them private companies), I am trying to grasp how central banks gold will be utilised to balance those trade deficits?

I know that in the good old days France was always keen to grab the American gold, and again, I have always wondered how the system actually worked. I believe the French government could simply exchange dollars for gold: but whose dollars, and who got the gold?

To my simple but practical mind, I can't link company transactions settled in fiat, with governments getting involved with gold.

Is it simply that companies getting paid in (for example) dollars will choose not to hold dollar assets, but will instead choose to buy some gold from the market, thus net imports will keep the currency strong and more gold will flow to that country?

I grasp the concept, just wondered if anyone else has grasped the practical, real world way it will actually work? Or maybe even remembers from pre-1971 days (I am far too young!!).


abe said...

This was emailed to me by a relative for political reasons. I thought this was quote was interesting -

"ROMNEY: There is no question but that the action of President Bush and that Secretary Paulson took was designed to keep not just a collapse of individual banking institutions, but to [b]keep the entire currency of the country[/b] worth something and to keep all the banks from closing, and to make sure we didn't all lose our jobs. [b]My experience tells me that we were on the precipice, and we could have had a complete meltdown of our entire financial system, wiping out all the savings of the American people[/b]. So action had to be taken."

While certainly not news, I do find it amazing. A presidential candidate says the entire financial system was on the verge of meltdown, and J6P thinks "Phew! glad that was taken care of.... Wait! Did you just socialize the losses! I'm furious!" All the while the system continues to teeter on the brink with J6P running right for it.

abe said...

Forgot the source... So sorry real clear politics!

Unknown said...


Read more FOFOA.

Aristotle said...

Gary (3:25 PM)

I have 2 minutes to attempt this response prior to departure for another commitment, so I apologize for incompleteness and brevity.

It suffices to say that your thoughts are along the right track. There is to be no official compulsory linkage with respect to gold between the international market's doings and any given central bank's conduct of policy.

The market shall do as it may, and central banks shall endeavor to conduct their national monetary policy to their best ability (failing at times). Gold's role in the whole affair is that is simply the best/ultimate consolidator of wealth available to mere mortals within the marketplace, and central banks prize it, too, as their most reliable reserve asset. That is the extent of "linkage", such as it we might try to label it, between the marketplace and the CB reserves. One party has no obligation to the other with respect to the flow of gold, but each endeavoring with a reasonable degree of self-interest will likely result in an appearance of overall coordination, as if all parties were guided by an invisible hand. Almost spooky, but not really.

The concept is so simple it defies... hell, out of time.

Gold. Get you some. --- Aristotle

Gary Morgan said...

Thanks ZenS.

I have so far read all of 2010's posts and comments, all of 2008, most of 2011 (April onwards), and am currently up to mid April 2009, so I am getting there.

But a quick glimpse of 'Bondage or Freegold' tells me that Fofoa read my mind of today back in July 2009 and answered me in advance (how do they do that?!?).

Gary Morgan said...

Thanks Aristotle, I think I get you.

Gold will simply flow to where the producers are, one way or another, via market forces.

costata said...

As with all reports from Mish Shedlock this one should be checked against other sources.

IF these stats are correct it does not bode well for the near term future of the US economy.

Analysis of falling consumption of petroleum distillates and gasoline:

Wendy said...


Only in America do they make a beer and call it platinum, j6p must be in heaven ;)

I find it very intersting the use the PMs in the superbowl commercials. I wonder if it portends a trend?

Wendy said...

Desperado..... welcome back :D

I came across a blog post yesterday, you will love it ;)

One Bad Adder said...

Most pro-GOLD advocates point to it's distinguished "past" as a currency/facsimile to help identify how it might be somehow cobbled into a "future" System (ie: by those who fall into the Gold-Standard Camp)

Yes Gold DOES have an illustrious past ...and may well "improve on" any future system by it's inclusion therein ...however -

Gold per-se actually has NO past, and NO future! What it DOES have (in spades) is a PRESENT!
...and by implementation of what is termed hereabouts as FreeGold - ie: as a Supra-systemic arbitrator, this unique property of GOLD is being utilised to it's fullest potential.
1Oz of Gold the here and now, is essentially the same as it was yesterday, tomorrow ...and whenever you choose to conduct an analysis ...past OR future.

WHEN accident OR design the World en-masse comes (back) to this realisation, FreeGold will be a fait-accompli IMHO.

Wendy said...

Sir Adder,

Freegolding is where I'd love to be, however if in fact the Fed et al are able to stretch it out further, I don't mind. north American society might have a bit more time to prepare, especially if they start seeing commercials on prime-time TV claiming gold is wealth (I can dream).

In the absence of a freegold environment, I am very comfortable with my savings in not so free yet metal :)

Wendy said...

Hmmm Sir Adder,

I just went outside, smoked a cigarette and thought about what I just typed. I take it back!

We in North America have reaped what we have sown with every opportunity to do it differently.

The evolution of free-gold would be so wonderful for Europe, and particulary Greece, Spain, Portugal, (the PIIGS).

Say goodbye to austerity.

Or is this pie in the sky?

Desperado said...


The Euro was conceived, along with the EU, in the ashes of WWII by those remaining of the elites from the previous order. Think of Goering and his looted art. The elites are like weeds. This is a cycle that has been recurring since time immemorial and will surely repeat after the gathering storm has subsided. It is patently clear that EU does not even vaguely represent what little consensus there is between the various peoples whose best interest it supposedly represents. If it is not representing the masses, then it is clearly representing some faction, call them the elites, that have immense power. And this faction clearly controls the central bank, because he who controls the CB controls the government. And it is in control of the entire government bureaucracy too. So ever since WWII this faction has consolidated power to the extent that they are dictating to what are supposed to be independent states not only who shall lead them (Papademos and Monti, both ex-GS) but also to varying degrees, their finances. This is a defacto CB and Treasury takeover in the sole interest of this faction. I would call this EVIL even if I didn't suspect this faction of committing murder, causing wars and spreading misery all in their own selfish interest.

FOFOA's monetary and physical planes account for little of what is important in life. We know how war and hyperinflation can tear a societies moral fabric apart. We have seen how the powerful have been able to start wars and corrupt and control the markets.

So when Victor says that individual countries can default without taking down the entire Euro, I want to retch. This means that this disgusting EU manipulation and control in the interest of these elites will continue and the goosestepping down Hayek's road to serfdom will continue indefinitely. But I don't think that it will be that simple, as DA describes. Things will explode long before then, and I think the elites have a plan B. And if their plan leads to them being able to somehow use their "gold reserves" to save the Euro (sure, call it freegold), the EU, and the control by the elites, then I don't think that I will like it. Unlike Another, I sincerely doubt that they would accept me among their ranks and I don't want my grandchildren to be their vassals. It has a lot more to do with than how many oz's of gold I have when the collapse is complete. I don't want to walk in the footsteps of giants, I want to see the end their centuries old rule.

So I'll just sign off now, FOFOA doesn't need me retching all over his comments section.

costata said...

These days with ZH material you often have to draw your own conclusions but IMHO some interesting spade work here by Tyler Durden on the quality (as opposed to) quantity of US jobs from a tax receipt perspective.

Several comments about the participation rate calling into question the headline number too.

FOFOA said...

ARI(!!!), it is so wonderful to have you back and in action… and to watch it all come together so nicely. With Victor's (lack of) coffee, AD's euro-flavored haterade, MF's keen limit shot, your magical mixology and, finally, Gary's insatiable thirst… it's all just melding like an orgasm/death spasm chaser! (Apologies to Indenture ;)

As you say, it's so simple it defies.....

MF, yes of course there is a limit. There is a natural limit to any economy's ability to save, to defer consumption. We must all consume to survive, and we can only produce so much more than we consume. Once we hit our maximum rate of production, we can only continue increasing our rate of savings by consuming less and less, and obviously there is a limit because to give up consuming altogether is to move on into the ACTUAL hereafter.

Call it the savings rate ceiling, and likewise there is a consumption rate floor. In the monetary and financial hereafter (Freegold), economies of all scales will cycle back and forth from surplus ex-gold (excluding gold) to deficit ex-gold and back to surplus ex-gold. It is a natural adjustment mechanism.

In the here&now ($IMFS), net consumers can seemingly net consume indefinitely. Just look at the US trade deficit for the last 40 years. Our average for 30 of those years has been to import 26% more than we export. You'd almost think there was no floor. And the flipside would be that there is no ceiling to how much value China can save. That's the Ben&Chen nightmare scenario, down to the last Higgs particle.

Remember I mentioned to Victor that reserves are like savings for the CBs, and that reserves/savings act as a kind of rechargeable battery of value? This analogy has some serious legs. It scales well, from an individual on up to an entire economy Superorganism or its CB. It works on the time dimension, with periods of recharge and discharge. A battery system is generally a backup system with limits, ranging from fully charged (ready to go) on down to completely discharged (worthless in a pinch), so it covers our floor and ceiling limits. We can talk about efficient use versus wasteful use of this stored value. We can talk about how individual savers actually "feed into the public grid" like running your electric meter in reverse with a dope solar array. Basically, this analogy has a lot of potential for me.

So with this in mind, we can think about how the net-producers like China and Germany are basically pinned at their ceiling limit in the $IMFS and have been for some time. Meanwhile they keep lending real goods and services to the Bens of the world, the net-consumers, and stacking up their debt notes. But their rechargeable batteries of value long ago reached full charge. All the juice being pumped in today (via continued lending to the debtors) is wasted and can never be recovered in real terms.

So what about that CB (systemic backup generator) gold? Gary asks:

"As trade imbalances are the total of all of the bilateral trade between countries, and specifically many different entities (most of them private companies), I am trying to grasp how central bank gold will be utilised to balance those trade deficits?"

Well, Gary, it's not quite as Victor said earlier:

"When freegold is in operation world-wide, there is no need for the CBs to hold gold, except perhaps as a short-term buffer and, of course, in order to inspire confidence in the currency. In times of normal operation, the CB gold will not need to flow."


FOFOA said...


I have written many times that ALL GOLD within any currency zone will act as reserves for that zone (the zone's rechargeable battery). Perhaps this is what Victor was getting at. Whenever anyone decides to discharge some of that stored purchasing power (sells some gold) it exerts a downward influence on the currency price of gold in that zone. This, likewise, exerts an upward influence on the purchasing power of the currency… (because the price of gold is the new benchmark for purchasing power, see?!)

It's not just about cancelling base money, Victor, it's about the currency price of the purchasing power benchmark chosen by the net producers. This may seem contrary to my post at first (where I wrote that gold is a closed circuit with a double float), but it's not. Whether a private saver or the CB sells (or buys) gold, it will have similar effects on the currency in that zone. The difference is that one is part of the Superorganism's currency management, and the other is the central (CB) manager. It's not about hard money or easy money, it's about balance.

Let's say you want to encourage exports as a currency manager. Do you buy gold or sell gold? And what if you want to encourage consumption in your zone? Do you buy or sell official gold reserves? Remember this, from the end of Gold: The Ultimate Hedge Fund?

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

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

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

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.


AdvocatusDiaboli said...

"Let's say you want to encourage exports as a currency manager. Do you buy gold or sell gold? "
e.g. The easiest way: in a rational (freegold) world, you could buy gold preferable directly from the outside of your currency zone, and pay with your own currency.
Now, how is it done today? Just keep the finger on the printer and wait flooding paper over paper (aka Swizz National Bank). Or if you are the FED you make a world tournee with your helicopter.
Now a quick reality check: In todays world those ongoing gold purchases have what volume?
And how do you do it in a currency union? Oh wait a minute, Greece CB bought last year gold.... I am waiting for the success :D
Greets, AD

One Bad Adder said...

Wendy: -
Au contraire Ma'am, I feel Austerity may well be the order of the day even after FreeGold least for us with a Western perception.
It's a pity they didn't get the Freegold thingie up and running as planned (I think c 2001) as NOW our Euro-peon cousins are individually and collectively taking it in the teeth complete disproportion to what was intended IMHO.

AD, Desperado etal: - Man up Gents!...your interminable pergatory nears it's end I feel ...and the DARKNESS? ...won't hurt you unless you let it.

Anand Srivastava said...

The Greece et al are in trouble because they did not observe austerity at the right time :-(. Freegold being a rational system will not allow irrational choices.

Clyde Frog said...

Freegold in and of itself won't prevent irrational choices.

But rational self-interest will, once Freegold finally shines a spotlight on reality.

AdvocatusDiaboli said...

and before any Freegolder EVER hails the Euro again, they should read (and understand!!!) this:

Max De Niro said...

Spanish speakers amongst you may like this

It came from a non gold-focused source.

Max De Niro said...


The Crisis has arrived in a galaxy far far away...

Yannick said...

Worldwide negative bill yield watch:

02/07/11: Switzerland sells CHF1.41415bn of 91-day bills at yield of -0.099% (Source)

01/09/11: Germany: A €4bn auction of six-month bills drew a negative yield of 0.0122 per cent (Source)

Motley Fool said...


For what it's worth (which is likely not much), I never found your posts to be rude, or disrespectful.

I quite like contrary opinions. In this case the only danger I see is that you may realize your mistake if you spend more time here. :P

Also. OBA is correct in pointing out that the current $IMFS euro is quite terrible, as you and AD keep complaining. This much is true. The FreeGold euro is a different kettle of fish though.


Motley Fool said...


My Ps. was intended as a simple addition to Aristotle's reply to AD, not contradiction. :P

I do like your analogy, it is useful. The analogy may be useful in demonstrating and aspect of how Freegold exhibits antifragility.


Ps. Oh and VtC was just trying to be a smartass. Eh vic? ;)

costata said...


Social pirahnas:

Clyde Frog said...


TARGET and the system of debt-as-reserves is not a euro construct. The problems you (and Desperado) lament are due to the $IMFS system, which today the euro exists within.

The other euro that will come into it's own in a Freegold environment is the one we are glad to understand. The fact that the existence of today's euro facilitates the migration to that better world on the other side of the prism. A world that otherwise would be like Back To The Dark Ages.

It's A Tale of Two Euros.

So just strap into your golden ejector seat, and wait for the show to start.

Clyde Frog said...

It's true though, costata. They really did make us pay for the rides.

Crack said...

Blog Party

Like Eating Glass

AdvocatusDiaboli said...


I give up, I really can not take that "Euro is different" jerking off crap any longer.
Byebye, and have fun with that Euro-MTM-BS, I wouldnt interrupt you any longer.
And by the way: Listening to that stupid reasoning and just climaxing every three month over the first MTM balancesheet line, without even understanding a single tip of the TARGET2 iceberg, ignoring any kind of reality, I think I better buy silver&stocks.
I have fallen far too long for that stuff.

sean said...

Thanks for the reply above FOFOA - makes sense.

Interesting finds Yannick. I don't know much about bonds, but this post seems germane. quote:"if investors increasingly doubt whether the euro can remain in existence, then negative German government bond yields are a totally rational outcome."
Extrapolating conversely, if German government bonds yields are negative, does this mean Desperado and AD are rationale??!

Gary Morgan said...

AD and Desperado (welcome back D),

I try to avoid politics, but in this instance I thought I'd make a comment.

I live in the UK, and suffer the interference of the Euro-institution elites via the laws they impose on us, and like you I detest it, the lack of democracy.

But here's a link that suggest where this may be headed:

Ultimately, as far as individual governments are concerned, they will deliver what the electorate ask for. The French it seems are going to decide against austerity in upcoming elections, and opt for the continuing delusion of socialist spending and state control (no real surprise to me).

Now, assume in the UK the same happens, and the Labour party get re-elected. They will do the same, spend, spend, spend, debt upon debt.

(I'm getting to my point)

The only difference between the 2 countries is that in France, the market will force reality on the government, as their bond yields will soar, and no doubt they will end up in the Greek/Portugese boat.Austerity (reality) will be forced.

In the UK, based on current BoE/Govt actions, the market might try to force reality on the government, but the central bank will step in and announce huge QE to buy up the debt.

Now, which do you prefer? As a saver, you have to prefer the ECB approach, as they are protecting the stability of the currency, whereas Sterling would be hung out to dry, sliding towards collapse.

So, nature will sort out the politics, and socialism to boot (and no doubt with it the horrible EU political set-up), and reality will arrive.

It's just a matter of sooner or later, and later just means a currency collapse. I hope you can find a way to see the ECB/Euro currency is your saviour, not the problem. But I do appreciate your hatred of the political set-up.


Matt said...

Hi AD,

Don't lament it too much - there is a very particular viewpoint on this site but that is ok, its just one corner of the WWW in the end of day.

There's still plenty of very good insight available here, and potentially a greater insight into the world we will one day inhabit, just try not to cross the blog politic as this little corner of the WWW is 'taken' by Freegold & FOFOA.

DP said...

Ultimately, as far as individual governments are concerned, they will deliver what the electorate ask for. The French it seems are going to decide against austerity in upcoming elections, and opt for the continuing delusion of socialist spending and state control (no real surprise to me).

Imagine a France where a lot of the time its currency is crazy-strong and the ECB are keeping their finger hard down on the print button to try to meet their single mandate of 2% HICP inflation across the Eurozone. They'd be pretty much giving the cash away, just trying to find enough people to take it and help them weaken their currency in terms of goods and services. I'm guessing the socialist government will have little problem financing pretty much whatever the electorate want, at affordable rates of interest.

Just a thought.

AdvocatusDiaboli said...

Hi Gray,

One last point to your comment:


Why: Because the Euro-Balancesheet is just a political smoke and mirror ripoff. I provide the link above why, has anybody read and understood it yet?
Better a clean balancesheet, that tell's you how broke you are, than a BS stuff like the Euro, simple as that. I guess that was also the reason why Weber&Stark said goodbye to the ECB, having enough self-esteem not to waste their time and person any longer.

Or to put it with the words of Doug Casey: The dollar is an I-Owe-You-Nothing, the Euro is a Who-Owns-You-Nothing.
Greets, AD

Anand Srivastava said...


I had similar issues with discussing on a low carb blog that carbs are not the bad thing. But nobody understood. After a couple of years now they do accept a higher carb approach, but it still is not very popular.

I stayed there because there was a lot to learn.

Here also you will not be able to effect a change, you can only hope that people will realize in time.

Stay here if you are learning something otherwise not much point.

That being said, I am not sure that your point of view is correct :-).

I agree that people are not always rational. People as a whole always have a very short sight. But they will not do anything purposefully that will jeopardize them in a short time. Globalization gives a lot of money to the rulers. Not so much for rulers of isolated countries, unless they have some very important thing to sell, like oil. This normally works only for small countries, except in the case of communism.

What does america have, that others don't have? What would be the benefit to the rulers if they tried to isolate themselves. Not much. Can america become communist? I can't see how.

Anand Srivastava said...

AD you are a German, and you are reaping the benefits of the Euro, and you are complaining. The prosperity you have is because you maintained an austerity program in-spite of a possibility of living on debt. Now you have a large export. You are selling to the in-trouble countries.

Compare yourself with China. China has been selling to the rest of the world. What are they getting in return, USDs. You are at least getting Euros. Euros have some backing at least. If the countries default and leave you will have their gold that they pledged when they joined. Your government is not paying them much money.

I think you complaining when you are actually the benefactor of the Euro. You compare yourself with people in Greece. You have a very low employment rate. They are literally suffering.

I am not sure why you are complaining so much about the Euro. I could understand it coming from a person in Greece, but not from Germany, which has largely benefited.

Gary Morgan said...

Hi AD, there wasn't a link?

One other point to consider. You are again rightly concerned that the ECB balance sheet has expanded a lot recently because of the liquidity it is providing to banks via LTRO and other mechanisms.

Whilst I am all for banks suffering the consequences of their folly, and would love to see them allowed to just go bust, I think you would have to agree that Europe-would havoc would ensue if the central bank just stood back and allowed banks to fail.

What would it be like, a situation where savers would literally lose their hard-earned savings because their bank has gone bust? Not good.

So, again, the ECB are just doing their job, keeping the banking system going for the general good.

I suggest you don't get hung up on the balance sheet, as when gold is revalued at 'the day of reckoning' it will more than make up for the crappy paper.

It all ties together, I hope you can see the connection. For what it's worth, just 10 months ago I thought the Euro was a pile of crap, the ECB a joke, but with plenty of reading and thinking (and an open mind) I have connected the dots for myself.

I live near the coast if you want to buy some sea-shells from me (I'll sell for Euros!).

DP, I'm not sure on that one, mainly as I can't see the Eurozone as a whole leading to a very strong currency.

DP said...

In a world where the euro is initially the only sure route to getting your mitts on your choice of gold and/or oil whenever you want to, I think the euro will be strong and the ECB will be wearing out the CTRL+P keys on their keyboard in their attempt to meet their mandate.

KJ said...

Sean, the comment from the link you posted:

"If you would like to safe-keep more than a few millions of dollars, you cannot hide the cash under a mattress, or buy gold or have FDIC insurance to keep your wealth safe if things hit the fan. So your only option would be to park your wealth in government treasuries, hence pushing the price up to a point that you may be willing to actually pay the government to store your money. Hence, negative yield on the treasuries."

gather that's the general mindset - business as usual - until it's not.

btw, aren't those german bonds denominated in euros?

AdvocatusDiaboli said...

Am I here in a nuthouse?

"Germany profiting from the Euro"?

Germany might as well just dumb the goods right in the port basin, saves the oil for the freight to greece and keeps the german CB out of trouble:


Where is the fine print that with those euros I have a claim to purchase any kind of physical gold which is stated on the ECB balancesheet?
You want physical gold? I got something for you: Just bomb the house of somebody who hoarding gold. Once the house is burnt down he will spend it, to rebuild it.

Gary Morgan said... much gold on the BB's balance sheet. Mmmm.

Just wait til that is truly marked to market in its physical only form. It will dwarf the TARGET assets that have upset you so much.

My best advice, having been ignorant myself: stop posting, stop getting angry, and delve into Fofoa from the beginning, including comments. With an open mind.

Then buy some gold, and enjoy peace of mind. Just don't take too long!

scarlo said...

I'm relatively new around here so I don't have much thought to share, but I wanted to express my thanks for FOFOA's blog and writings, and now Aristotle's posts. Just watching and learning here @_@

Alien said...

I understand you perfectly.
WE live in Germany, maybe you read "querschusse". Please don`t leave.
Do nor forget, we speak German, our access to information is not unilateral.
FG is one story, the euro is another. The bifurcation could happen with or without the euro, only the question is when?

Nobody here understands the unemploymentin Germany, the trade balance, the Target2 in DE and so on.They have no idea that 8-9 MILION people leave on subvention from our socialist state. Actually they no NOTHING about Germany, only the lies from MSM.
Please stay around, you can articulate yourself much better than myself and I am glad to hear you.
It`s a bit obsolete only about FO/A thoughts to hear, but FG is a Mandelbrot evolution.

milamber said...

FOFOA (& others who responded to my questions several posts/weeks back),

I just wanted to say thanks for the responses to my questions about gold falling back in the 80's.

Although i had already read & therefore (ASSUMED) i understood, i am back to rereading FOFOA ( and comments), since a lot of my questions were addressed in earlier posts. I am also spending more time on Aristotle's posts as well.

Because the questions hadn't formed in my head in 2012 weren't there when I first read through FOFOA, I don't realize that they (and others that I have) were answered until well after reading the posts.

Hopefully that makes sense.

Anyhoo, I didnt want people to think that their comments were ignored since I hadn't posted any followups. I am still processing them as I fight against tired head.....

Time warping Back to 2009 FOFOA....


Alien said...

do Americans know that Ferdinand Kirchoff. one the high Judges from the Constitutional Court - Bundesverfassungsgericht- hsaid that "We have never had true capitalism in Germany" ?
Google for it if you don`t believe it. (Den reinen Kapitalismus hatten wir in der Bundesrepublik auch nie.).
So much to Germany and free market!


Anonymous said...


Gary offers good advice. Look, this is blog dedicated to the writings of Another and it means the participants here are going to either embrace the Freegold thesis or they are going to move on to somewhere else where they can embrace a thesis that satisfies. Changing this blog or trying to sway it in such a way that it will conform to your notion of how things are or should be is pointless and a complete waste of your time.

Skeptics are welcomed with open arms here with the expectation that they will evolve through discussion and eventually bring further understanding upon themselves as well as others who are learning the concepts. Even those who are gleaning nothing new from the discussion can prosper by discovering new ways in which to present and debate the material. However, a skeptic's usefulness quickly becomes a liability to this blog when he takes on an agenda or personalizes the debate. Your skepticism is noted and is not being missed.

You really should remain here only as long as you can satisfy yourself that there is something worthwhile to be found. I believe there is plenty here for you. I also believe that you have not read all the material available. If I am wrong in this then I stand corrected. If however you believe there is no chance that you can ever see legitimacy in the Euro and the ECB as it applies to Freegold, you should simply move on.

I found this blog by accident shortly after FOFOA launched it. I have read every post many times over and my understanding has evolved over the years. I was not totally sold until a couple of years ago, but I saw the debate and the material as useful to my "maturing" process. I am glad I stuck with it, and hope you do as well.

DP said...

Alien: FG is one story, the euro is another. The bifurcation could happen with or without the euro, only the question is when?

Yaaaaaaay! :)

The euro isn't Freegold. It embraces the inevitability of Freegold and prepares itself accordingly for a Freegold world that will materialize when the present $IMFS system dies.

Jeff said...

I hear lots of euro hate, and I know what FOFOA thinks will happen, but what do the euro haterz expect to happen? Worldwide HI? Dollah reserve 4evah? Gold standard? Bartertown? Please provide some details, euro haterz.

Some quotes to make AD's head explode:

FOFOA: The ECB has one plain and simple mandate, to act with regard to a target CPI that is statistically harmonized across different economies dealing with different economic factors. In other words, the job of the ECB is to maintain stability in the purchasing power of a common currency against the general price level in many different countries.

This simple architecture is designed to work best in Freegold, where the price and flow of physical gold will automatically regulate and relieve the pressure of economic differences between member states.

A/FOA: This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

DP said...


My view is that already today (since the birth of the euro) we live in a world that is increasingly a "Reference Point Gold" (RPG) world — based on what I witness in the charts of relative performance between commodities, currencies and gold over the last decade or so. But we do not yet exist within a "Freegold" world.

I think RPG and Freegold are not one-and-the-same concept. RPG is an ongoing currency management process, currently only undertaken by the ECB as far as I can tell, while Freegold will be a one-time reappraisal of the value of (physical) gold.

The euro brings RPG to the global financial table already, plus it will be best placed to deal with Freegold whenever it should finally manifest itself.

My crystal ball indicates to me, given the horrendous outlook for global trade, that they both point to higher gold prices ahead: one gradually and without fanfare, the other suddenly and conspicuously.

AdvocatusDiaboli said...


FOFOA's writings are great brain food for everybodys own thinking. Again, thanks to FOFOA for providing that, I think everybody can agree that he is great in that keybusiness.
Actually I find FOFOA's writings much more instructive than ANOTHERS prediction. I guess if not completely blinded by the cult, everybody noticed by now that ANOTHER was with his "predictions" completely off grid. This is easy to tell after 15yrs of extreme global events. Sure once the future becomes history, the "prophets" will run into problems. But to reject what reality just in order to celebrate a cult... how do you call that?
Sorry, I am drifting to a strawman, let's put it in another perspective, you use the words "embracing a thesis". A thesis can not be proven, that's why you call a thesis. So you take in science another approach: proving it wrong and stripping it down or rearranging it so far that it can not be proven wrong any longer. That is the absolute only purpose of a thesis. If you do not do that, but instead just "embrace" do you call that?

What remains: I am really wondering how open which people are. Are you willing tacle the thesis, ask yourself? Because if you're not, it is not a thesis, it is your religion. And as we all know from all day life: Never argue with religious people about their belief.
Greets, AD

Gary Morgan said...

AD, that comment (I think) proves that you haven't read much, if any, of the archives of this blog (INCLUDING THE COMMENTS).

If you do, you will see literally hundreds of debates about the thesis, and ironically many here today had serious doubts when they arrived (me included).

So, good point, I agree, but just go read it all, then come back (MF-style).

Until you do, you will lack understanding, and (being frank) credibility, as you will be argung points that were made and discussed one, two or three years ago.

Finally, no one believes the Eurosystem is perfect here, just that it is set up ready for freegold, and that freegold is inevitable.

Alien said...

One simple minded euro hater sez:
1)The damned euro doesn`t work for all euro countries: see trade imbalances, see the miserable CBs balances.
2)there aint something like "price stability: see price explosions EVERYWHERE 10 years later. Go shopping in Europe.
3) the euro is a POLITICAL currency.
We don`t want "European politics" in our purse, we want means of exchange on the basis of true capitalism.
And sorry if my English is not the best but I have the advantage to read in many more languages than many people here snd so I understand by consulting different opinions more than others.
Arrogant? Yes, because IÜm getting nervous to see people here hailing "personalities" with meager contributions and dissing others for not conceptualising their lex.

As I said before FOFOA is right about FG, it will happen after the coup de grace for the DAMNED IMFS, which I hate even more than the euro!!!!!

I want GOLD as REFERENCE POINT for All means of exchange, for true capitalism and meritocracy without state intervention and confiscation and I do not care how it is called.I want neutrality in my purse and I hope gold will punish corruption, thieves and laziness!

Alien said...

I sometimes hate your YTs, yeah, continental, not English my humour but I love your mind.
Of course, shrimps like us need FG but RPG is the universal hail and that is what I`m passionate about and hope to see it soon, so that I even accept a murderous war to take down the IMFS.

Peter said...


So "Euro-Freegold-RPG" is not a valid conflation to use around here, in your opinion? They are three separate, but not entirely unrelated, concepts.

DP said...

You can't please everyone all of the time, unfortunately. So I'll just have to content with pleasing myself. ;)

What is it you're waiting to see about "RPG"? As I said before, my view is RPG is already here and already being used by the ECB to manage their currency's value.

Isn't it "Freegold" you're waiting for passionately?

Or, perhaps from your comment you impatiently await the day when Freegold revalues your gold, and a "gold standard" is restored to the world rather than continue with a credit based money system. Well, this world then.

Incidentally, which world are you from originally? Just being nosey.

JR said...

The Architects

In my opinion, there are two things we learned from ANOTHER via his mouthpiece FOA that outweighed all the other great insights they shared. Those two things are:

1. The true purpose behind the euro and its architecture, and
2. The effect the approaching euro launch would have on gold.

Following ANOTHER's revelations, Jacques Rueff was the first name I put on my own personal list of early ideological euro architects a couple years ago. The ECB itself pegs the beginning of "The Road to the Single Currency, The Euro" at 1962 with the "Marjolin-Memorandum". [5][6]

The Marjolin-Memorandum was the European Commission's first proposal for an economic and monetary union. Robert Marjolin (1911-1986) was a French economist and politician involved in the formation of the European Economic Community (EEC). He was 15 years Jacques Rueff's (1896-1978) junior and, like Rueff, he was an economic advisor to Charles de Gaulle. I mention this only to further the connection between the modern euro and Charles de Gaulle of the 1960s who complained publicly about the exorbitant privilege afforded the US by the use of dollars as international CB reserves, demanded physical gold from the US Treasury, and pulled out of the London Gold Pool which led to the end of Bretton Woods three years later.

What we learned from ANOTHER thirty years later was:

1. The purpose of the euro was to provide an international transactional alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600
Monday, August 8, 2011 - GOLD ABOVE $1700
Thursday, August 18, 2011 - GOLD ABOVE $1800

What I can tell you with full confidence is that this is only the very beginning of gold's functional transformation.

Once Upon a Time

KJ said...

AD, I believe this is the starting point if one so chooses to start by reading Another; please note the forward.

In particular:

"If his "THOUGHTS!" are theory; they are good theory. If they are speculation; they are reasonable speculation. If they are supposition; they are well-grounded supposition."


"We encourage you to find time to read and consider these remarkable postings of ANOTHER with an open mind. In the field of gold and international economics, these posts are sure to remain as fascinating and worthy of careful study as anything you will find on the web today."

This is each persons journey along their own trail and of their own choosing.

JR said...

The Gold Must Flow

So no, it's not a flaw of sharing the same currency that the PIIGS can't balance trade with others in the euro's core. It's a flaw of the current system which existed long before the euro was even born. Within the current system, the euro does remove the possibility of local currency collapse as an alternative adjustment mechanism, but honestly, that's part of what they wanted with the euro. The current system is one of irreversible debt-buildup and gold-debt which sterilizes the flow and price of gold.


what everyone is getting wrong is that a shared currency is simply a standard. Like a meter or a foot, or a minute. It's how you use that standard that matters. If you have less "standards" flowing in then you spend less "standards."

Expenditure is the adjustment mechanism in a fixed exchange rate zone like the eurozone. It is Goldman Sachs and the 66-year old $IMFS that has enabled the circumvention of the adjustment mechanism in Europe, not the euro. The same goes for the US states.

The Privateer writes, "The claim is that the obvious message of the European debacle is that a sovereign government must have full control of ALL aspects of monetary and fiscal policy if it is to prevent the type of sovereign debt debacle now engulfing Europe. As yet, no argument has been put forward for the opposite proposition."

Here's one: Under the $IMFSystem when relatively small currency zones have control of "ALL aspects of monetary and fiscal policy," hyperinflations are relatively common. Hyperinflation is the adjustment mechanism in floating exchange rate zones under the $IMFS. This is exactly why the euro severed its link to the nation-state... Because a) we are still living under the $IMFS and b) Europe has a living memory of hyperinflation.

If you think austerity riots are bad, you should see hyperinflation riots!


JR said...


The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."


Another: If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will horde all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does comes, no paper asset of world economic system will survive, nothing! Not a good thought, no?Thank You

Jeff said...

Hi Alien,

I understand your frustration with the euro, but as everyone has said, the trade imbalance you see now between european countries exist under the $IMF structure. Euro performance after the paradigm shift may be different. The gold must flow.

JR said...

The whole ECB/Euro architecture was built to turn Genoa 1922 on its head, to reverse the damage done and to restore the function of gold which Jacques Rueff knew all too well. The ECB has one plain and simple mandate, to act with regard to a target CPI that is statistically harmonized across different economies dealing with different economic factors. In other words, the job of the ECB is to maintain stability in the purchasing power of a common currency against the general price level in many different countries.

This simple architecture is designed to work best in Freegold, where the price and flow of physical gold will automatically regulate and relieve the pressure of economic differences between member states. If the ECB had been designed to assist the European economies, it would likely have been given the second mandate, same as the US Fed. The Fed has two mandated targets: CPI and full employment. These dual mandates are like fair weather friends, because when the heat is on—like it is today—they actually become dueling mandates. The ECB, on the other hand, is not mandated to assist the economy like the Fed is. In fact, FOA wrote back in 2000:

"Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold."

Like I said earlier, the monetary plane, which includes all that nominal sovereign debt in Europe, is only connected to the physical plane by two things, the price of goods and services (CPI or the general price level, on which the ECB has a mandate) and the price of gold (which the ECB happily floats). I think we can all agree that the aggregate debt is doomed at today's prices. It is fictional, imaginary capital. But those of you predicting the imminent collapse of the euro as a medium of exchange need to explain how nominal euro debt is more likely to break its connection with goods and services than its imaginary connection to gold at today's prices.

I'll give you a few hints. Unlike the US, where the expenses of the same government that calculates CPI rise along with CPI, and where the CB has conflicting mandates that benefit from a statistically-lowered CPI, the ECB has not only met its mandate, but done so credibly. And unlike Indonesia, the ECB does not count gold in its CPI (HICP). Instead, the ECB floats its gold publicly and without worry. So while you're wondering in which of the two choices the disconnect will happen in Europe, consider this: Over the last decade, the general price level has performed more or less as expected while the gold price in euro broke off in 2005 and rose 325% in six years:

January 1, 2002 – GOLD @ €310.50
Tuesday, November 15, 2005 - GOLD ABOVE €400
Tuesday, April 18, 2006 - GOLD ABOVE €500
Thursday, January 10, 2008 - GOLD ABOVE €600
Friday, January 30, 2009 - GOLD ABOVE €700
Wednesday, December 2, 2009 - GOLD ABOVE €800
Tuesday, May 4, 2010 - GOLD ABOVE €900
Monday, May 17, 2010 - GOLD ABOVE €1000
Monday, July 11, 2011 - GOLD ABOVE €1100
Tuesday, August 9, 2011 - GOLD ABOVE €1200
Monday, August 22, 2011 - GOLD ABOVE €1300

Once Upon a Time

JR said...


Don't believe all the noise, and there's a tonne of it right now. They don't know what they are talking about. The euro survives and thrives regardless of how the European debt crisis is ultimately resolved, and no countries will leave the euro. In fact, there are countries trying to get in, and none that will leave short of a coup, revolution or state failure, which isn't even a consideration right now. And even if that happens, the euro will still survive and thrive while the country that leaves will suffer greatly, the local hyperinflation that will ensue being the least of their problems.

Spend some quality time with the Eurosystem's balance of payments and marvel at how remarkably balanced Europe is with the rest of the world. Then compare that with the US balance of payments. As just a quick example, in April (one month) the Eurozone imported only €4.1 billion more goods than it exported. The US, on the other hand, imported $58 billion more goods than it exported, and April was the lowest month yet this year for the US. Of course that's just goods. For services, the US exported $14.5 billion more services than it imported. How much of that do you think was "Wall Street financial services"? Europe also exported more services than it imported, but only €2.8 billion.

So for goods and services combined, the Eurosystem ran a trade deficit of €1.3 billion in April, while the US ran only a $43.5 billion deficit (down from its previous normal $50 billion, but back up in May). Looking back at 2010 (just to get a full year's picture) the US ran a $500 billion goods and services deficit for the year. The Eurosystem (even with those lazy PIIGS) actually ran a trade surplus for the year, exporting more goods and services than it took in! So how can that be? As a currency representing a community of more than 300 million people, the euro is quite healthy compared to the dollar!

Of course there is a huge imbalance inside Europe between the states running a large surplus and those running a large deficit. But with a shared currency the adjustment pressure for such an imbalance is foisted elsewhere, not on the currency. It lands squarely on the politicians, who, like Costata said, couldn't be a more deserving bunch of Aholes. For the dollar, the structural deficit and debt of the US places a massive devaluation pressure directly on the dollar. But for Europe the currency is balanced with no (or very little) adjustment pressure.

The economic flow of goods and services within Europe will of course have to contract as the imbalance retreats. If the euro weakens on the global currency stage Europe will start running an overall trade surplus again, like China, which will soften the blow of a contracting internal economy. If the euro strengthens, things like cheaper oil will help soften the contraction. Internally the politicians have their hands full. No doubt! Externally, the euro is just fine. To the euro, just like FOA said, the politics of the PIIGS and Germany are little more than a sideshow.

And notice I didn't even mention gold yet. Anything that would appear to seriously threatens the euro, like an outright sov. debt default, would explode the price of gold which would simultaneously rescue the euro balance sheet and kill the dollar.

Unknown said...

Thank you JR. :-)

JMan1959 said...

Thanks for this:

"So no, it's not a flaw of sharing the same currency that the PIIGS can't balance trade with others in the euro's core. It's a flaw of the current system which existed long before the euro was even born. Within the current system, the euro does remove the possibility of local currency collapse as an alternative adjustment mechanism, but honestly, that's part of what they wanted with the euro. The current system is one of irreversible debt-buildup and gold-debt which sterilizes the flow and price of gold."

I have been asked many times when defending the architecture and staying power of the Euro: "If they were so prescient in their design of the Euro, why are they having the problems they are having right now?"
You have now given me my answer for them. The design of the Euro is not the problem--it is the debt and the gold sterilization that is the issue, not the currency.

Jeff said...

Of course, the euro could fail. Better hope not.


If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does come, no paper asset of world economic system will survive, nothing! Not a good thought, no? Thank You.

Alien, here is a good quote about price stability after the transition:

blondie: re: gold “backing” currencies in a Freegold system, discussed earlier in this thread.

CB gold reserves are for the management of the currency; this is really a CBs only mandate, good stewardship of the currency.

CB gold reserves do not “back” the currency, although the CB in question may use some of their gold (provided they have some) to purchase their currency from the market, lessening the quantity of currency in circulation and thus “strengthening” their currency. In doing this they are injecting the value from the gold into the currency.

A CB may also do the opposite and print currency (increase the quantity) and use this currency to buy gold from the market. In this way the CB weakens their “overvalued” currency, by extracting the value they regard as excess to requirements and storing it in their newly acquired gold.

Any currency for which the market is willing to exchange gold for is “backed” by gold... by the market’s gold, not the CB’s. The gold a currency is exchangeable for is the gold that "backs" that currency. Any currency should find gold backing at some level, unless the market judges it to have no value at all.

Any currency is only ever backed by the goods and services (value) it is exchangeable for, and in a Freegold system gold is the proxy for all of these, the proxy for value, thus when one knows the current exchange rate of any currency for gold the relative values of all else becomes available.

A CB can use its gold to keep these relative values stable, this stability making their currency more reliable and therefore useful, increasing usage demand for the currency from the market. The market is thus requiring an expansion of currency volume, to cater for increased usage, and the CB issuing such a stable and in demand currency accrues gold reserves as a result.

Anonymous said...


But to reject what reality just in order to celebrate a cult... how do you call that?

Your premise is flawed. The "reality" you cite is not the reality I see, but simply the one you embrace. In fact, what you see as celebrating a cult is from my point of view a celebration of a living and breathing thesis that is standing tall to the challenge of the scientific method.

A thesis can not be proven, that's why you call a thesis. So you take in science another approach: proving it wrong and stripping it down or rearranging it so far that it can not be proven wrong any longer. That is the absolute only purpose of a thesis. If you do not do that, but instead just "embrace" do you call that?

I call that faith. But again your premise is flawed. I have subjected the RPG-Freegold thesis to rigorous examination and will continue to do so until it is either proven a law or relegated to the rather large of pile of failed theses by a competing thesis demonstrating more utility. So far so good, no faith here.

Are you willing tacle the thesis, ask yourself? Because if you're not, it is not a thesis, it is your religion. And as we all know from all day life: Never argue with religious people about their belief.

I think the answer is given above. I am willing to table any thesis when its utility no longer serves me. My goal is the most accurate view of reality that is possible to achieve. Armed with this view I can make the most logical and pragmatic decisions a human mind is capable of. I am always looking for the best thesis, and to date RPG-Freegold is it.

Are you arguing with a religious person? No sir, quite the contrary.

Alien said...


FG is a personal happy surprise for everyone having just a wedding band.

I am exicited about RPG for all currencies and the functioning of the new system. It`s about justice and no free lunch for issuers of "World reserve currency".
Don`t you git it? I want to see the dollar D.E.A.D. I don`t like the pax americana under it.

Yes, you are nosey, sweetheart.
I`m the best breed, East and Western old continent, I`ve seen totalitarian systems, hated it and now I smell dirt again, here.

Anonymous said...


you said that a revaluation of gold would help the PIIGS countries. As far as the basic trend is concerned, this is certainly true, and it would make clear that France and Italy, for instance, are on the safe side.

Greece has about 110 tonnes. If the government would use the entire gold to pay back any debt that exceeds 60% of their GDP (just making up these numbers), i.e. pay back around 200bn Euros, they would need a price of gold of at least 57000 Euros per ounce. So Greece will be in financial trouble regardless of a possible gold revaluation.

In order to get the debt/GDP ratio of Italy down to 60%, they would need to pay back 925bn Euros. With their 2450 tonnes, this would work if the price is at least 11700 Euros/ounce. That looks a lot more realistic, and with this amount of 'backing', they should have no problem with creditors losing confidence as long they have some tax revenue to pay the interest.


Oh and VtC was just trying to be a smartass. Eh vic? ;)

Sure. Each and every time.


until the EU summit in November 2011, Sarkozy behaved like the US governor for Europe. Think of Libya. Think of what he said about the ECB (have to print to rescue the governments) and the IMF. So I thought it had been decided that he has to go. Hollande (despite talking socialist), is way more pro-Europe than Sarkozy ever was.

Then, in November, it seems they turned Sarkozy around. There was this funny press conference in which Sarkozy said "The ECB is independent, and I will not intefere with their decisions" (roughly). Then, Merkel kicked him while he was down and added "The president of France just said that the ECB is independent." I don't know what they did to him, but somehow they put him straight.

Perhaps Hollande is no longer needed?


In a world where the euro is initially the only sure route to getting your mitts on your choice of gold and/or oil whenever you want to, I think the euro will be strong and the ECB will be wearing out the CTRL+P keys on their keyboard in their attempt to meet their mandate.

I agree this is a possibility. As I said before, through the god-for-oil arrangement at the LBMA, Europe paid both the Saudis and China in gold. What for? If it is right that the favour they are expected to return is to switch straight to Euros when the day X arrives, then you are absolutely right.

I wrote 'possibility' because the US military might also have something to say about whether the Saudis sell their oil for Euros.


DP said...

Then are you in for a treat, my superior gened friend, courtesy of your much-hated euro. The best things come to he who waits.

Motley Fool said...


FOFOA opines, and I concur, that dollar might precedes and is required for military might. If we assume day X has arrived, then the USM will limp along for a little while on what reserves they have, but not long.

Oh and DP, I agree that initially the euro would have targeted HI (into gold), but I'm not so sure about the continue pressure once RPG has been adopted worldwide (which should be a fairly rapid development, as the sinking nations grasp for any piece of floating debris).


Anonymous said...


Where is the fine print that with those euros I have a claim to purchase any kind of physical gold which is stated on the ECB balancesheet?

Right now, there is no point in saying anything like this. If you want gold, just go to the BBs in London and get some. They keep the price of gold artificially low, and you should rather thank them.

On the day X+1 when the London market has shut down (whenever this will happen), you can bet that someone else, perhaps the ECB, will make a market for gold in Euros. There is no need for the CB to 'back' their Euros with gold. The market price will be as high as required to find some willing sellers in the private market. Why should the ECB sell their gold under fair value? This stupidity is reserved exclusively for the US (and UK).


Anonymous said...


yes, I understand what you are saying. The trouble is that if your 'little while' turns out to be (another) full decade, there will be some (further) serious damage to the real economies in the meantime.


Motley Fool said...


I cannot imagine the USM machine operating on Hyperinflationary fumes for a decade.

Could you share your thoughts as to how this would be possible?


Anonymous said...


on the voxeu paper by Tornell-Westermann you quoted:

This is relevant only if the Euro zone splits up and Germany leaves (because it looks at the Bundesbank balance sheet in isolation). Since I think the Germans are not that stupid, their analysis misses the point.

Even if you still want to discuss their work, the only thing you see in the TARGET2 balances is that PIIGS debt that was held by private entities in Germany has been transferred to the Bundesbank. Once the debt is written off, someone in Germany will lose. Before it was perhaps some pension fund. Now the loss would be centralized at their CB.

If you are just worried about the German position as a whole, there is not much difference. Of course, you can argue about who inside Germany should take the first hit. Yes, this is a legitimate question, but not the one you asked.


they can certainly behave in a destructive fashion for many further years. Think about Russia today. The Soviet Union was dismantled many years ago. Still, if they wanted, they could create a huge amount of chaos.

I certainly hope you are right and it changes quickly and peacefully.


AdvocatusDiaboli said...

we are talking about more than 500billion by now, still rising, ACCELERATING.

Sure you can say, does not matter, have fun with this great TARGET2 printing press. That attitude is basically the same with the $.

What happens if Greece defaults?
What happens if Greece leaves the Euro?
What are all those magical assets being pushed around for balancing between CB and commerical banks?
In the end it comes down to this: why is TARGET2 misussed to cook the ECB balance sheet? Oh yes, I forgot: The Euro is the first currency to serve the link...lalalala....

Actually I dont care, getting rid of Euro and praying that this BS goes away. This year election in France, next year in Germany. We will see and plenty of black swans ready to land before and in between :D
I personally do not care who gets elected, all the same liers anyway, as long as we get rid of that Euro crap, that worthless money will not be repaid anyway. And I have the very special feeling that the silent majority of Europe feels like that, walking with their fists in their pockets.
What some americans simply dont get: WE ARE NOT THE UNITED STATES OF EUROPE AND NOBODY (even the lazy greeks) WANTS IT TO BE (except those communist Barossos of the world), I DONT CARE ABOUT THE EURO-EXTERNAL-TRADE-DEFICIT DUE TO THIS "MAGICAL EURO" BY "MAGICAL BOOK COOKING".
Let's bring it on and have a nice street lamp party with those crooks.
Greets, AD

Motley Fool said...


I have a few questions for you.

Are there people who like paper money? Like it for exactly the reason that it dilutes their debts and helps them cheat (in reality) the people who lend them money? How many of them are there? What do you propose should be done about them if they are unwilling to mend their ways?


AdvocatusDiaboli said...


The german tradition is paper money, just hard cash, not plastic money. And laws and regulations had been very strict against debtors (I dont remember exactly but AFAIR until the late 70ies(?) there was even no private insolvency, no jingle mail, debt for lifetime, credit only with >30% downpayment...). The germans liked it that way and their DM. So we had the DM and were happy with it. And looking back I say it was a good time and the Bundesbank did a good job.
The italians liked their lira and everytime I went there on vacation there was an additional zero behind the prices.
So what? No problems. Shall everybody live how he pleases. But no....some crooks showed up, telling everybody we need one currency otherwise there will be war again if we would not and we need that for lalala-globalization.
And like I said: Germans are always guilty, so no german dares to question that, otherwise he's a nazi.
Greets, AD

Motley Fool said...

Alright AD

How about this. Let us say Germans are an exception to the rule.

So let's remove Germany from the world map, and then I would like you to reconsider my questions.


AdvocatusDiaboli said...


I know what you want to say, I know what freegold is about. If we would not have "modern finance" there would not be a need for that. Sure FOFOA calls that "lubrication". But on one side you got freegold, which also means (really) free paper on the other side. Who will be the onces to suffer? Those with fixed income, while the rest gets rich by inflating against those. Freegold does protect the savers, but in the same way it punishes the ones who's fixed salary is inflated away.
Anyway, to answer you question: As I said I dont care, shall every nation with its tradition live like they please: The Euro was the worst, it exactly "united" the worst possible opposites available in the world.
You want Freegold? Why not in the earlier EMU fashion?
Greets, AD

And dont you dare to take Germany off the world map;)

Motley Fool said...


I am not quite sure the EMU was needed and that oil would have necessarily become the oil currency as Another suggests. But here we are.

It doesn't help lamenting the past, we must look today towards the future.

There will be a lot of suffering in the change, that much I cannot deny. There is also a lot of suffering now.

I would like to think though, that once the masses 'get it' by demonstration, since it's not that difficult a concept really(save in gold, spend in paper), then future choices as to things such as 'fixed income' will be different.

It's not ideal, but at least after some point people won't be continued to be robbed of their savings constantly, if they choose not to be robbed. ;)


Anonymous said...


The german tradition is paper money

Chopper Ben said that gold was a 'tradition'.

But let's not make jokes about something that serious.

we are talking about more than 500billion by now, still rising

Where do you think this comes from? It is Greek debt that was purchased by German banks, pension funds and life insurers during the period 2000-2009. I don't know what you are trying to say. If you want to turn back history, fine, but I certainly cannot do this for you. If you accept where we are now, sure, you can complain about their stupidity of the past, but the talk is now to deal with the mess. And the Bundesbank took the garbage. Let me guess: Eventually the German savers will be paid off in gold. Post-revaluation.

If the position is still increasing, this just shows there is more and more garbage floating to the surface where the Buba cleans it up.

The real question to ask is this: How the hell could the German savers be so stupid as to purchase Greek and Portuguese government debt with their surplus. If you accept that the average citizen outsources their investment decision to the local banks, then you should ask who was it that regulated these banks and how could the bankers be that stupid.

Well, we all know the answer to that question. So the real key is the question why the savers just lent their money to the bank rather than requesting final and counterparty-free payment in gold. Yes, this is the question. They will all eventually learn the lesson.

Btw, I don't think it would have been much different during the good old Deutschmark times. The problem was that the savers took their savings to the bank and the bank purchased other peoples' debt. Even a Bundesbank could not have prevented them from doing this.

Finally, let us appreciate the beauty of the present mess: The Germans seem to be buying a whole lot of gold right now.


Aiionwatha's Nation said...


I would argue that people like paper money (digital nowadays) because they don't understand understand how the system works and how it is they are constantly undermined by inflation, graft and misplaced confidence.

In the context of banks making prudent loans, central banks serving primarily as clearing agents and government debt prices reflective of a true functioning market that restricts issuance it is a safe and efficient way to trade.

What is going on now is a far cry from that and nobody's debt incurred below production is getting any easier to pay because the costs of living are rising far in excess of wages in deficit areas.

That is one big weakness to the Euro, living expectations and imbalances are 10 years of debt buildup beyond what they were in 2001 and people sense they have been given a false bill of sale.

On the bright side, the dollar is utterly hopeless and will make a transition that probably makes the Greek folks pretty good about where they are.

Motley Fool said...

Aiionwatha's Nation

I agree that the proportions are out of balance due to the current system. But even otherwise honest men sometimes want losses socialized, when it is their own.

I don't have to like the character or agree with the morality to acknowledge it's existence.

I would like to think everyone would use gold coin honorably, and never default, some imaginary paradise.

The real world isn't like that. So I see the utility in paper, as long as it is naturally systemically constrained, such as via FreeGold.


AdvocatusDiaboli said...

"How the hell could the German savers be so stupid as to purchase Greek and Portuguese government debt with their surplus."

Nope, that's not how the TARGET2 imbalances build up. It's e.g. transfering money form the PIGS into Germany into private german bank accounts (shall it be purchases or PIGS feeling the country), and the required (obligatory) settlement by the german CB.

Quote from the article:
"These TARGET claims arise when an international purchase of goods or assets is not immediately offset by a private financial flow. Next, the liabilities of a central bank include the currency in circulation, the deposits it takes from financial institutions, and the TARGET liabilities with the Eurosystem."

I agree that in that article it is not described very well, there are other better articles, but I did not find any in english yet.
Greets, AD

If anybody interested and speaking german:

Anonymous said...


Quote from the article:
"These TARGET claims arise when an international purchase of goods or assets is not immediately offset by a private financial flow. Next, the liabilities of a central bank include the currency in circulation, the deposits it takes from financial institutions, and the TARGET liabilities with the Eurosystem."

Isn't this the same as what I was saying? Someone in Greece bought German products and paid with Euros. At first, the Cash is in Germany. Briefly it showed up in the TARGET2 balances, but the German banks immediately purchased PIIGS bonds and sent the cash back south, offsetting the TARGET2 balance.

The Greeks had purchased German products, causing a trade deficit. But the German banks bought Greek bonds, creating an offsetting surplus in the Greek capital account (foreigners invest in Greek financial products). The Greek balance of payments (trade account plus capital account) was approximately balanced before 2010.

But this was possible only because some private parties in Germany were willing to hold Greek debt that would ultimately be unsustainable and be worth only 20 cents on the Euro.

Now the German savers (their banks) have realized their mistake and since 2010 have been selling these Greek bonds. From the point of view of Germany, this is a huge capital account surplus (unwinding investments abroad and repatriating the funds). This cash, however, is central bank money and routed through the TARGET2 account, i.e. the private parties in Germany have huge accounts receivable whose counterparties are the other Eurosystem CBs or those that owe money to these CBs.

This illustrates very nicely the role of the trade imbalances and why the mess is created precisely because the savers invested their surplus in other peoples' debt.

Initially (this is the credibility inflation phase), the Germans purchased Greek debt, offsetting their trade surplus with a capital account deficit (German money being invested abroad). This creates the illusion of a balance of payments equilibrium.

Of course, this was unsustainable. Since 2010, we are in credibility deflation and the stupid savings are being unwound. The cumulative trade surplus of Germany is irreversible. The products have long left the country. But the cumulative capital account deficit was only temporary. By selling their Greek bonds (to the ECB among others), Germany now gets all the cumulative capital account deficit back all at once. This appears as a huge 'accounts receivable' position in TARGET2.

So the present TARGET2 balance shows a good part of the past cumulative trade surplus of Germany. The part that was initially invested in PIIGS bonds and that has now been recalled and is zero-maturity money with the Bundesbank, waiting to be deployed in a more prudent fashion.


AdvocatusDiaboli said...

okay, that's what I ment saying pushing around "assets" between ECB, CB and private banks.
Which once in detail I dont know, maybe I find more details. But actually does not matter, the money is gone/will not be repaid.
What can Germany learn from that: Screw me once shame on you, screw me twice shame on me. Time to move on and leave the PIGS-club. What is the euro good for, if clearing is just a casino?
Greets, AD

Aiionwatha's Nation said...


Fully agree with you on the conclusion.

Just trying to make it clear that I would argue most folks at the margin don't prefer paper for their ability to borrow and pay back in inflated currency. I think it's more the same mentality as the savers going wild over the SPX in that tomorrow will deliver more prosperity than today.

Neither side can see that on a long-term basis that they are both losing to government, the FI's, poor capital allocation and massive imbalances caused by unrestricted credit expansion and continually socialized losses.

That gets me to another big problem I have with the current paradigm. Bass ackwards incentive structures that continually cripple the productive economy the longer they continue.

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