Thursday, February 23, 2012

Today's (quote-unquote) "Gold"


There were a few great discussions going on in the last thread and so I thought I'd rejuvenate it with a fresh count!

Early on in the thread Hawks5999 quoted me and OG from Yo Warren B, you are so OG! and then asked a question:

FOFOA: "Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

Buffet: "This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further."

Hawks5999: "Can you break down the nuance between these two statements? Because they sound like they are both saying the same thing to me. Sorry for being dense if it's really obvious."


Here was my reply:

Hello Hawks,

Great replies from Max, JR and others, by the way!

It's not really obvious, but I'll try to break it down even further for you. As JR pointed out, price and value are different things. Price is determined at the margin. Think stock to flow ratios with the ratio acting as a governor on the price in both directions.

Warren's stocks have relatively objective valuations through common metrics like earnings, operating cash flow and the sum value of their component parts. This is kind of like the NAV for GLD and PHYS. If the price falls too far below that valuation (it is undervalued), the stock to flow ratio will rise constricting the amount of flow (supply) at the margin where price is discovered. If the price is higher than the valuation (it is overvalued), the ratio will collapse flooding the market with shares.

Now compare that with gold which has no similar objective valuation. Of all the possible "unproductive assets" out there, gold has the highest stock to flow ratio because of its unique, singular properties. To think about it simply, price is determined at the margin—the flow—while value resides primarily with the stock(holders). Does this make any sense? If gold is as undervalued as I say it is, then we should expect the s/f ratio to explode, constricting the flow (supply) at the margin.

Can you see how viewing price and value from this angle puts the onus on the stock holders at least as much as on the pool of new buyers?

"Correlation does not imply causation"

In light of this new perspective, we can see that price can converge with value through the actions of either the current stock holders or the pool of new buyers. And when valuation is of the relatively objective variety, as it is with OG's stocks, it is usually a combination of both.

But in the case of gold, where value is entirely subjective, this is not necessarily the case. In fact, I would even propose to you that, subjectively, those who already possess the physical gold value it higher than those who don't yet hold it. Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.

Cont…

2/4

ANOTHER: "People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold **flowing** during a time that trading would have locked up.

(Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up [to cease flowing] as the price rises.) Westerners should not be too upset with the CBs actions, they are buying you time!"


Me: "Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

"Gold the wealth reserve" means A) only physical gold, and B) in its widest distribution… "which requires a much higher valuation than it has right now." "Correlation does not imply causation." Gold in its most valuable role correlates with it being in wide distribution, but it is not necessarily caused by that. Are you starting to see yet? Perhaps gold's functional change will cause its widest distribution, not the other way around.

Today's "gold" encompasses many other things. Ask any investor what percentage they have in gold and whatever they tell you will likely include mining shares, GLD, silver, maybe some platinum, and possibly not even ANY discrete, unambiguous pieces of physical gold. This is an important concept to grasp, that "gold" today is a bastardized term and the $PoG does not have anything to do with "gold the wealth reserve—which means physical gold only."

People see the "paper gold market" working today and so they think that it can work all the way up. Like we'll go from $2,000 to $3,000 to $4,000 and so on all the way up to $55K. They think that as the pool of new buyers flood into today's "gold" the shorts (or the bullion banks) will simply have to cover their exposure and bid for any physical they need until the price gets high enough for them to get it.

In many ways today's "gold" does need an expanding pool of buyers. But here's the main difference between OG's stocks and physical gold. From my 2010 backwardation post:

Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world **except gold**.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero.


And from yet another angle we can put the onus on the existing stock holders rather than a pool of new buyers.

Cont…

3/4

In the post above you just heard OG talk about three major categories of investments which are, basically, stocks, bonds and "unproductive assets". Through the singular properties of gold (durability, fungibility, divisibility, lack of industrial uses, CBs have it, etc…) along with the focal point principle, we can go along with Warren and focus on only gold as the third major "competitor".

Now in just three weeks I've written posts about both the King of Bonds and the King of Stocks dissing bonds. That should tell you something about bonds, no? So let's say it's mainly between stocks and gold at this point. As I have pointed out, stocks are for investors and gold is for savers. Savers outnumber investors by a longshot, and previously it was bonds that did it for the savers.

So now we've got all these homeless savers that will need to choose between stocks and gold (or else sit tight in bonds waiting to be sheared like either the Greek debt holders or Zimbabwe pensioners). This bunch is NEVER going to choose today's "gold" (the $PoG) en masse. They will likely end up splitting the difference and going 50/50 in stocks and bonds (or cash) while a few put 5% in GLD.

So what I don't foresee is a stampede by those homeless savers into today's "gold". There may well be another mini-stampede like we had in August, but it will display many characteristics of a bubble, including the volatility and the downside, which savers don't like. Savers aren't looking for the next XX-bagger and they don't like beta, so they are a hard sell for both OG and the $PoG. Savers simply want a nonfluctuating asset… preferably in real terms.

So Freegold, newly stabilized at a plateau stasis of ~$55K in constant dollars, will be very appealing to them. Funny to think that they'll buy gold en mass at $55K but not while it's only $1700, but hey, c'est la vie. As KindofBlue wrote: "Early adopters [of the next reference point for purchasing power] are being handsomely rewarded."

But once you realize that gold's highest value and widest distribution are correlated but not necessarily causally related in the obvious direction, the question then becomes how we get from here to there.

As I said (because ANOTHER taught me), "Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero." So you see, there doesn't need to be a stampede into today's "gold" for real, physical gold to become "priceless". ANOTHER wrote, "Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies"."

So now I'm looking only at physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold (i.e., not for paper profits). And I'm wondering when physical gold will stop moving through paper currencies, at least at parity with today's "gold", the $PoG. And I think that will probably happen when the $PoG goes too low. OBA has a neat theory about that.

Look at Buffet's piece above. He's shunning bonds but keeping his cash in bills. That's what the savers are doing while they decide where to deploy that cash. All the financial advisors across the land are advising savers to hold some cash, because they just know there will be some deals soon. And for the really big money, that means T-bills, just like the $20B Berkshire is holding. And when a trade gets that crowded it chases the yield right away, which is why the T-bills are heading to sub-zero yields.

Cont…

4/4

This is the rush out of future-dated debt into Here&Now cash (T-bills for the really big $$$). It's the bank run shoebox under-mattress effect en masse. This makes the dollar look (temporarily) strong and today's "gold" (the $PoG) look weak by comparison, gold bug protestations notwithstanding. So just imagine another quick run-up like July/Aug. to, say, $2,333 correlating with a big spike in the USDX/$IRX (price) and then a crash in the $PoG down to ~$1,000 or lower. How hated would today's "gold" be by the homeless savers then? That's some serious beta!

So that's why I said in the post, "ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands." And at the same time… because the return is surprisingly shitty all of a sudden… "physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only."

FOA predicted something like this as well:

FOA (06/12/00; 19:48:25MT - usagold.com msg#26)
Put your cards on the table!

The current paper gold world will die (burn) as its value to users erodes, not increases!

…Again, most everyone in the Western Gold bug game is running with the ball in the wrong direction.

…So who is in danger of being hurt as this unfolds?

That's right, the Western paper gold long! I'm not talking about just the US market! This is about the entire world gold market as we know it today. The real play will be for the ones that get out in front of the move by owning physical…

It seems every Gold bug sees only half the trade and has great faith that contract law will favor a short squeeze. Yet, none of them see where it is the long that will be dumping and forcing the discount!


The point is, there is no price discovery market for "gold the wealth reserve" that could even require an expanding pool of buyers. There's only the stock to flow ratio of physical gold (gold the wealth reserve) as a tiny component part of the wide $PoG basket, today's (bastardized) "gold", a ratio which is already very high and struggling to keep from going infinite (parabolic). [Any stock with "zero" flow has an "infinite" s/f ratio because in the function r=s/f, as f approaches zero, r approaches infinity.] A rising $PoG "stretches" the existing flow making it "larger" in currency terms and keeping it from falling to zero. But what if the $PoG suddenly dips below even the cost of mining gold? What is that cost today?

Once the flow of "gold the wealth reserve" (physical gold only) is credibly reestablished at the revalued Freegold price, the savers will eat it up like hotcakes! Ergo, "its widest distribution possible."

"Correlation does not imply causation."

Hope this helps!

Sincerely,
FOFOA


Then victorthecleaner wrote:

FOFOA, fantastic! Why don't you make this an official posting?

No problem, Vic, here you go.

We also had a newcomer show up with a repost from the Gold Standard Institute website which kicked off a nice discussion about various hard money proposals and prescriptions versus emergent Freegold.

The next day, Victor wrote another outstanding piece on his own blog called Currency Wars: Why The United States Cannot Return To A Gold Standard. In it he addresses one of the main proposals in Jim Rickards' book, Currency Wars.


Victor starts off by asking if Rickards' proposal is even possible, and then answers his own question with this: "The answer is No. But why not? ...The answer is that the existence of the Euro prevents the United States from returning to a gold standard."

Here are a few highlights, but please go read Victor's post in its entirety:

Rickards advertises the return to the gold standard in particular with the claim that the first country that makes this step, would gain a considerable international advantage through the gain in confidence in its currency.

The problem with this statement is that the advantage of the first adopter is no longer available. The first step was made as early as 1999, and it was done by somebody else: by the Euro (€). It was accomplished in a fashion slightly more sophisticated than just a plain old-fashioned backing of the currency with gold at a fixed exchange rate: The Eurosystem of Central Banks, i.e. the European Central Bank (ECB) together with the National Central Banks of the member countries of the Euro zone, account for their gold reserve at the current market price of gold in €.

[…]

From these balance sheets, we can see that there is no advantage of early adoption that could be captured by the United States. The Euro zone has already anticipated this step, and the Euro enjoys an even more robust gold backing. In fact, all else being equal, the comparative advantage of the € over the US$ increases with an increasing price of gold.

[…]

■ In the United States, according to Rickards’ proposal, the government or the Federal Reserve guarantees that one US$ can always be redeemed for 1/7000 of an ounce of gold. The key to this guarantee is that the government pays out the gold even if there is no private participant in the market who is willing to sell her or his gold for this price. Even if the free market values gold higher than US$ 7000 per ounce at some point in the future, the United States Government is still required to redeem one US$ for 1/7000 ounces of gold (this is the point of having a gold standard after all). How clever is that?

[…]

■ Since the ECB has never claimed that the Euro were as good as gold, they need not redeem any Euros for gold. If somebody purchases gold with their Euros, these Euros continue to circulate. The Euro is explicitly advertised as a transactional currency, but not as a store of value. Gold is the store of value. This is Free Gold, the separation of the store of value from the medium of exchange, i.e. from the credit money that forms the transactional currency (also see Section 7 of The Many Values of Gold and FOFOA’s The Long Road to Freegold).

Let us finally remark that the price of US$ 7000 per ounce as proposed by Rickards merely serves as an example and that none of our arguments depends on this precise figure.

The material presented in this section was inspired by Rickards’ book and by contrasting it with FOFOA’s point of view. See, for example, Euro Gold, Party Like It’s MTM Time, Reference Point Gold Update 1 and Reference Point Revolution.

[…]

In order to illustrate this effect, let us assume that the official US gold price and the free market price in Euros diverge considerably. We estimate that the US$ and the € presently have purchasing power parity at an exchange rate of US$ 1.20 per € 1.00. As a very rough simplification, let us say that one hour of labour costs € 30.00 in the Euro zone and, at parity, it costs the same amount in the United States: US$ 36.00. Also at parity, the official US gold price of US$ 7000 per ounce corresponds to € 5833 per ounce. Let us further assume the free market price of gold in the Euro zone differs substantially: € 8750 per ounce.

Firstly, there is the obvious arbitrage: The smart money in the Euro zone can simply take € 5833, exchange them for US$ 7000 in the foreign exchange market, go straight to the Federal Reserve and redeem this sum for one ounce of gold which is immediately shipped back to Europe. There is therefore a continuous flow of gold from the United States to Europe unless the currency exchange rate adjusts to $US 0.80 per € 1.00. This is the exchange rate at which the official US price of gold of US$ 7000 per ounce agrees with the European free market price of € 8750 per ounce.

Although this adjustment of the exchange rate indeed eliminates the arbitrage opportunity, it does not stop the outflow of gold from the United States to Europe. The problem is that the currency exchange rate now deviates from the purchasing power parity of US$ 1.20 per € 1.00. At the no-gold-arbitrage exchange rate of US$ 0.80 per € 1.00, one hour of European labour can be offered in the United States for US$ 24.00 whereas American labour still costs US$ 36.00 per hour. The United States therefore run an increasing trade deficit compared with the Euro zone. Under the proposed gold standard, the Europeans who initially receive US$ for their exports, can immediately cash in and redeem their US$ for gold.

The flow of gold from the United States to Europe therefore persists regardless of the currency exchange rate. If it is not a consequence of direct price arbitrage, then it follows from an imbalance of the trade accounts. In either case, physical gold reserves are drained from the United States...

[…]

We see that the arrangement that is now proposed by Rickards, basically used to exist during the Bretton Woods period. In the late 1950s, the credit volume in US dollars was already growing so quickly that the official US gold price and the free market price of gold outside the United States started to diverge. Although the Western European allies helped to stabilize the gold standard, it inevitably failed because of the arbitrage and the trade imbalances sketched above. If a gold standard of this type is established again while a major trade block openly advertises a free market price of gold, it would probably collapse even sooner than it did in the 1960s.

In 1971, the United States chose to terminate the gold convertibility of the US dollar rather than to revalue gold in US dollars. We refer to FOFOA’s It’s the Flow, Stupid for the reasoning that lead to this decision. Finally, please see his Once Upon A Time for more details on the London Gold Pool.

_________________________________________________________
Side Note:

In fairness to Jim, Rickards/FOFOA reader Aquilus asked Jim at a book signing event about a fixed versus floating gold price. Because Aquilus knows that I, too, appreciate Jim's work, he emailed me the following report:

"The more interesting part is that I had been trying to get him to give me a straight answer on the notion (from his book) that once gold is revalued to "the right price" the Fed would then step in and defend that price (in a narrow range). He had been avoiding a straight answer for months, but I finally got one yesterday while he was signing the book - in a short one on one conversation.

When I asked him how he could seriously believe that a fixed price could be defended when dollars continue to be issued and credit created, and how that would be different from the old London Gold Pool, he smiled and said, "no, no, you see, the defended price would indeed have to change every year or else it would not work."

So, basically, he's still somewhere in the "we can semi-control" the price with this Fed-defense of an adjustable price, as far as I can tell."


UPDATE: Also see Blondie's comments right under the post. Thanks for sharing, Blondie.
_________________________________________________________

…The ECB, however, which does not guarantee a redemption of the Euro for a fixed weight of gold, can engage in various types of Gold Open Market Operations.

Firstly, in absence of a liquid market for physical gold in Euros, the ECB can act as a market maker and, say, bid for a fixed weight of gold at € 8745 per ounce and offer to sell a fixed weight at € 8755. If they bid for and offer more than 10 tonnes each at any time, they are able to make a liquid market for physical gold in Euros, a market in which other central banks can trade the quantities that typically arise in the settlement of international trade balances. As soon as it turns out that there is more weight of gold sold than it is bought (or vice versa), the ECB adjusts the bid and offer prices accordingly. This amounts to assisting the price discovery for large quantities of physical gold while the reserve of the Eurosystem remains essentially unchanged.

Let us stress that as of February 2012, there exists no liquid private market for physical gold in € in which bid and offer would be quoted for tranches of 10 tonnes or more at any time. In fact, this is apparently not even possible in the London market in which gold is traded in US$:

James G. Rickards, Currency Wars, page 26:
In ordinary gold trading, a large bloc trade of as little as ten tons would have to be arranged in utmost secrecy in order not to send the market price through the roof [...]

Secondly, the ECB can manage a dirty float of the gold price in order to smooth fluctuations in the currency exchange rates, in order to influence the domestic price level, or even in order to affect the competitiveness of goods and services from the Euro zone in the international market. If they expand the monetary base and purchase gold in the private market, they lower the exchange rate of the Euro relative to gold, creating domestic consumer price inflation and rendering exports more competitive and imports more expensive. Conversely, if they sell a part of their gold reserve and cancel the base money they receive, they raise the exchange rate of the Euro relative to gold, reducing consumer price inflation and rendering exports less competitive and imports cheaper.

In particular, if things ever turned hostile, for example because not only a book author but also some government officials started talking about ‘confiscating’ the gold owned by foreign countries, the dirty float could be used in order to terminate Rickards’ experiment with the new gold standard in the United States at any time, simply by expanding the monetary base in € and purchasing physical gold in the open market. This operation is always possible because it relies only on the ability to expand the € money supply, but does not require any existing official gold reserve. In fact, any major currency area or trade block who exports enough goods and services for which there exists a global demand, can make this move. So far, none of them has.

[…]

It should be clear from Sections 2 and 3 above that it is the high price of gold in terms of US$ or € that inspires confidence in these currencies rather than the question of whether the currency unit is redeemable for a fixed weight of gold. (There is one caveat though: as long as the US gold reserve is owned by the highly indebted government rather than by the Federal Reserve, it will never inspire the full possible confidence.)

[…]

Let us summarize what is the key point of Rickards’ proposal to return to a gold standard at a substantially higher price of gold in US dollars. It is not the idea of the gold standard that the currency unit would be backed by a fixed weight of gold. This would not be sustainable in the long run, and it would eventually fail for the same reasons for which the London Gold Pool failed. It is rather the revaluation of gold in US dollar terms that inspires confidence and that addresses many of the present issues such as recapitalizing the banking system.

We finally refer to FOFOA’s How is that Different From Freegold for another response to a very similar question.


Nice work once again, Victor! As Ari would say, it's good to have help carrying this water. B^D

Sincerely,
FOFOA

509 comments:

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Aquilus said...

BTW all: page 2 comments required now.

costata said...

Nickelsaver,

You wrote:

Understand the difference between price and value. Price fluctuates, value does not. If the value of gold fluctuated, it wouldn't make a very good reference point.

IMHO ephemeral_reality nailed it with this quote from Menger:

Value does not exist outside the consciousness of mankind.

Things that are described as "under valued" could more accurately be described as mis-priced. Notions like "inherent value" and "intrinsic value" are blind alleys.

There are many assets (fine art, antiques, land and natural resources to name a few) where a given piece of property can have multiple "values" (actually prices) at the same time depending on the prospective buyers in the market. The issue is: What is the realizable price at any given time and place under competitive bidding? In other words the market "value" meaning the value (price) placed on that piece of property by the market.

And speaking of reference points and fluctuation, what is the "value" of a metre? What is the "value" of a gram? Perhaps their value to mankind derives through a variant of the network effect which underwrites the value of the US dollar. A perception of value not shared, for example, by aardvarks.

Gold doesn't need to have a constant, fixed value in order to function as a reference point for floating currencies. It only needs the physical properties it possesses already and value in the "consciousness of mankind" - a comparative value weighed against other things that can be acquired.

After the transition to Freegold-RPG the price of gold will fluctuate in line with the numeraire selected by, or imposed on, the aspiring purchaser. If A/FOA are right the price of gold that can be realized by gold miners will be restricted. Hence there would always be at least two prices for gold in any currency region where gold miners dig holes even after the transition to Freegold-RPG.

Nickelsaver said...

Costada,

Ok, I'll bite.

1) The inverted waterfall.

http://3.bp.blogspot.com/-tODlKGqn5yI/ThuqVOo5QCI/AAAAAAAABzM/JAv6pvaArvE/s1600/Orbital_Launch.jpg

The plateau represents the constant.

2) From "Glimpsing the Hereafter"

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.


An asset that neither gains or looses purchasing power, I would call that a constant.

3) Value does not exist outside the consciousness of mankind

My own consciousness is the only one that I may accurately reference. And since I perceive gold as a constant, it must be so.

costata said...

An article below on gasolene demand that potentially fills in a few blanks in the discussion about oil and another article on refinery closures that raises just as many questions in my mind.

http://www.financialsense.com/contributors/dan-collins/the-china-factor-will-drive-american-gas-prices-well-past-6-dollars-per-gallon-this-decade

We can see in the above chart, despite U.S. vehicle production declining rapidly, the U.S. retail gas price continued to increase in the last decade. China started the year 2000 producing 1.8 million units in the car market and U.S. gas prices were only $1.11 a gallon.

By the year 2011 China had produced 18.5 million vehicles per year and U.S. gas prices averaged $3.54 a gallon. The U.S. vehicle production crashed from 13 million units to less than 8 million units in the same time period. The U.S. vehicle market for sales was down from a peak of 17 million units early in the decade down to slightly over 12 million units in 2011. Despite this, U.S. gas prices still tripled.


http://articles.philly.com/2012-02-28/news/31107777_1_sunoco-philadelphia-conocophillips-refinery-ultra-low-sulfur-diesel

Sunoco said it had lost nearly $1 billion in three years on refining and was committed to getting out of manufacturing and focusing its business on retail marketing and logistics.

If the Sunoco Philadelphia refinery shuts down in July, suppliers may need to find 240,000 barrels a day of gasoline and 180,000 barrels of ultra-low sulfur diesel by 2013.

costata said...

Nickelsaver,

I think FOFOA is presenting the "big picture" view in that extract you quoted. If the purchasing power of gold under a Freegold-RPG regime is constant globally relative to some benchmark (such as the total money/currency pool) that doesn't preclude the possibility that its purchasing power will fluctuate depending on your location, circumstances (eg. the weather) and the basket of goods you wish to buy at any given time.

A little Misean food for thought quoted by Nathan Lewis (link below):

Here’s a similar passage from Ludwig Von Mises, dating from 1949:

"Changes in the purchasing power of money, i.e., in the exchange ratio between money and vendible goods and commodities, can originate either from the side of money or from the side of the vendible goods and commodities.

The change in the data which provokes them can occur either in the demand for and supply of money or in the demand for and supply of the other goods and services."


In other articles Lewis has attempted to draw a distinction between price stability and value stability. Caveat: I find his perspective interesting but I'm still mulling his arguments over in my mind so don't assume I agree with everything he writes.

http://www.24hgold.com/english/news-gold-silver-the-warren-pearson-index.aspx?article=3802848442G10020&redirect=false&contributor=Nathan+Lewis

Cheers

JR said...

Hi Nickelsaver,

You hit one one of the biggest issues I struggle with - the nuance in involved in what we mean when we say gold preserves purchasing power. Here are some excerpts from Glimpsing the Hereafter that I think help shed light on this area of subtlety - think preserving "currency purchasing power:"

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.

[...]

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.

[...]

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.

[...]

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's purchasing power can change. The below helps sets out this key distinction between the purchasing power of currency/money (which is what gold preserves) and the purchasing power of gold itself - which fluctuates based on the saver's demand for gold and the amount of real stuff in the world.

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.

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.


cont.

Nickelsaver said...

"Changes in the purchasing power of money, i.e., in the exchange ratio between money and vendible goods and commodities, can originate either from the side of money or from the side of the vendible goods and commodities."

And since we know that gold is neither money nor a commodity...

You can have the last word going fwd. I will simply say. The constant gold, is much like the constant of the vacuum of space. That vacuum is not absolute, especially as you approach a black hole. But for all intents and purposes, it is a constant relative to its general surroundings.

In terms of wealth preservation, if gold is not a literal absolute constant, it most certainly is a virtual one. Everything else is splitting atoms.

JR said...

cont.

We are talking about purchasing power, and we purchase with the transactional medium/currency. More along the lines of preserving that purchasing power - our currency purchasing power - despite the credit/debt money currency system that devalues the currency. These is no escape for the savers now from the inflating/devaluing easy money $IMFS, but there will be in Freegold.

Yo Warren B, you are so OG!

Investments denominated in currency may be nominally safe—if you expect to have a million dollars after a given holding period, you WILL have a million dollars at that future time, but you may only be able to purchase a single roll of toilet paper with that million—but their risk in real terms (purchasing power terms) is HUGE… especially today!

[...]

Warren's been around for a long time, alright. And it just goes to show how tough it has been during our entire lifetime for a saver who simply wants to preserve her purchasing power. She has to chase a 4.3% yield every year just to stay even! Crazy, isn't it? What if there was a way to perfectly preserve your purchasing power over any time horizon without chasing a yield?

[...]


the vanishing of savers' purchasing power through inflation is the real killer over long time-frames.

[...]

AMEN! Thank you brother. "If you own one ounce of gold for an eternity, you will still own one ounce at its end." Warren's words, not mine. But I'll bet you that I will be milking this quote for a long time to come!

Remember earlier I asked, "What if there was a way to perfectly preserve your purchasing power over any time horizon without chasing a yield? To what percentage of the population do you think that would appeal?" Well, what if physical gold, that singular hard asset that is also held by central banks (precisely BECAUSE it has the fewest industrial uses), was on its way to becoming the singular global reference point for purchasing power, instead of the dollar with everyone chasing a 5.7% annual yield making it harder and harder to catch?

"If you own one ounce of gold for an eternity, you will still own one ounce at its end." In other words, perfectly preserved purchasing power. See? Please read my post Reference Point Revolution for more on this transition that's already underway.

[...]

And in the distant future, physical gold will be a far superior savings medium as it will be the very benchmark of purchasing power everywhere.

JR said...

The debt currency system has to inflate (aka devalue). And it does so against something else (a reference point).

In Freegold, the transactional debt based currencies will devalue against gold. Hold the gold, you don't suffer a loss of purchasing power due to the transactional debt based currencies inherent inflation (aka devaluation).

Nickelsaver said...

JR,

Yeah. I reread that post tonight.

I like to break things down to there simplest forms, and i like to stay out of the weeds, as it were.

For me it is easier to understand that everything else besides gold is in flux. As such, PRICE is always a variable, but VALUE is constant. If I were to view value as a variable, then my hands might be that much weaker.

Who knows? Perhaps we are all deceived, and the perceived value of gold is not what we think it is. But I think the arguments presented here are very sound.

-----------------------------

On a side note. I got a t-shirt slogan.

WWFOFOAD

too religious?

then how about:

"I'm a friend of FOFOA"

JR said...

For me it is easier to understand that everything else besides gold is in flux.

exactly - we are looking at purchasing power, which is done with the purchasing medium.

Looking at gold relative to the purchasing mediums (aka debt based currencies that by definition devalue over time) - gold is steady while the currencies are in flux - they go downward.

==================================

but VALUE is constant.

You're deceiving yourself - value is **subjective**.

JR said...

In order for a thing to perform as a reference point for value, when market demand for that thing rises it must be met with the difficulty of the physical, not satiated with the ease of promises. This is the main reason currency makes a poor reference point for value. When demand for currency rises it is hoarded which slows the economy. Value is the output of the economy. It is the opposite of currency. When the demand for currency is collapsing, the demand for value is rising, and vice versa.

This is why Central Banks came into being in the first place; to make sure that rising currency demand does not hurt the economy. This is why the BOJ injected trillions of yen after the earthquake; to protect vital economic activity from the spiking demand for currency.

I know this is a difficult concept to swallow, but value and currency are polar opposites, which is why, if gold is the reference point for value—which it is—it cannot function properly and also be an economic currency—or tied at a fixed parity (price) to currency in any way! To view an economic currency built to function properly alongside the reference point gold, look no further than the architecture of the euro. [10] This is why the first ECB President stated clearly and publicly that the euro "is the first currency that has… severed its link to gold." [11]


Reference Point Revolution!

costata said...

JR and Nickelsaver,

Perhaps we could go some way toward resolving this issue by saying that gold is the least subjective reference point for value under a Freegold-RPG regime. Conversely we could express this as gold being the closest to an objective reference point for value.

Gold as a global, homogeneous trade good will filter out emotion, personal subjectivity and so on in discovering prices. Giving us the closest thing to a dispassionate valuation of the purchasing power of each currency pool (as a whole). And an early warning sign of a change in the trend of the purchasing power of a currency.

That leaves us free to evaluate the merit of continuing to hold gold as a savings vehicle, using those savings to consume or to invest those savings in the pursuit of a return on capital.

And, yes, to risk our assets by borrowing and risking the loss of some or all of our assets in the event that we cannot repay the debt.

Nickelsaver said...

Ok,

So you want that t-shirt slogan to read:

Gold: the least subjective, closest to being objective store of value - go get you some?

costata said...

Nickelsaver,

Very amusing. Do you write your own material?

If you come out with these kinds of statements you should expect to be called out on them:

Understand the difference between price and value. Price fluctuates, value does not. If the value of gold fluctuated, it wouldn't make a very good reference point.

Sorry. I have already determined in my own mined that golds value is the unknown constant. And that price is irrelevant in terms of the current paradigm.

My own consciousness is the only one that I may accurately reference. And since I perceive gold as a constant, it must be so.


Reference point Nickelsaver's consciousness?

Anand Srivastava said...

Nicklesaver

All of them. Despite the recognition of the Euro's position, I have never seen fofoa or anyone else here suggest to own as Euro's within the current paradigm. On the contrary, it is to own unambiguous physical gold.

I guess others have already spoken about the variability of value of gold. I would just point out that if technology and the consequent prosperity is an important effect then the purchasing power or the value of gold does not remain constant but it increases. Which is even better than what you are thinking.

It is not just the currencies that are devaluing against gold everything else is :-). So it is not just a great store of value it will not be a bad investment for the very long term.

The other thing that you say is that all paper currencies will crash. That is totally absurd. What you are in effect saying is that we will need to move into gold standard. That is totally against what FOFOA is saying. We need paper currencies for transactions and gold for storing value, they are different functions.

Nickelsaver said...

Anand,

What the JR, Costata, and TF have objected to in my statement about gold as a value constant is very different from how you argue it.

I am arguing from post transition, and they are picking apart my usage of gold as a constant in the finite. In RPG, if gold was so far removed from the idea of a constant (that gold itself could not be counted on as store of value) than we are wasting our time.

I am not saying that the price of gold will not vary. I never said that. I am not saying that all currencies will reach zero. But because the $IMFS reach is into all currencies (yes even the Euro) there will be a reset. But I am talking about after the reset after all.

"So it is not just a great store of value it will not be a bad investment for the very long term.

I'll quot it again.

From "Glimpsing the Hereafter"

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.

Nickelsaver said...

Costata,

Why don't try rebutting points 1) and 2)

which are fofoa quotes

as opposed 3)

which was meant as sarcasm...

btw...if you are going to make an appeal to mankind, please at least allow me to be a member.

Anand Srivastava said...

@Nicklesaver

I do mean after the freegold. I do understand the concept of store of value. A store of value can be anything. If you eat rice you could buy enough for a year, and it will act as a store of value till the time it goes bad.

Gold is just the best. It has no other use, and it never does deteriorate. And if I am right, it will also MILDLY appreciate.

The present time is different and the gold is nowhere near what the value should be at this point in time. So at present it is also a very good investment.

Even after transition, gold will vary somewhat in the short term, but will be very stable in the long term. At that time price should reflect the value quite faithfully.

I am not sure if this is so complex that we have to simplify it and say that gold is the constant in the world. I don't really like simplification too much. It tends to be wrong most of the time.

One Bad Adder said...

Boys: -
...if I may?
As Nickel is aware I think of Gold as a reference point for the here 'n now.
..and when tomorrow arrives it will then be NOW ...and so will be my Gold - unaltered.
The rest is akin to holding a Lottery ticket I feel. A one-in-a-million chance.

Motley Fool said...

Nicklesaver et al

At the risk of creating confusion I will share my thoughts on price and value.

I used to think that gold was a stable value and that only paper changed, the old toga and sandals argument. I no longer think so.

The value of any thing is the amount of utility it can provide at any specific point in time.

So, at the present moment in time the value of gold is about $1700. Bear in mind this is true in the current $IMFS system, a system that is widely agreed cannot last much longer.

If we were to have a gold standard at say 20% backing then gold would need to be about $5000, that would be the value of gold in that system. In a 40% gold standard, a value of $10,000 should suffice. Keep in mind here that these systems are also not sustainable, and would fail.

Under Freegold the value of gold would be roughly $60,000. Thus under FreeGold, gold attains it's highest possible value (or utility).

Where it seems I may have a slight disagreement with FOFOA is on the value of gold shortly post FreeGold. I believe that the amount of value creation that is locked up and not utilized due to the current system, is vaster than most can imagine. As such I foresee a period of incredible value addition as the potential of all humans are unlocked. This is especially vital for the super producers. Strange how merely having the ability to protect wealth that is earned by all parties can have such a dramatic effect.

This means that post FreeGold I see the price of gold steadily rising as this potential is unlocked, where after a semi-stable plateau will be reached. This latter being the view that FOFOA espouses.

In summation, when talking of price versus value, the distinction is only of use when different time-frames are used. At any now, the price Is the value. Only by differentiating between our Now's does a discrepancy arise.

Peace

TF

Ps. It helps when defining your paradigm when discussion these matters, as pre- and post-Freegold obviously differ.

LD said...

comments

JR said...

Yeah Costata,

Value is subjective which is why you need a reference point so all the market actors can come together and express there subjective desires through the pricing system. Gold is real, its an objective reference point.

The pure concept of money is not real in a physical sense, its our shared use of the same thing to express our subjective valuations. We need an objective thing to be the reference point to express out subjective valuations.

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."

Moneyness

JR said...

Hey Rube,

WTF are you talking about? Why do you like hard money socialism?

You don't understand what you are arguing, and you don't understand what others are trying to help you understand. That's cool, we all have special talents in our own ways. But pretending like you know what you are talking about and condescendingly dismiss others who are trying to help is not cool.

We know you don't understand that quote from Glimpsing the Hereafter - you posted it above, people explained it and now you have ignoring their explanation in lieu of reverting to your original point. You don;t have to keep posting it to prove you don't understand it.

Preserving purchasing power != constant value, mmmmkay??

I explained the quote to you above and provided a FOFOA quote demonstrating "The purchasing power of gold can be rising or falling" 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)."

If you want to ignore others its cool but when you run your mouth about others being wrong people and challenge people to keep explaining stuff they just explained you are gonna be called you out for being less than a reasonable.

You say:

In RPG, if gold was so far removed from the idea of a constant (that gold itself could not be counted on as store of value) than we are wasting our time.?

I couldn't disagree more. Why does a store of value have to be constant? We had this under the gold standard (SoV trying to be constant) and it continues to be a problem under the $IMFS (we still don't have an expandable store of value). The problem is with a store of wealth medium that can not expand in value. Freegold solves this problem by providing an store of value (external to the devaluing debt currency system) that can expand in value:

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

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


Focal Point: Gold

So now its your turn funny guy:

It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity.

You gonna cry uncle yet or you wanna keep digging deeper?

JR said...

Value is subjective.

So we need an objective reference point that people can use to express their subjective valuations - that's the pricing system that brings all these subjective valuations to together. Gold as the reference for the transactional mediums we use to express our subjective valuations.

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."

JR said...

BTW, in case anyone hasn't read the OP, it says this:

But in the case of gold, where value is entirely subjective, this is not necessarily the case. In fact, I would even propose to you that, subjectively, those who already possess the physical gold value it higher than those who don't yet hold it. Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.

JR said...

"The circus will never stop I’m afraid…"

"But when the lights are turning 'round
And wheels are rolling on the ground
That day I'll burn this whole place down
When the circus comes to town"

AdvocatusDiaboli said...

Hi JR,
you are a really great FG advocate providing great explanations.

What I do not get: In a FG environment, why should anybody have interest to sign a contract (e.g. labour, rent, leasing...) in FIAT currency, but rather insist on a gold payment contract?
Just wondering.
Greets, AD

Ryan said...

re: AD

This was brought up a few posts back in the comments, maybe someone can remember the thread and post it. I believe the topic was Australia selling steel to Japan(?) and why wouldn't they settle in a gold contract.

In a FG environment, what is the role of currency, and what is the role of gold?

Currency is for transactions, gold is for excess production. For instance (from your eg), I rent space from you for $1000 a month. That $1000 isn't pure profit and excess, because you will have expenses to pay. Maybe saleries to employees, lawn care, utilities, etc. If you settled in gold, you would have to exchange it immediately for currency to pay for the services. If you settle in currency, you pay your expenses, and then you decide to re-invest your fiat trying to chase a yield, more production, etc. Or you save the excess in gold.

Anonymous said...

"Here, sir, please sign this contract for payment in .25 grams of gold, I've got this nice little tiny glass vial here that holds these small amounts quite nicely" "Make sure you don't spill it!"

Have you handled less than a gram of gold, AD? And , no, they're not gonna mint a bunch of coins with fractional amounts of gold for transacting with. Redundant much?

We will use paper coupons(fiat) because it's much more efficient and easy. Once you've accumulated enough paper(short-term savings), you simply take the coupons(fiat) and exchange it for gold(deep savings) ....

Nickelsaver said...

JR,

Rube? LOL

Alrightythen - no t-shirt for you.

AdvocatusDiaboli said...

Ryan,
"I rent space from you for $1000 a month. That $1000 isn't pure profit and excess, because you will have expenses to pay."
sure. But if I am not an entity that relies on double bookkeeping?
To give you an easier example: I privately own farmland and want to rent it for gold (because most farmland is rented for more than five years, minimum).
Greets, AD

Crack said...

I know how much y'all like c&p

The credit deal, or debt portion of legal tender is the contractual protection offered by the court system. I imagine that this will not change. Courts will only be able to enforce settlement in dollars. You can't force a closed tractor factory to deliver a tractor it never made, but you can force it to pay the equivalent in dollars. You can't force a barren mine to dig up gold it never had in the first place, but you can force it to liquidate assets and pay in cash.

Book of FOFOA, 9:10

zabba said...

Hello. As I understand it... Crackwhore Gold is a bi-polar monetary system. Meaning fiat is required along-side Au. Au won't be too practical for paying the bills (daily living) but will be perfect for savers to store their wealth. But, I guess, nothing would prevent you from asking for a contract payable Au. But, if the gold does not flow (exchange for fiat), then this is not FG, right?

All: Speaking of value... post FG how many ounces do you think the Mona Lisa would fetch? Just curious.

Motley Fool said...

AD

It's not that people won't be able to make private contracts in gold, it's that courts won't enforce them in the case of default...which tends to incentivize you not to make them in gold.

Additionally gold is a excellent store of value, but not that great as a medium of exchange when compared to the wonder that is fiat and digital currency. You want me to pay you on another continent? Which is more efficient, shipping gold or moving some digits? :)

Tf

Nickelsaver said...

Uncle JR,

"It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity.

In as much as the value of gold is determined by the relationship between it and the fiat currency, I have never maintained that its value is constant. I will cry uncle to the use of the term value for what I am implying.

And what I am implying is (outside of a change in the quantity of gold or the number of person utilizing it) gold is a constant. The value changes not because gold changes, but because the currency does.

And so when I said value of gold does not change, I was not referring to price in currency terms or in purchasing terms. But rather that any change in purchasing power is a result of a movement in the the currency or other commodities.

I will refrain from muddying the term value with respect to gold going forward and simply say...Gold is the constant (more or less).

P.S.

you can have a t-shirt, but it will cost you 10% more than everyone else (aggravation tax)

Motley Fool said...

Nicklesaver

That is not the case. Fiat could track the addition of gold perfectly, in theory, and still it's value could change.

Imagine the value of gold if we were to find a source of 'free' energy. A million an ounce at least.

TF

Motley Fool said...

Nicklesaver

That is not the case. Fiat could track the addition of gold perfectly, in theory, and still it's value could change.

Imagine the value of gold if we were to find a source of 'free' energy. A million an ounce at least.

TF

Motley Fool said...

What gold is, is a claim on existing value and all the potential value that exists. It just happens to be the best kind of claim. :P

Nickelsaver said...

TF,

I'm done with the exercise.

I just checked my physical gold holdings. It has not changed from yesterday to day. And that is enough.

Anonymous said...

JR, Costata, NickelSaver, Anand et. all -

From Menger's axiom on value ( value does not exist outside mankind's consciousness ), stems the concept of marginal utility .

It is the boundary use of the good that determines the value of the good . Which we can say in other words, value at the margin .

For instance, let us take water - which is much more abundant than gold. The boundary use of water at first would be quenching thirst, once that is taken care of, the boundary use of the same good would be watering the plants. Once that's taken care of, the boundary use would be say washing the windows. So you can see that the boundary use determination itself is an iterative process of applying the concept of utility at the margin . You can see that for a good like water, the marginal utility continously diminishes.

Iterative, self-similar, recursive. Are you starting to see a fractal nature in human interaction? :)

Moving on to gold, the amount of gold stocks above the ground is perversely high. . FOFOA talks about the concept of stocks and flow, and he argues that gold is an excellent wealth stock. Why there is so much gold above the ground and still there is demand for it is beyond any economics course .

Given that there is so much gold above the ground and still there is demand for it always at the margin, I think it is safe to say that the utility at the margin for gold is constant (barring a gold asteroid knocking on earth and showering gold all over mankind LOL). It is a wealth storage medium and humans do not have a limit for how much stock they would want as wealth storage. The fact that gold is rare, hard to dig, mine and produce is also a contributor to its near-constant marginal utility.

There was a book published by Ray Jastram which tracked gold's value in terms of measuring against real goods and it was found to be constant over quite long periods of time. For more interested readers, I suggest consider reading and perusing the data collected in that book.

Nickelsaver said...

TF,

Sorry, I do not think customs will allow shipment of your t-shirt without a bribe.

Anonymous said...

JR,

Why does a store of value have to be constant? We had this under the gold standard (SoV trying to be constant) and it continues to be a problem under the $IMFS (we still don't have an expandable store of value).

No, I don't think this is true. Even under the gold standard, the purchasing power of gold (=currency at that time) fluctuated. This can be seen from the original Gibson-Barsky-Summers data.

The gold standard worked perfectly fine as long as there was no widely accepted gold credit, i.e. as long as people paid for purchases in gold coins and as long as credit money (bank notes and account balances) were not widely accepted as payment (because banks operated only locally).

For that time, Barsky-Summers tells you exactly what happens: As a store of value, gold competes with long-term bonds. Depending on the future real yield on these bonds, the real price of gold rises or falls. Everything is expressed in real terms, i.e. relative to goods and services. What the transactional currency does in the meantime, is a different question.

I therefore expect Barsky-Summers to apply perfectly well after the transition, too. What's new is only that the medium of exchange is decoupled not only from real goods and services (there can be price inflation or deflation), but also from gold.

Victor

Anonymous said...

Ryan, SleepingVillage,

I am sure AD asked because he thinks that, probably, over time, the medium of exchange will devalue with respect to gold.

So if AD signs the contract with his employer (assuming he has a strong position), he could say, hey, rather than paying me $6000 a month, why can't you write "the current market price of 2 grams of gold" in the contract.

This also avoids the objection by 'Crack' and that by 'MF'. Payment is in dollars, it is just that the precise amount depends on the price of gold.

Here is my point of view on the question:

1) This type of employment contract does not create a form of paper gold as it is payment in currency, and so there is no reason to object to it because I might subvert the 'free' in freegold.

2) If everyone has such a contract, the economy loses the ability to fight a recession by devaluing the transactional currency and thereby cutting all wages in real terms. If would still be a sort of hard-money system - perhaps Germany might go for it after the transition, but Greece would not ? I don't think it introduces another conflict between debtors and savers though.

Victor

JR said...

Exactly Victor,

As long as credit didn't grow too much, fiat didn't have to devalue as hard and thus the link between gold and fiat could be kinda stable. Aka if the store of value was not devalued too badly by the credit system the GS won;t break.

But we know that won't last and the credit/debt currency will inflate and devalue (its what it does), so the link will break from gold under the GS.

Anonymous said...

This raises some further questions.

The government can tax wealth. So, for example, they can say, you owe us 0.5% of your total wealth every year. Although the wealth may be held as gold, the tax would be payable in dollars. Typically this is done as a tax on real estate wealth because it is so easy to assess. Assessing how much gold people have is a lot more difficult, but I don't think this is ruled out by some principle.

But I think we agree that the CB should not be able to tax wealth by devaluing the currency with respect to real goods and services. If you buy a bond as a store of value, you are aware that you have devaluation risk, and you voluntarily enter the struggle between debtors and savers (FOFOA would call this 'investing'). The CB can expropriate your bond holdings in real terms by devaluing. But if you don't want to be exposed to this, you save in gold, and you are independent of what the CB does.

An independent thought:

If you believe what I wrote about Barksy-Summers above, the price of gold in real terms will fluctuate, depending on the future real yield on bonds. A central bank whose primary mandate is price stability, however, would try to make sure that the medium of exchange fluctuates very little in real terms. Therefore, you would expect that people would want to sign their employment contracts for a fixed amount of dollars rather than the dollar equivalent of a fixed weight of gold.

One question I always had and which has not been resolved is the following: Once we are through the transition, how is it guaranteed that there is not a new wave of credibility inflation at some point in the future? For example, our CB is very efficient, and the currency devalues only by a very steady 2% annually with respect to goods and services. Wouldn't many people start investing and buy bonds? Perhaps the real value of bonds (in terms of goods and services) would fluctuate less than that of gold? Barsky-Summers?

What we know is that in absence of gold-denominated debt that is accepted as payment, the price of gold will never again be depressed by synthetic supply in the same way as it is today. But this doesn't rule out the possibility that holding bonds will be fashionable again, that lots of people do this, and that they all get burned at the same time when that bubble bursts.

Victor

JR said...

Hi ephemeral-reality,

OMG well said - quoting Menger and talking about gold's marginal utility - sounds like someone should read The Value of Gold!!!!

This concept of diminishing marginal utility can even be found as far back as the fourth century BC, in Aristotle's "Politics", in which he wrote, "external goods have a limit, like any other instrument, and all things useful are of such a nature that where there is too much of them they must either do harm, or at any rate be of no use."

There is more to this story, but before we proceed, let's take a quick look at the marginal utility of gold as a store of value. Take the man above with $1.5 million in disposable cash. Say he buys himself one $50,000 BMW and one $55,000 gold eagle coin. He has just obtained the full utility of a fine automobile as well as the value preservation of that same purchasing power, for up to thousands of years if he should so choose.

Now say he buys one more $55,000 gold eagle coin, and then another, and another, and so on until all his cash is gone. In the end he will have 26 gold coins. And here's the question: Will that 26th gold coin purchase provide the same utility or diminished (less) utility than the first? Remember, the only utility of gold coins is that they retain their value for thousands of years. That's all they do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money."

The answer is "the same utility," because unlike ANYTHING else, (yes, even silver), gold has INFINITE marginal utility in this particular role.


===============

P.S. - Ray Jastram didn't track gold's value, he tracked the purchasing power of the currency price of gold as quoted by the prevailing price discovery mechanism.

AdvocatusDiaboli said...

Vtc & MF

First of all, it depends under which legislation the contract is made: e.g. in former germany the farmland contract where also in "Sacks of corn". No BS fiat settlement, I am not really sure how it is handle today, but I thing no settlement, bring the real stuff (just remember the super short sequezze on the VW shares 2yrs ago).
And if somebody defaults he will default in total, does not matter if he does not have gold and does not have FIAT as well.

Also looking at that circumstance I see some kind of bullion banking just arround the corner (again).

So when two serious business men will do a contract, I guess they will choose gold.
For whom the FIAT? Jep, social welfare: Here's the paper, see if somebody is dumb enough to take it (or maybe just for the basic supplies of the by then completely ruined masses).
Because Freegold also means REALLY FREE PAPER, gov.&CB will print really really lots of it. I do not see any barrier to the death of paper in total, should FG show ever occure as a transition.
Greets, AD

JR said...

Reminder about a key idea from Credibility Inflation

You can devalue a debt based currency (aka have inflation) yet still have a stable pricing because the rate of economic expansion (aka new goods and services) is greater than the devaluation/currency inflation.

The Setup

Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economic expansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding the expansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to a much more expandable "balance sheet money system" as I like to call it — or another name I like is "purely symbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life" gadgets, widgets and shipping lanes that the world had never before imagined.

For the next three or four decades we would be able to comfortably afford the new introduction of Betamax VCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digital cameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderful products would be built cheaper by someone else on the other side of the world and shipped to us cheaply using the oil purchased from the Middle East with easily available U.S. dollars.

Anonymous said...

AD,

Because Freegold also means REALLY FREE PAPER, gov.&CB will print really really lots of it

No, I don't think so. This was discussed here before, and so I guess it will be just a few seconds and you get a JR.

The reason is that if your fiat is merely a transactional currency, any increase in the credit volume will instantly lead to a devaluation with respect to real assets. Very embarrassing for the CB.

The way in which the present fiat system is exploited is by first seducing people to save in debt and then devaluing in order to rip them off. So the incentive for devaluing the fiat by excessive credit growth exists only because people have stored their savings in debt.

Victor

mr pinnion said...

"In summation, when talking of price versus value, the distinction is only of use when different time-frames are used. At any now, the price Is the value. Only by differentiating between our Now's does a discrepancy arise."

Bloody good summaration that, MF.
Was thinking along the same lines myself.

Regards
Ozzy

Anonymous said...

Vtc,

Good thoughts on long-term bonds vs gold. Counter-party risk being a big gotcha, long-term Government bonds do have some characteristics of gold which leads them to be a competitor for long-term savings against gold.

Long-term bonds are saving on society's ability to produce, earn income and pay taxes fairly to the Government, which in turn would provide the required public goods/services immediately with those bonds and repay them with interest later.

Gold, on the other hand is a non-income producing asset, but with zero risk. Buying gold is saving in the form of an instrument that will always be valued by mankind.

Even if we had a Freegold environment, bonds would still be fashionable. It's just that the degree of fashion would depend on the level of trust that the people have on their government.

JR - you're right that Ray Jastram tracked the purchasing power of gold. But over long periods of time (more than 200 years), purchasing power preserving *is* the value of gold. In that its *value* never diminishes.

Edwardo said...

VTC wrote,

"our CB is very efficient, and the currency devalues only by a very steady 2% annually with respect to goods and services."

You call that efficient, but, it's not, as that 2% (assuming these wretched CBs who pay lip service to price stability even meet their stated targets) erodes purchasing power dramatically over the course of a working person's career.

AdvocatusDiaboli said...

VtC,
I think the problem is that FOFOA dilema is perfectly right when stating:
A medium of exchange can/shall not be a store of value, this would lead to problems. 100%ACK
On the other hand, let's call it AD's dilema: A medium of exchange can not work if it does not hold value, because no real physical wealth will bid for it, yes?
When you are talking about "transactional", please always keep in mind, that we are talking about humans, not double bookkeepers.
Greets, AD

Anonymous said...

Thanks, Victor



I thought AD meant to settle in actual gold due to his hate on for the evil fiat. Thanks for the clarification on that.

At first glance, I see no problem with payment in currency based on the current gold price at the agreed upon time of payment(s), and why this couldn't be written into the contract. I guess it would lend more confidence to both parties as well. This would keep the "hard money" guys from getting their panties in a knot:)

As per the gov taxing wealth...

I wonder how a VAT would work? See, currently in Canada, you do not pay tax on profit made on your home(principal residence) if you live in it for a certain length of time and then sell. Exempt from capital gains.

I wonder if a VAT of some kind would work to keep things more simple. You can hold as much gold, tax free, but when it is deployed/turned into currency you will pay a VAT on goods and services? No need to involve our savings in any sort of taxation.

Nickelsaver said...

FOFOA T-SHIRT

Anonymous said...

You build 'em up and I will buy a few. I could use a shirt or two that's not a band T, hah! Proceeds after expenses go the FOFOA fund?

M said...

The Central bank of Israel claims to have no gold. Gold is on the balance sheet with a little dash mark. No numbers.

??????????????????

Nickelsaver said...

The t-shirt idea is fun. I was thinking more in terms of everyone being able to go to the t-shirt website and buy direct. That way y'all won't have to provide me with yer personal info and what not.

It will cost more to buy them in lower quantities, but then you have to factor in reshipping, so I think its a wash. As far as proceeds to fofoa, the donate button works just fine.

Anonymous said...

M,

didn't someone just say that they bought some US stocks? (not verified) They must be the truest supporter of the US$ world.

Victor

Nickelsaver said...

I ordered a single shirt. It was $27.16.

If you are going to order one, be sure to do the following:

Select "Full color" for the front, "One color" for the back, and then qty of size. If you are not ordering an xl, make sure you put a zero in that box as that is what I ordered.

Cheers

Nickelsaver said...

Oops - I should have proof read my original design. I left out an apostrophe in the word "Let's"

This is the corrected version

My apologies

http://www.ooshirts.com/d/89201849

AdvocatusDiaboli said...

ER

"Long-term bonds are saving on society's ability to produce"

I love that one, LOL. You should better say: Long-term bonds are earnings on the ability of the government to rob you at gunpoint or winning the printing contest.

Which brings us to another great question: Who would buy gov.bonds in a freegold environment?

Greets,AD

FOFOA said...

Hey Nickelsaver,

Wow! $27.16 for a t-shirt! If enough people want FOFOA apparel I'll get something official started, but it won't include that picture because I don't own the rights to it. I was thinking something more like this (replace Curry with FOFOA). Or Freegold School of Economics. Or maybe even ANOTHER School of Economics! Something like that. You don't want it to be an invitation for a pirate to follow you home. It feels silly to me to sell FOFOA-wear, but hey, if that's what you want…

People can email me if they are interested and that way I can gauge the level of interest, if it's even worth it.

Sincerely,
FOFOA

costata said...

AD,

Who would buy gov.bonds in a freegold environment?

Someone who wants an income producing investment.

If the currency in a given zone is well-managed and the government has low debt it should be a relatively low risk investment.

AdvocatusDiaboli said...

costata,
government does not produce anything, exclusively consumes. Those social handouts are in general also immediately consumed in physical terms.
So when the gov. entity issues bonds, it immediately devalues the fiat currency. Today this is not visible because people save in bonds and fiat, but theoretically in a FG environment it would be visible immediately (just as VtC described above). So again: why hold those instead of holding the real stuff? For the illusion of an "income"?
Greets, AD

Anonymous said...

No, AD, issuing bonds alone will not devalue the fiat currency as long these bonds are purchased with saved currency.

What depresses the value of currency relative to goods and services is only expansion of the "currency supply", i.e. the total amount of currency that circulates. This amount increases only when commercial banks create credit (or some equivalent transactions happen outside the banking system, for example, endorsing of real bills, using the same collateral several times, etc.)

So if someone borrows money from a bank, the value of currency relative to goods and services is depressed. If someone borrows from a saver, nothing happens. This is because when you borrow from a bank, you get new currency that did not exist before. When you borrow from a saver, that person no longer has the currency and cannot buy goods and services with it as long as you have it.

Victor

Robert LeRoy Parker said...

Nifty website Nickelsaver. Although $27 is a bit pricey.

Here is my t-shirt suggestion from forum 1600 completed.

Link

I think the black will blend in with the black of the t-shirt upon printing.

Bed time!

One Bad Adder said...

FOFOA: - I'm in for a subtle-T ...but would much prefer a MuG:)

Managed to talk a colleague into acquiring some Metal today - Gold to hold ...and Silver to trade.

Only the third convert in 12 Years. Gave him the full-monty ...and he thought it all sounded pretty valid ...under the circumstances.
...and it's these "circumstances" which are continually in flux.

AdvocatusDiaboli said...

No VtC,
because the currency raised by issuing the bonds will be used to consume("destory") physical goods.
Let's say there is a market place where farmers bring their food for trade together with their "currency tokens". Now government shows up and sells to the farmers their newly printed IOU-bonds and after they got the currency-tokens they buy from the farmers their food. Okay, still nothing lost in total....but....upps the state employees just eate up the purchased food and sh!t it out right in front of everybodys both...
Now, how much is the remaining currency worth, what can you buy with it?
Greets, AD

One Bad Adder said...

What about a "design comp" FOFOA. (Nickels chomping at the bit already;)

USAGold used to run a $PoG "guessing-comp" which was VERY popular ...I even managed to win a couple to boot.

In the spirit of "entertainment" email me - I'll cover.

FOFOA said...

Ahoy, OBA!

Design submissions by email or comment post are de facto in the running. No need to cover. Demand drives everything. Demand creates supply. Bring it on. Show me it's worth the effort.

Sincerely,
FOFOA

Aquilus said...

Treaty on future Euro-state deficits signed. (implementation crucial)

P.S. at the article end $IMFS/Cameron upset..

Nickelsaver said...

FOFOA,

I hadn't thought being followed home, LOL.

What made that T so pricey was the Full color front. But I just love that graphic. It is the coolest.

Those t-shirts break down to around $16 ordered in qty.

So the challenge now is to make an fofoa T-shirt that would not be viably associated with your blog.

But I was going for the opposite. I want people to read your blog.

But respect your wishes.

If you decide to take down the link to the t-shirt within the comments, I will understand.

I'm also thinking about a "who shot JR t-shirt". J/K

Anonymous said...

I Like this design for a FOFOA T-shirt.

Bjorn said...

I liked the "ANOTHER school of economics" line so much I just had to make a design as well...

http://www.ooshirts.com/d/54888193

Anonymous said...

@Bjorn

I like it!

Jeff said...

http://www.ooshirts.com/d/67237646

Anonymous said...

AD,

Long-term bonds are earnings on the ability of the government to rob you at gunpoint or winning the printing contest.

That's an extreme anarcho-capitalist type view point. Are you suggesting that taxation itself is robbery?

DP said...

ER,

You meant antisocialist, right? :)

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

DP,

Let's just say that I don't see the world as black or white.

Michael H said...

Two recent pieces by Bruce Krasting on increasing currency in circulation, one in Switzerland and one in the USA.

On Banknotes

”Note that 59% of all bills outstanding are of the 1,000 CHF denomination. This is crazy. It's the same as having $1,000 bills in the USA. Can you imagine going into a Starbucks to buy a paper and a coffee and tendering a $1,000 bill? It wouldn’t work in the US. The SNB provides the obvious explanation for the huge float in large denominations.
The high proportion of large denominations indicates that banknotes are used not only as a means of payment but also – to a considerable degree – as a store of value.”


Chuckles

”Lee Adler at Wall Street Examiner has some interesting data on the amount of printed money outstanding:

Two things caught my eye. The recent percentage rate of increase has not been seen since the crisis days of 2008. The second thing is just the sheer amount of paper money “out there”.

I have only questions regarding the rate of increase. Are these 100-dollar bills ending up in the USA? Or are they going out of the country? Are they being used to transact business? Or are they being used as a store of wealth? I believe it is all of the above.

The $1.05 Trillion of outstanding currency comes to 7% of GDP. That is up from 5% in 2007. The increase of $300 Billion represents a 40% increase while the economy was basically flat. If this was all in 100-dollar bills it would stack up 700 miles high. Didn't Bernanke say the Fed wasn’t printing money?"

Michael H said...

Anybody else notice this?

” The last 400oz physical I bought, I just simply called my bank, lucky me: I got it for almost the same price as paper. Tested it and picked up that stuff personally three days later. Why should I buy paper gold?”

---------------------

There was discussion in the last thread about Greece putting up gold as collateral; many comments, such as this one from DP, which I just picked out as a representative pointer.

” Greece isn't gonna just blow off its debts and stay in the Euro

Didn't Greece buy equity in the Eurosystem when it was allowed in? 15% of which was physical gold transferred to the ECB's centralised ownership, alongside the other 85% in foreign currency?

If they chose to walk away, would they not forfeit their equity position in the Eurosystem. At the very least.”


I think I agree with victor on this one, that Greece should/will default and stay within the Euro, and won’t have to ship any gold at the moment of default.

Once Greece defaults, if gold and debt get repriced (one up and one down, of course), then Greece will need to ship small amounts of gold abroad to support its standard of living as it adjusts its economy to live within its means.

Having Greece pay its current loans in gold, even very high priced gold, will be counter-productive to Greece and counter-productive to the Euro-freegold project:

- Greece entered into the debts with the understanding that they were non-recourse, non-collateralized sovereign debts. Why would they put up collateral now, instead of just walking away from them and starting fresh?

- Greece’s current debts belong to the current $IMFS system, and ‘saving’ these debts with gold, even high price gold, will be saving the current system of saving in debt.

This is said with the understanding that the ‘Greece puts up gold collateral’ stories are unsubstantiated and fishy.

---------------------

costata,

Yes, the latest Cook piece was somewhat disappointing. But I liked his earlier article and thought that his prediction that oil would soon correct down to $60 was worth listening to.

Anonymous said...

Wow, I really dig that shirt site.

Here's one for the boys and one for the girls hehe:) or vice versa.

Motley Fool said...

Ozzy

Glad you liked it. :)

...

Liked the last white shirt. :)

kobajashi said...

Dear readers of FOFOA,

As FOFOA statet as a possible outcome, that $POG will rise sharp till $2333 ( or so) and than fall back to - $1000 (or so). I have some thought's of my own …

- Because Jim Sinclair talks about a sharp decline (30%) in the USDX in 2012 !!
- and also because LEAP2020 (a very good informative website about europe integration http://www.leap2020.eu/English_r25.html and their must read bulletin GEAB witch right now the nr is 62 http://www.leap2020.eu/GEAB-N-62-is-available-Global-Systemic-Crisis-Euroland-2012-2016-Perpetuation-of-a-new-global-power-on-condition-of_a9183.html and you can read an online short version for free ) is talking about a sharp decline in the dollar of 30% from june 2012, is it possible that together with the decline of the dollar, Gold first shoot's to 2333?? ( tis will also be a rise of more than 30%!!).
After this, the world will see the real value of a dollar and will start dumping treasury's. Because of this action the dollar will rise and gold will fall to sub $1000

Is this a good possibility?

Greetz Koba

Anonymous said...

@SleepingVillage

The orbital launch pattern is really a nice touch.

kobajashi said...

So what I am really trying to say/ask … (I am a little confused in how (why) the paper price will fall so low)

When $POG gold will be around $2333, FOFOA expects "the world" to see the real value in the dollar and starts dumping treasury's AND starts asking for dilivery of physical in mass? But at that point, physical is expected to be totally whitdrawn from Kitco and other Gold pools? So that's why everybody will be paid in dollars instead of physical and because of that the longs will start dumping the paper gold in mass? And Physical will go in hiding?
This will also move the dollar upwards!!

Am I correct when stated like this?


Greetz Koba

Aaron said...

Are you kidding me /SV/?

Wearing that shirt home might land me a hatchet in the back of my head! ;-)

Anonymous said...

Somehow 2001 was a key year, wasn't it? Who is blackmailing whom?

http://www.nytimes.com/2012/03/01/us/graham-and-kerrey-see-possible-saudi-9-11-link.html

For some further facts (although I don't share his interpretation)

http://www.amazon.com/House-Bush-Saud-Relationship-Dynasties/dp/B000CC491W/ref=sr_1_2

Victor

costata said...

Michael H,

”Note that 59% of all bills outstanding are of the 1,000 CHF denomination. This is crazy. It's the same as having $1,000 bills in the USA.

Worth bearing in mind that this could also be a play for organized crime funds. That might be a better explanation for the assaults on the Swiss banking system by the USG.

Re: Cook

I think the comments (read with the post) fleshed out his case for $60 oil.

Re: Greece

I think some of the commentators are missing the fact that Greece must achieve a surplus on their primary balance before interest payments.

As long as the government is running deficits in spending versus revenue they must constantly increase their borrowings. Until they achieve a positive primary balance they have no hope of stabilizing their financial position.

Admittedly their attempts to do so are being hampered by creditors attempting to place themselves at the front of the queue for payment.

If Greece could achieve a primary balance surplus (like Italy) it is the creditors who are most at risk. Greece could default and when lenders threaten to cut them off from the bond market Greece could say: "So what? We don't need to borrow."

So the game by the IMF et al is to get as much of the debt as possible locked into the Greek government budget before Greece achieves a primary balance surplus. I think this helps to explain the conflicting agendas in the so-called "bailouts".

The targets are based on deficit reduction not deficit elimination. To escape the trap IMHO Greece should have done the following:

1. Suspend all interest payments on their bonds.

2. Cut expenses to achieve a primary surplus (or balanced budget).

3. Negotiate with creditors over loan restructuring.

Easier said than done, I admit.

Anonymous said...

Haha, Aaron. Yeah, I was only half-serious with the pink one;) All in good fun. But you know, with fame comes FANS!

Thanks, Matrix - It seems to work nicely and fits the shirt well. I'm not too sure about the rest of it, though. Feel free to edit it as you please:) and share your results.

Zebedee said...
This comment has been removed by the author.
RJPadavona said...

Hello Friends,

How's this for a t-shirt:

http://www.ooshirts.com/d/88453965

Alien said...

Costata,
Greece has lots of oil and even more natural gas. They won*t need to borrow once they choose.

Aiionwatha's Nation said...

Great shirt RJ! Is it on the assembly line?

Saw this video on Max's website. It's amazing how much easier it is for people living in a real economy to see the scam. Wonder who cobbled it together?

I recommend it for the perspective as I'm hoping for better than two goats per 1/2 oz, but hey that may turn out to be paydirt depending on whose scenario you like.

Quote of note: "the banking system is a crime."

http://www.youtube.com/watch?feature=player_embedded&v=nNtIsSWVJBI

Edwardo said...

ephemeral_reality wrote,

"Are you suggesting that taxation itself is robbery?"

As Thomas Jefferson observed, "The power to tax is the power to destroy." Implicit in that observation is that taxing authorities may, from time to time, abuse their authority. Such abuses tend to be described as confiscatory, an act that is, in effect, theft, regardless of whatever reason or reasons are offered as a rationale for said confiscation.

Aiionwatha's Nation said...

Tax, borrow, print combo, while running a global price fixing scheme...now that's confiscation.

TJ was no slouch.

Nickelsaver said...

http://www.ooshirts.com/d/97032946

costata said...

Alien,

According to a report I read (I posted a link on an earlier thread) Greece has not yet claimed the mineral rights to the ocean area they are entitled to claim under international law.

The same report asserted that substantial deposits of gas remain to be discovered in this region even after the large discoveries off Gaza and Cyprus. So there does seem to be a potential windfall waiting for Greece if they can avoid being screwed out of it.

The latest PMI data and other reports indicate continuing contraction in the Greek economy.

So I think it is a tough call as to whether they are able to reach and/or sustain a primary surplus. If they have achieved a primary surplus, net of interest expense, then FWIW I think they should default ASAP.

Nickelsaver said...

AN,

Great video.

All those dinar savers will be in nice shape soon enough. And all the greenback savers will be screwed, because devaluation is hidden from their eyes.

I suppose a very weak currency can be a blessing in disguise.

Aiionwatha's Nation said...

NS,

One part I thought was interesting was the exchange of dinars for goods and notes. My RPG education makes me cringe at such a thing, but in that system I guess what goes around will come back around.

"a man in debt is so far a slave" Emerson.

These ideas certainly aren't new outside of the USA 1982 - 201?.

Nickelsaver said...

AN,

That's pretty close to bartertown.

Aiionwatha's Nation said...

Yes, I supppose so, but so much better than a society pleading for more notes printed at will.

Nickelsaver said...

yeah...gold imprisoned by monetization is better than paper backed by paper.

JR said...

Hi Michael H,

Greece entered into the debts with the understanding that they were non-recourse, non-collateralized sovereign debts. Why would they put up collateral now, instead of just walking away from them and starting fresh?



Do tell, what is this you talk of?

Alien said...

Costata

"major interest in Greek hydrocarbon reserves. Eight of the world’s biggest seismic research companies bid to survey for deposits"

Why, is it just now they`ve started looking for their treasuries? I don`t believe.

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_02/03/2012_430900

And now this one:

From last year:

Energy & Natural Resources - Greece
Hydrocarbons management becomes official

January 17 2011

Introduction
Responsibilities of EDEY SA
Further EU legislation

http://www.internationallawoffice.com/newsletters/detail.aspx?g=1c68fa40-8b85-4163-b5a3-93f41b1a37ef

Gesellschaft für Verwaltung von Erdöl und Erdgas in Griechenland


And as of this year a few days ago:

“EDEY SA” Cap 1m 02.25th

http://www.rechtsanwalt-griechenland.de/blog/gesellschaft-fuer-verwaltung-von-erdoel-und-erdgas-in-griechenland/

They will default on the week from 19th to 23rd. By Friday it`s done.

Let`s see what the hedgies want, if credit event or not butI would say an orderly default is already managed for.

Alien said...

Dear FOFOA,

here you have a scientific proof of how the superorganism works.
I qiote:

Study leader Professor Chris Frith says: “The ability to adapt to others and align ourselves with them is an important social skill. However, at what level is this skill implemented in the brain? At a software (information processing) or hardware (structural) level? Our results show that social conformation is, at least in part, hard-wired in the structure of the brain.”

What are we to expect from these revelations? It is often said that a group of people can never change at once, only one at a time. However, it seems that there is now conclusive evidence that human brains are changing everywhere and almost simultaneously. The cause may be attributable to either changing thought patterns, releasing outdated societal values, embracing the versatility of the human dynamic or all of the above. Whatever it is, it will likely change the world."

http://preventdisease.com/news/12/022212_Grey-Matter-In-Our-Brains-Is-Increasing-And-You-Wont-Believe-Why.shtml


Let`s see how long it takes albeit I believe the higher the pressure the quicker the transformation aka development.

costata said...

Alien,

Thanks for the update on the efforts to exploit the hydrocarbon potential in Greece.

It will be interesting to see if this plays out as you anticipate.

Cheers

One Bad Adder said...

Kobajashi: -

If I may address your query (in FOFOA's absence):
You wrote -

So what I am really trying to say/ask … (I am a little confused in how (why) the paper price will fall so low)

When $POG gold will be around $2333, FOFOA expects "the world" to see the real value in the dollar and starts dumping treasury's AND starts asking for dilivery of physical in mass? But at that point, physical is expected to be totally whitdrawn from Kitco and other Gold pools? So that's why everybody will be paid in dollars instead of physical and because of that the longs will start dumping the paper gold in mass? And Physical will go in hiding?
This will also move the dollar upwards!!

Am I correct when stated like this?


The current mechanism for price discovery and an enormous amount of third-party öbligations relative to $PoG (gold) can ultimately be settled in Dollars.
When (if) it becomes imperative to hold only "the metal" ...these claims will hit the market en-masse ...and $PoG / S will plummet as a result thereof.

Catching this particular falling knife will ultimately render only painful paper-cuts IMHO!

One Bad Adder said...

Koba: -

Talk of a precipitous drop in the US Dollar side of DX has been around for yonks ...and it hasn't happened ...yet - on the contrary, $US has risen as Yields on T's have dropped!
My thoughts (in the currency patch anyway ...and for the time being) are that they're doing ALL THEY CAN to stop the Dollar from "rising".
Curiously, $PoG has "risen" these last 10 years as a result thereof rather than any fundamental flood of interest in GOLD per-se.
It WILL happen Koba (FreeGold) ...but NOT as we generally expect it to I'm afraid.

ampmfix said...

@Alien,

"However, it seems that there is now conclusive evidence that human brains are changing everywhere and almost simultaneously"

just like these:

http://www.youtube.com/watch?v=XH-groCeKbE

Alien said...

amomfix,
beautiful vid, thank you!
The narrative fits for? Easy analogy.
Waitinng for the masses, the golden starlings and no collusion in human murmuration too I hope.

Michael H said...

JR,

When I said "Greece entered into the debts with the understanding that they were non-recourse, non-collateralized sovereign debts. Why would they put up collateral now, instead of just walking away from them and starting fresh?",

What I mean is that sovereign debt is, by its nature, non-recourse, like credit card debt. This is how I understand it, anyways, which of course could be incorrect.

The only reason for Greece to put up collateral would be for new debt, not its past debt.

Unfortunately, the issue gets a little muddier since part of Greece's current debt needs to be 'rolled over' along with new debt being issued.

The latest 'Greek debt deal' supposedly writes off $141B of Greek debt. Greece's gold holdings are 111 tonnes. In order for Greece to generate $141B by selling gold, they would have to sell their entire holding for nearly $40k (all prices USD).

For total Greek debt,

http://nationaldebtclocks.com/greece.htm

of 345B Eu, Greece would need to sell the entire hoard at close to 100k euros per ounce. Now, given 'just a bit' of inflation along with higher real gold prices, this is feasible. But it still doesn't seem fair.

Of course, Greece is a small country and the world is harldly ever fair to small countries. But it would be an inauspicious start to a new world monetary system, wouldn't it?

Michael H said...

costata,

I looked back at your comment about China and the gold market and realized that I don't have too much to add at this point.

However, a couple of thoughts about India:

As FOFOA points out, India should not be able to import any gold since it is running a trade deficit ex-gold. The fact that gold is flowing into India is an anomaly of the $IMFS.

I wonder if the trade deficit, coupled with India's huge private gold holdings, make India's economy a target for destabilization.

Perhaps some large actor with control over both currency and gold markets could manage to crash India's economy so badly, that gold gets 'released' from private hands for the sake of survival.

JR said...

Hi Michael H,

Why are you talking about Greece selling gold? My point is I think you are looking at this the wrong way. As Lisa pointed out when the rumors first started, doesn't this sound like what FOFOA has been telling, like from Euro Gold:

Quarterly Reflection

Over the latest quarterly cycle we have witnessed several curious advances in Europe. To name just a few, on May 24th the European Parliament's Committee on Economic and Monetary Affairs agreed unanimously to allow gold to be used as collateral in clearinghouses. [2] And then on June 7th the ECB encouraged investors to buy new Greek bonds to replace maturing securities with two separate unnamed European officials saying investors may be given collateral as one possible incentive to roll over the debt when it matures. [3] And finally, on "Snapshot's Eve", June 29th, we learned that China's SAFE (State Administration of Foreign Exchange) is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. [4][5]

The monetary plane is changing. The signs are everywhere. Euro gold just broke EUR 1,100 today. Here's what it looks like in dollars:

Tuesday, January 1, 2002 - Launch of euro transactional currency
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


==================================

Or from Open Letter to Ron Paul:

Honestly, the Eurozone is so far ahead of you DC guys on this it's not even funny. They mark their official gold reserves to the market price every quarter, and they just voted to make gold a system-wide acceptable collateral asset. [2]

"The European Parliament's Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold."

OMG! Can it be that a collateral asset that is consistently rising in free market value makes boatloads more sense than ones you have to prop up with quantitative easing and open market "print to purchase" operations??


=================================


Greece will never part with its gold at today's prices. As Dr. Evil says above "one million dollars in gold." Not one ton of gold.

We know it is the ECB's call if gold is involved, so assuming gold were to be involved, what might the ECB be up to?

"This is not about Greece paying off its debt in high priced gold. It is a systemic shift to meritocracy where if you don't earn it, then you must part with some REAL treasure. Sure, Greece could theoretically sell the Parthenon."

Of Currency Wars

JR said...

Btw, haircut/defaults/restructuring of existing debt is not inconsistent with using gold as collateral for new debt.

Likewise, its also consistent to stiff some savers who bought your debt will recognizing the importance of making other savers, like those who might continue to buy your debt, happy and willing to keep buying your debt.

kobajashi said...

Hello One bad adder,

Thanks for your explanation.

Because Englisch is not my language, it's difficult to understand all you are saying.
I will try to explain what I did and didn’t understand so good.

So basically you think we can't foretell how freegold will take place? (The steps and when which step will take place?)

You also think that when (if) it is obvious that the metal( physicaly in your pocket) is what counts, than all the paper $ gold obligations will flood the market and make the paper price of $gold plummet.

But you think at the same time The $ (doller) will plummet? Will this be because the 'useness" of the us $ will plummet at the same time? (at that point the dollar will maybe end as the world reserve currenty?

I thought the correlation between the two was (normally) : $gold =up  $ down ??
But probebly because the change in the system, this will not be any more at the time?

I really hope (when the time comes and freegold really happens), I understand what will be taking place and that I will be convinced enough to not act like the (stupid) weak hands.

Right now I think I am a stong hand. I am accumulating Au since 2007 and did buy on dips (when weak hands sell). But if the transition is so hard and unforeseen, than I hope I won't panic because if we are honest… who knows for 100% sure what will happen?? Nobody I guess…?

For now I understand (with my little knowledge of finance and economics … I am an technician but has learned a lot the past 5 years) that a sepperation of the unit of account worldwide ($, €, …) and the preservation of whealth (physical gold) IS NECESSARY!!! And for now I sleep very well because of my understanding an acting like I did.
But This is because for now, everything goes like planed (sort of) and everything looks relatively calm here where I live.
But what will happen when some day, things will get real ugly and things will not go as I thought?

Maybe you guys with lots of knowledge are more comfortible than me but I think many readers here feel the way I feel?


Greetings

Koba

dragonfly said...

Gotta love all those T-shirt designs.

Here's one more.

http://www.ooshirts.com/d/74947858

Nickelsaver said...

John Fry,

I would wear that t-shirt periodically ;-)

One Bad Adder said...

Koba: -
Your English is good, your understanding is too Sire.
...and a Technician? The World would be a better place if we were ALL Technicians Koba ;-)

OK,FWIW - I don't think the $US is going to drop any time soon ...and definitely NOT as a result of $PoG going "to-the-moon" (as they say).

The hard thing to do (mentally) is to stop thinking of GOLD in terms of it's Dollar "value".

GOLD (as opposed to $PoG - in this current financial environment) is to all intents and purposes - PRICELESS!

mr pinnion said...

My T-shirt effort

http://www.ooshirts.com/d/27249489

Regards
Ozzy

dragonfly said...

Regarding the dollar rising near the end of the $IMFS. I can imagine that the foreseen scramble for dollars to settle debt, and the $IMFS creating additional dollars to facilitate the process, will be a reflection of the underlying rush to nail-down true possession in the physical world at all levels. Who has clean title to what will be the final concern, prior to a reboot and a new system. It should be the result of an overall realization, on the part of most market participants, that there are far too many claims on the physical world than true capital in the world can satisfy. It's as simple as that in my view.

It doesn't seem that debt is actually saved by monetizing it, but more to the point, that debt monetized facilitates real purchases in the physical world. It's the scramble to make the debt real that exposes the fundamental fault in the system. Loss of confidence and all that entails initiates the printing.

The currency that never existed to monetize the wealth-perceptions of the population at-large will be issued in an attempt to float those perceptions for a while longer, as the system morphs into what it will become.

If the system's last-gasp attempt to maintain confidence has been the derivative "insurance" concept, then maybe the huge dollar-transfers we've been witnessing for the last few years have been mere patches at the derivative-level of reality. Is the propping-up of sovereign debt just a stop-gap measure to keep the derivative mess from unraveling? Are they that intertwined?

That's my limited understanding at this point on the overall idea of an end of the dollar's timeline.

What's confusing to me is that we're not seeing the "saving of all debt, at all cost" at the local level in the United States, thus the political battles at the state-level concerning pensions and local debt structures. When do we see the Fed/Treasury backstop these obligations with currency infusions? Or is that a dumb question? Is it the case that the process of saving all debt has begun, at the top of the pyramid, and the floodgates will be opened sometime after that phase, to include the local levels?

It sure looks like the $IMFS has the intention of squeezing the local level in a deflationary manner at present, deflationary in the sense of deflating individual expectations. It doesn't appear that there's any intention of monetizing those expectations. Any thoughts? Am I generalizing it too much?

I read about policy changes coming via Treasury, Labor, IRS - whereby retirement funds will be encouraged to seek safety in government annuities, i.e. another layer of debt. How long can the $IMFS extend its timeline using these types of corralling techniques? Is that just a temporary measure to keep as many dollar-promises out of play during the final scramble for title in the physical world? How could we be close to a game-changing shift, when it looks like all the gears of the existing $IMFS appear to be engaged and planning in a very long-term manner? TIA for any thoughts.

dragonfly said...

One more thing, I'm always pondering how Freegold emerges, especially if it is determined in the arena of the "giants". Will it be market-driven, political will, or a mixture of both. Are there any other possibilities? I think we need FOFOA to post one to initiate a general discussion on this aspect, fully realizing that it has been embedded in all of his posts up to this point. People new to this concept can get lost in the technical aspects, and certainly confused by the more esoteric foundation in the A/FOA archives. I know I'm one that wonders if a market-driven rise to levels indicated in Nick Laird's recent chart might be one scenario, at the end of which the giants recognize a 'fiat accompli', and Freegold comes about without a lightning-strike in the night.

Anonymous said...

You gave me an idea, John, thanks!

new design

Winning!

dragonfly said...

Nickelsaver, thanks for the laugh!

I have one on order and I'll report back on reactions to it.

dragonfly said...

SV - looks great, I think I'll order one of those also.

Anonymous said...

Excellent, I'm thinkin' I will as well, John. The Bernanke one, too! hah!

dragonfly said...

Ozzy, yours goes on my order list also, nice work, maybe I'll have one for each day of the week. Probably have to hire a driver trained to evade tails though.

AdvocatusDiaboli said...

ER,
"That's an extreme anarcho-capitalist type view point. Are you suggesting that taxation itself is robbery?"

See, here at FOFOA I think the great thing is to call things the way they are, not like you think they should be, without any moral judgement (well, most of the time...).
But if you ask about my personal judgement: Yes, it is robbery (it fullfills all defintions of robbery). Is it usefull for the overall organism? I dont know, IMHO sometimes yes, most of the time no (because when the majority of morons elects the greatest brown nosers, you can be sure to have an idiocracy). But at least be so honest to call things what they are (so moral judgement is just a side show).
Greets, AD

JR said...

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed."

What is the problem with Greece and the other so-called PIIGS? Is it profligate public spending/financing, the credit that enabled it, the system that helped hide it, and the mountain of unserviceable debt that resulted?

The difference between the $IMFS and Freegold is that the former encourages and enables the above while the latter never lets it get this far along so as to become a systemic risk. It's called 'balance as you go', as opposed to enabling the growth of an imbalance so large that it finally collapses back into balance.

I cannot give you the blow by blow that you ask for, but I can still show you what must happen. And it is helpful in this regard to work backward from the future until we come to two choices that will both result in the same end.

First is that we are facing a systemic shift from the $IMFS to Freegold. Don't forget that the actual value of an individual transactional currency unit (even a euro) doesn't really matter in the context of its primary function. So even though one currency is built for the new, emergent system, I would still not want to be holding that currency through the transition.

Second is that Greece's debt cannot be paid back in real terms, and neither can the aggregate planetary debt. It doesn't really matter if it is not paid back through default (bankruptcy) or through devaluation of the currency... it will not be paid back in real terms. But devaluation of the currency is certainly the more politically acceptable route.

Third is that all this planetary debt (including Greece's) is a function of the $IMFS. The eurosystem, even though it was built to thrive under Freegold, is still supporting the $IMFS. The action to look for is the passive action of withdrawal of support.

The way the $IMFS works is that, at the very end, it either bails you out or kills you dead, depending on who your friends are. Freegold spanks you along the way with a little pain here and there until you get your finances back in order.

I expect Greece and the PIIGS to get spanked hard at the beginning of the new system. I do not expect Greece to leave the euro, but it will certainly have to get its public finances in order.

You see, the shift is going to be swift and it will reveal a change in perception that is almost impossible to imagine right now. Physical gold is going to rise so high, so fast that it will become known as the most prized treasure a collective state can hold. And immediately upon this recognition Greece will have to either part with or encumber its most prized "monetary" treasure while it restructures its newly devalued debt and its economy.

No longer will unlimited Ponzi finance be an option for ANYONE'S financial difficulties. But at the same time, the worst of the financial predicaments will have been significantly devalued, as they were bad bets by creditors from the start.

This is why it is so important to understand the implications of Freegold now, because the cascade of events once "the plug is pulled" will be mind-numbing. The ability to understand events as they unfold will be quite rare (and quite valuable) as we are in uncharted waters.

Does this explanation help you find the answers to your questions?

Sincerely,
FOFOA


via "The Gold Man" (not Goldman) at the BIS

JR said...

Above FOFOA made clear:

Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.<

Its about the big holder's withdraw of stock from the flow, when:

"So that's why I said in the post, "ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands." And at the same time… because the return is surprisingly shitty all of a sudden… "physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only."


Does this help think generally about the multitude of possibilities as to might i might unfold?

Anonymous said...

@SV

Your new design is the big winner IMO. It has it all, FOFOA, AU, and the inverted waterfall. I think this one is the best so far.

Nice work!

dragonfly said...

JR, thanks, that does hit the core of it - it's interesting how my own grasp of things gets in the way of simplicity, even when I've considered the thought previously.

I printed that out and put it on the refrigerator. Laser beam focus you got there.

jonny49 said...

My T-shirt design:

http://www.ooshirts.com/d/20777591

Woland said...

In my capacity as a newcomer to this forum, I would like to pose a question to all, with respect to the one
question which neither A, FOA or FOFOA, was able to
give a convincing answer: WHEN does FREEGOLD
arrive on the world stage. That the prospect is
nearer now than in 1999 there is no doubt. That the
delay of Freegold was caused in part by the need to
account for the inclusion of CHINA, there is again no doubt. We know that Big Oil has been prepared
for a long time, and was officially included around
1998. While the TRIGGER for $IMFS default is not
knowable, or predictable, I think one element must
be in place before the failure of the system.
In a race, before it is to begin, all the participants
must be on their marks. In FREEGOLD terms, that
means that all MAJOR beneficiaries of the NEW
system must have sufficient gold reserves to be able to withstand the transition from $IMFS to freegold,
as their $ reserves collapse while their GOLD reserves skyrocket.
So, an important signal (perhaps itself unknowable to the "great unwashed") is when, in their own view,
China, Russia, India, Brazil, Indonesia, etc., feel that
the loss of value in their $ reserves will be more than made up for by their gains in gold reserve valuation.
We know that the Eurozone is prepared. What about
the others?


the transition

Anonymous said...

Woland,

welcome. I have nothing to add (I don't know the answer either). I just wanted to say that I like your point of view.

This may also be linked to the observation that the US$ price of gold has been increasing since 2001 at a very steady rate of about 19% per year - this clearly looks managed to me (although not in the way GATA suspect). Perhaps there is already an agreement about giving some countries, perhaps not all of those you listed, some extra time. China comes to mind.

Victor

Nickelsaver said...

No enrolling spring semester.

http://www.ooshirts.com/d/90467006

Aaron said...

Excellent Nickel! The best design yet.

Nickelsaver said...

VIATICUS CERNO PECUNIA AURUM

roughly - a monetary journey to separate money and gold

Check out the back for a clear view of the seal. Can you identify the symbol in the middle?

http://www.ooshirts.com/d/70033940

Anonymous said...

I took SV's design and tweeked just a bit. I ordered a bunch for myself and my crew:

http://www.ooshirts.com/d/90840022

Nickelsaver said...

Thats a sharp looking T matrix

mrbeyond said...

comments

kobajashi said...

Hello One Bad Adder,

Thank you SIR for your patience, you're definitly not as Bad as you think you are 

When I say Englisch is not good I say this because it takes me days to read and understand half of one article of FOFOA an it takes a month to read and understand ¼ of the 500+ comments 

And when I want to ask a question related to these hard subjects, then I even have to use google to translate my thoughts so this also takes lots of time to correctly express myself. But its for the right course I believe ;-)

But the hardest part is to fully transfer these thoughts to my family and loved ones so they also could know and understand what is wrong with the system we live in and to let them make the right decision about there future related to whealth and money. I am very glad my partner follows me and also my parents and sister. But my friends … they look at me and think … oh yeah right. (sadly enough)


With the most kind of regards…

Koba

Aquilus said...

Just a thought: if t-shirts get the team spirit going so much, why not try out freegold emergence alternatives using a (remote) "war-games" concept described in the Rickards book?

Organizing something like that would be challenging, but could be fun..

Alien said...

In case I am not disturbing the shirts enthusiasts, here some newa about PAGE:

http://www.tfmetalsreport.com/podcast/3468/tfmr-podcast-14-ned-naylor-leyland-discusses-page-silver-and-true-price-discovery

Aquilus said...

I am very skeptical about the people behind this much-touted miraculous free market in the middle of communist China , but let's assume they are telling the truth this time.

If that's the case, all we see is that China does not care about controlling silver that tightly - rather they treat is as a new commodity market opening up.

mr pinnion said...

Alien.

I ve just wasted part of my life listening to that link.What a load of tosh.
For a start anyone who says they know Andrew Maguire looses all credibility as far i i m concerned.

Why did PAGE fail? Because a few well conected blokes in London phoned a few well conected blokes in China and told them to kill the thing.
Wow, who de have thought it?
Them London guys have phones and friends.Totally unpredictable that one.

Why will this 'NEW ENTITY' succeed?
Because they are keeping the name of it a SECRET! Genius!
So when the well conected blokes in London phone their well conected friends in China, they wont know what to tell them.
Seldom have i seen a more cunning plan in my intire life!

I think what you ll find will happen is this,

http://www.youtube.com/watch?v=RnW8dmJ0Fl4

Regards
Ozzy

burningfiat said...

Ozzy,

Good summary, haha...

I'm afraid you're right. A physical exchange in China was probably too much to ask for.

Perhaps it really is up to our OG's ECB and BIS to make a physical exchange (in size) happen.
Once all other options like bailout-programs, refinancing-programs etc. has been exhausted naturally :P

/Burning

Alien said...

Ozzy

exactly my opinion.
It`s only that last summer some people at FOFOA`s seemed to be quite excited with PAGE. Even FOFOA has some kind of contact to Ned. I don`t know, maybe he has some thoughts on this, but I doubt.
I wouldn`t hold my breath waiting for the crony Chinese to change anything while busy to save their arse. They are doing quite well for now and they may need more time.
Sorry for the time lost on the mp3 link, lucky me I only read the text;)

somanyroadsinvesting said...

Per Woland's question. Perhaps when China get more than the US' reserves of 8k tons. Also feels like China's pushing its citizens to buy gold kinda has the feel of a future trade in place. China will say hand in your gold and we will give you a new Yuan that is backed by gold.

Saw this video a year ago. Thought was interesting:

http://www.youtube.com/watch?v=YPXncTuwFIE

costata said...

Take a look at the spider webs that the commodity trading banks and BBs have built.

http://www.reuters.com/article/2012/03/02/us-fed-banks-commodities-idUSTRE8211CC20120302

"The truth of it is that having access to the physical markets is about optimization and knowledge - it gives you the visibility of the market to make far more successful proprietary trading decisions in both physical and financial markets," said Jason Schenker, President and Chief Economist at Prestige Economics in Austin, Texas.

"That's why for many years the most successful traders had access to both markets, and why we've seen little sign they're moving quickly to divest these assets now. It's trading with material non-public information - the difference compared with equity markets is that it's perfectly legal."

Based on past precedent, financial holding companies would still be allowed to be involved in trading physical commodities like oil or metals, even if they are not allowed to outright own the physical infrastructure which supports their operations.

Edwardo said...

"The Fed's not going to be terribly accommodating," said Oliver Ireland, a former associate counsel to the U.S. Federal Reserve and a partner with law firm Morrison Foerster in Washington, D.C. "There doesn't seem to be a lot of sentiment in this town for people doing new things and taking new risk."

I want to believe you, Mr. Ireland. However, regarding the matter of whether these big banks will get to keep their commodity businesses as described in the article, ask yourself this, Does it not beggar belief that after moving mountains to save these institutions that The Fed would now throw its weight against these institutions in a manner that would do them material harm?

Bosco said...

On PAGE.

What a load of BS from the Neyland guy.

Look at Bron's message on PAGE and also my reply in the comments:
http://goldchat.blogspot.com/2011/12/is-page-dead-on-pboc-ban-on-non.html

From the beginning, PAGE was just a local gov't endeavors to capture on the wave of commodity trading in china. Anyone who believed it's a game changer showed no understanding on how things really work in China. (On the same note, the common accepted belief that the Chinese gov't is pushing for its people to buy gold (and silver), IMVHO, is just another myth).

Anonymous said...

Not only JR (the other one) occasionally becomes religious. Also KWN does. Today, the Sprott himself came in to 'give investors strength'.

LOL.

Victor

Aquilus said...

Where did I read a warning about this before?:

Vietnam to Buy Bad Debt From Lenders to Avoid Banking Collapse - BBG

costata said...

Aquilus,

This article talks about mergers among banks in Vietnam as one of the strategies under consideration.

http://www.businessweek.com/news/2012-02-29/vietnam-ready-to-force-bank-mergers-as-bad-loans-hurt-growth.html

No mention of the government buying bad debt.

Boefke said...

My favourite in the T-shirt contest is Nickelsavers' one. +1

http://www.ooshirts.com/d/90467006

Robert said...

Woland, you ask the unanswerable question when you ask "When?" There always seems to be a long delay before the inevitable becomes self-evident. FOFOA says better to be a decade early than a day too late. I suppose that you could also say better to be three decades (yes, a whole generation) early than a day too late. I remember discussing sustainability issues back in high school 25 years ago. The country and the world were on an unsustainable course then, and we are still on an unsustainable course a generation later. Who would have though that Japan could muddle along like this for decades? Who can figure out the timing for when a bubble pops? Not me, that's for sure. I remember buying out of the money long dated puts on Countrywide back in 2003. I was right about the conclusion, but still way too early.

For me the interesting question is related to when: It's "How?" And specifically whether it will be an intentional malicious act that brings down the system. I think there is a growing recognition that the entire system is a lot more fragile now. How long before terrorists target the financial system instead of skyscrapers. How long until foreign governments start using ideas as weapons? -- specifically the idea that the world no longer needs the USD? If the Iranians really wanted to cause trouble for the US, they would mothball their nuclear program for a couple decades, open the country to inspectors, and then announce that they will no longer accept USD for oil. What if the OWS movement abandons politcal slogans and instead targets the system they decry? How about a "National Default Day" when everyone stops making payments on debt and steps up the pressure for a debt Jubilee? I have lost faith in the political process, but I have not lost faith in ideas. And in the end I think that it will be an idea that catches fire that might bring down the system.

Edwardo said...

This story is making the rounds. I'm sure it's nothing.

http://americankabuki.blogspot.co.nz/2012/03/115-resignations-from-world-banks.html

Nice post, Robert. When you say the following:

"And specifically whether it will be an intentional malicious act that brings down the system."

The system is collapsing as we write, and all The Kings horses and all the kings men... And it is, in my view, being brought down, as is generally the case in such things, by the actions of those the system was meant to most serve.

costata said...

JR,

Locke, Menger, Hayek... we need, else, what?

sean said...

re: resignations from world banks - not sure I understand what this is supposed to mean. The lizards are taking over??

sean said...

@Costata,

There's a fine line between profiting and profiteering - and at the end of that line there's a spider!

By the way, don't know if you caught the reference in that article to an ex-JPM commodity managing director called "John Fullerton", who has now reformed as a "markets activist".
I found his webpage Capital Institute, a "a collaborative space working to transform finance to serve a more just, resilient, and sustainable economic system" in which they search for an alternative, sustainable, economic system(!)
Looks quite interesting though, and nice to know that not all (ex)-bankers are evil! ;-)

Aquilus said...

@Costata

Re: Vietnam

Vietnam to Buy Bad Debt From Banks to Ease Risk of Collapse

sometimes it takes a little time before links are available on the public Bloomberg news feed.

Either way, if in Vietnam, get those garden gnomes out of your lawn, because front-lawn money dumping is about to commence

Anonymous said...

@AD, Edwardo,

While I am in complete agreement that taxing income, which came about through productive effort amounts to robbery, I don't believe the idea of taxation itself as evil.

IMHO, Anarcho-capitalism or unfettered free markets working is a myth. There are several reasons why I think it is naive, but here's a neatly written article on the Free market canard .

I also view human societies as complex adaptive systems and policy makers (be it fiscal or monetary) need to ensure that they maintain system resilience. Over the past few decades, most governments and monetary policy makers have traded off resilience for stability, thereby making the system extremely fragile and prone to tail-risk events.

Government policies have also actively encouraged non-productive rent-seeking and have insulated financial institutions from risk, making the system extremely vulnerable to exogenous shocks.

Left to their own, human systems deteriorate with entropy and manipulation: therefore governments do have an active role to play in maintaining the society. But the way they play it should be to ensure that system resilience is maintained, non-productive rent seeking is heavily discouraged (through heavy taxes on such rents).

Freegold as such is an excellent monetary system architecture that allows individual governments and policy makers to maintain their economy as they see fit, through the currency system of commerce. Nevertheless, in my understanding freegold itself doesn't advocate how governments/policies should be run directly. It is left to the abilities of these people in power.

Jose Castro said...

Hi FreeGold experts,

Thinking long term...
In a resource starved society, imagining that Herman Daly’s ten-step plan (http://www.theoildrum.com/node/3941) for a steady state economy come to be (however unlikely), what do you imagine would be the effect on gold's value?
I guess it would still be much higher then today's price, but would it not start declining as international trade surplus/deficits shrink and a much smaller flow is needed to settle the trades?

Thanks for any clarifications and I apologise if this was already discuss elsewhere. If that's the case maybe someone can point me there?

Keep up the good work FOFOA, I rarelly comment but I'm an avid reader of your posts. If it werent for you I would still be conviced that golg bugs are cuckoo and that gold is in a buble (which is kind of true for paper gold) and I would not have my small savings in gold... waiting for the jackpot! :)

Michael H said...

JR,

”Btw, haircut/defaults/restructuring of existing debt is not inconsistent with using gold as collateral for new debt.

Likewise, its also consistent to stiff some savers who bought your debt will recognizing the importance of making other savers, like those who might continue to buy your debt, happy and willing to keep buying your debt.”


Yes, I think this is where I was getting crossed up. I was interpreting the options being discussed as either default or posting collateral on the existing debt, not the new debt.

Nickelsaver said...

Boefke,

Thanks. Here is a refined version.

http://www.ooshirts.com/d/53263019

Anonymous said...

Intriguing PDF link from Chatham House, London on gold's role in the monetary system.

As Jim Rickards writes in his tweet, it is a high-toned apologia for money printing and willful disparagement of price stability.

1. They correctly state that fixing gold price will be severely deflationary.

2. They correctly argue that the paper price of gold is volatile, but lead to an dubious conclusion that it's not an effective reserve asset. They don't answer why central banks continue to hold gold on their balance sheet and ECB even MTM's their gold reserves.

3. They correctly state that systemic tail risks are extremely high and therefore gold will continue to play a role as a safe haven.

4. They incorrectly state that gold cannot be a good policy indicator. Of course it wouldn't be now, because of paper market obscuring physical price discovery.

Unfortunately, they haven't read FOFOA.

costata said...

Aquilus,

It would seem from that link Vietnam is about to tread the path of "good" intentions. Thanks for the link.


ephemeral_reality, sean and Jose Castro,

Thank you for those links.

sean said...

Jose,
Thanks for posting the interesting link to Herman Daly’s "Steady State Economy". I wonder if development of the SSE might be either aided or hindered by Freegold. One of the problems with the current system according to Daly is that the benefits of comparative advantage are nullified by the free flow of capital, and therefore by free trade and globalization – which really mean deregulated international commerce –because capital is very free to move. This problem is well-explained here. Under Freegold, though, I think this is resolved. If all those goods obtained by capital rushing overseas are balanced by the movement of gold (ie: financial capital), then as outlined in the gold must flow, gold in the "surplus zone" will have more purchasing power in the "deficit zone" and increase import of goods. Ie: it will all balance out!?

But anyway that’s not what you were asking. You asked if the value of gold would start declining if international trade surplus/deficits decrease and so there is less flow of gold. (You said price as well but I think you mean value or purchasing power, which comes back to the recent "hot topic" of how the price and value of freegold are on separate isolated circuits and can even be moving in different directions. See http://fofoa.blogspot.com/2012/02/glimpsing-hereafter.html)

So for the sake of argument then, imagine if international trade dropped off or was balanced completely. No need for international flow of gold. But savers still want to save, so there’s still just as much demand for what gold is available. And if someone wants to, they can still use their gold to buy the same amount of stuff they could before. The value of gold is the same. The price of gold in dollars, however, still varies up or down depending on how many are printed.

I think the short answer is that the gold must be free to flow, rather than the gold must flow, per se.

I hope this helps. Corrections welcomed!

costata said...

Well said sean!

Another Dimension To The Currency Wars?

Snippet from the link below:

The supply of AAA rated assets globally has declined about 2.6 percent since peaking in April at $18.8 trillion according to the Barclays Capital Global Aggregate Bond Index. A Bank of America Merrill Lynch index shows the number of issues in its AAA index fell to 3,611 from 5,331 in 2007.

By reducing the number of AAA sovereign countries it intensifies demand for the shrinking pool of AAA sovereign debt.

Other than the extract I quoted the rest of the Bloomberg piece reads (to me) like MOPE (h/t Jim Sinclair for that acronym).

http://www.bloomberg.com/news/2012-03-05/aaa-shortage-drives-up-international-holdings-of-treasuries-to-5-trillion.html

Anonymous said...

Eventually this remaining AAA will turn out to be a poison pill. But we are not there yet.

Victor

somanyroadsinvesting said...

The question I have is what happens in the extremely unlikely event that governments start behaving better. Cut expenses, raise interest rates etc. I know there seems to be little evidence of that but seems like one of the biggest mkt fears is if the mkt raises interest rates then metals get hurt a lot. Curious what you guys think? Thx

Edwardo said...

ephemeral_reality wrote:

They (Chatham House) don't answer why central banks continue to hold gold on their balance sheet and ECB even MTM's their gold reserves.

Gosh, by golly, wow, The Bernank answered that one a while back. Tradition! You know, like serving Turkey at Thanksgiving, Easter egg hunts, tailgating before a big gridiron contest, and financial firms stealing customer funds. Less facetiously, of course, they don't, answer such questions because CBs holding physical gold amounts to a gigantic elephant in the lobby of the global financial system. Best to -shhh- pretend that the (for now) very still yet enormous golden pachyderm isn't there.

Nickelsaver said...

SoMany,

I don't think that we will see interest rates go up. In the Bloomberg article that Costata posted, says "President Barack Obama’s financing of a budget deficit forecast to exceed $1 trillion for a fourth year"

Raising interest rates would increase the debt service payments. That would take away from the room that Obama is using to run the government. In other words, not only is there not going to be spending cuts, USG would probably increase spending if it could, but can't. Keeping rates down is all that can be done just to keep the deficit from increasing faster than the Fed can QE.

Which makes me wonder, what is the crossover point at which the USG can run a yearly budget deficit, while still being able to make debt service payments that are within the average yearly increase. At some point the debt service grows to 2 then 4 then 10 times the GDP.

Anyone know the math on that?

Aquilus said...

Just a quick point - not to distract from the question above:

The USG does not have to issue debt to finance itself - it can just spend money directly into existence (see Moneyness) , but that would introduce base money directly instead of credit money (through Treasury sales to entities other than the Fed)

Anonymous said...

somanyroadsinvesting,

let me try to answer this one (still up to debate if you like): the point of no return has long been passed. If you raise interest rates today in any significant way, you get into a cascade of defaults and a depression much worse than 1929-33.

Who would certainly not survive higher interest rates? Governments that are in debt to more than 90% GDP (includes the US). Consumers in the US, UK, Canada, Spain, Ireland.

Who might survive? Perhaps private households in Japan, perhaps extreme surplus countries such as Germany. But they are not isolated from the rest of the world, and so the answer is probably negative in their case, too.

Victor

Nickelsaver said...

Aquilus,

I thought I had this?

"The USG does not have to issue debt to finance itself - it can just spend money directly into existence"

You're talking about printing money right? Isn't that what QE is?

Anonymous said...

Costata,

That Bloomberg article reminds me of a market monetarist view that I recently read on Global Shortage of Safe Assets . He starts off well, saying One of the key problems facing the world economy right now is a shortage of assets that investors would feel comfortable using as a store of value.

After which, he rambles on about structural and cyclical dimensions to it, but never gets to the heart of the problem which is that one-way road towards infinite consumption never works.

He thinks of global demand for safe assets more as an annoyance for his NGDP idea LOL.

He has some evidence that Sweden adopts something similar to a NGDP target and therefore recovered much faster than rest of the OECD post-2008.

Victor is right. It's only a matter of time until the whole world realizes that there's not many places to hide.

Anonymous said...

Dear FOFOFOAs,

I'd be interested to hear your thoughts on the following question. Imagine you are the president of the CB of a country such as Australia or Canada, i.e. US$ block, but with lots of natural resources. Imagine you are clever and you get the big picture. One day the US$ will start falling. Then what?

* you have lots of US$ on your balance sheet, but no gold reserve left
* your currency is perceived as 'yet another dollar'
* do you want to hyperinflate your local currency, too
* do you not want to, but unfortunately have to
* is there a way of avoiding HI and, if yes, how?

Here are some of the constraints you need to work with:

As I understand, Canada exports not only oil, but also industrial goods into the U.S., and so they might choose to devalue their C$ as well.

The U.S. might want a part of your resources cheaply and for hyperinflating US$. You might not be able to say 'no' to this. But you might use some other part of your resources.

What do you do, Mr Stevens and My Carney?

Victor

Nickelsaver said...

Victor,

I don't know if this is possible. But it is my answer.

Short paper gold, set the printer on high, and buy physical in size?

costata said...

ephemeral_reality,

I realize it's ludicrous but under the present system downgrading the credit ratings of other sovereign debtors may be encouraging competition for USG paper.


VTC,

In Australia's case I think the PTB "get it" but they cannot take any overt steps to distance themselves from the USA.

As I see it the game plan down here for the time being will be to stick to the free float of the Aus dollar. Using the exchange rate as a stabilizer.

IMO if the government concludes that it needs to rebuild the gold reserves or extract a Freegold-RPG premium it will either convert gold miners to contract miner status or use some form of windfall profits tax to capture the extraordinary profits.

I do not expect a HI episode in Australia. IMO we are far more likely too see the kind of asset price deflation anticipated by the debt deflationists. If the government attempts to print to ameliorate its problems the exchange rate would fall and we may experience high inflation (but not HI). Stagflation in other words.

If China has a hard landing then this may provoke a steep downtrend in our terms of trade. This could deliver a shock from the capital account side of the balance sheet. But an increase in interest rates here would be a positive for the exchange rate.

So overall I think the "lucky country" will muddle through rather than seeing the extremes that will occur elsewhere. Anyway that is my 0.02 FWIW.

Alien said...

"Who is appointed to run the current-account deficits that these policies entail? Theanswer is nobody. On the balanced-budget theory, which put crudely requiresevery country to be run like Germany, the whole world would be in surplus – presumably with Mars. Sadly, the Martian economy does not exist. Taking theEurozone alone, the private sector’s financial surplus is running at about 4% ofGDP, less than Germany and Holland, but still large. For the advanced countriesas a whole – the bulk of the world economy, taking in Western Europe, NorthAmerica, Japan and Australasia – the number is 6% of GDP. The remainder of theworld’s economy consists of China, emerging Pacific Asia, Latin America, India,Russia, OPEC, etc. Much of this group is in current-account surplus (large forChina, Asian Tigers and oil exporters). The whole concept of every country aimingfor a balanced budget, at a time when private sectors are way out of financialbalance, now and for several years in the direction of surplus, is simplymathematically impossible."

Stupid economists. Savings in Au and you could have spared the inbalances. sadly governments and banks needed to rob us blind abd create so much hate in the EZ.
Otherwise they do a good job in explaining why the euro can`t work for a long time. I agree with Motley Fool about its transition role and hope it will break down afterwards.

http://www.scribd.com/doc/83928584/Netherlands-and-the-Euro-Full-Report-Final

50sQuiff said...

I'm a humble reader who works quite hard to communicate Freegold ideas on some Paperbug/Hard Money Socialist forums.

I've long wanted some kind of ANOTHER/FOA/FOFOA tshirt for me and a friend, because whether we like it or not, (free)gold has become part of our identity.

I really like Nickelsaver's design, here: http://www.ooshirts.com/d/53263019

Would you consider creating a version without the inverted pyramid badge and/r 'U'? It's a bit too 'Illuminati' for the uninitiated :)

Regards,
TeshooLama

somanyroadsinvesting said...

Thanks for the feedback Nickel and Victor. I guess my concern is people like Ron Paul are getting more attention therefore maybe on the margin we become to act more responsible. Maybe nothing dramatic, but go from trillion dollar deficits to maybe half a trillion and then the mkt gets excited that we are taking the right steps and the trend looks better and therefore people become more confident in paper fx.

Anonymous said...

For Liberty wrote-

FOFOA, man, your writing style.. You are the king of take a simple crystal clear line and dilute it into 5 pages of foggy, hard to trace macaroni.Yes, you right, you right, but.. Have you read the Relativity Theory of Einstein? Every sentence is so crisp and you never get the feeling you are going in circles. If you came up with the Relativity Theory.. I still wouldn't know what that is.........


Please troll another forum. The theory of relativity is complicated enough for a common man to understand. Unless you grasp the basics of physics, you may not essentially understand the theory.

Freegold is like a grand induction, less Black Swan like...more Mandelbrothian in nature.

No more feeding the troll.

Ryan said...

Interesting thought experiment, vtc. Other than reading articles, I don't have any acute industry knowledge of Canada's energy exports. However, I'm under the impression that most of their oil goes to Cushing currently. If that is true, Canada would almost have to be a first mate standing by the captain as the ship goes down wouldn't they? At least until they can export to another country in size. If they abandon the dollar, who do they export to?

Has there been any discussion here at FOFOA regarding the USG's 'foreign aid' to countries and their ties to buying USTs? The thought popped into my head yesterday and I found a fox news report from Coburn talking about the correlation. I would be interested if there is anything more substantiated throughout the past decade or two.

How does everyone pronounce FOFOA when talking to others? FOH*FOH? FOH*FOH*AH? Completely spelled out? My wife's eyes always twinkle when she knows I'm about to try to say FOFOA (I'm uncomfortable with all and so switch between all three)

Nickelsaver said...

TeshooLama,

The possibilities are endless.

http://www.ooshirts.com/d/80546403
http://www.ooshirts.com/d/13055045
http://www.ooshirts.com/d/12089027

Anonymous said...

Vtc,

Just thinking out loud, Australia deals a lot more in trade with China than the US - if I am right.

Australia's large commodity and resource business will take a hard landing if China takes a hard hit because of its own malinvestment.

Jim Rogers once said China is like the US of 1920's. Heavily malinvested, but still producing a lot more than it consumes. So he reckons it'd do well long-term, although boom-bust cycles are inevitable. I'd expect Australia to align its own currency strategy closer to China if SHTF in the US.

As for Canada, it exports most of its goods/resources to the US. For Canada, it may be inevitable to go through an episode of HI if US does. IMHO, reverbrations of a US HI will be felt all over the world and Canada is closest to the epicenter.

Those are my .02.

Aquilus said...

@Nickelsaver

You're talking about printing money right? Isn't that what QE is?

I was referring to the following parts in FOFOA's Moneyness (one of my favorite posts):

The Treasury does not need to issue debt in order fund its spending. When it spends, it simply credits private sector accounts with new credit money and the banks with new base money. There is no direct connection between sales of Treasuries and money spent other than a myth in our confused minds.

In fact, during the debt ceiling debate in late 2009, MMT actually advised them to stop issuing Treasuries and just keep spending



Just because the Treasury was nice enough to issue bonds to cover the deficit spending does not mean they absolutely have to. And yes, QE2 introduced new base money, but the Treasury did not have to go through bond issuing - it's more of a custom that keeps everyone calm because there's no direct monetizing.

Bonds are credit (the economy’s money) denominated in (referencing) the base unit (the dollar). Swapping credit for base units dilutes and debases every single credit dollar in the world, all quadrillion of them if you included derivatives.

When the private sector (plus our foreign free stuff suppliers) buy bonds, the USG is essentially spending credit money rather than expanding the base because "the credit to the reserve account of their banks" that Randall Wray mentioned above is deleted when the private/foreign sector buys a Treasury bond. Spending credit money does not dilute the base and debase the reference unit. But when the people (or banks) that bought those bonds swap them with the Fed for cash, the base is diluted and the reference unit is debased. So Cullen is wrong. A dollar bill and a dollar bond are not essentially the same thing.

Anonymous said...

Ryan - F O F O A (eff oh eff oh eh). Fofoa is an island in Tonga or something:)

Victor;

Canada is trying to build a pipeline to the west coast (Asian market) right now, once they get past all the greentards. Harpie recently buddied up with China and signed a bunch of trade deals. I think they're smart enough to realize the US is doomed and they need to diversify. China already has a large stake in the oil sands of Alberta and Sask as well as mineral interests across Canada.

We used to export a lot of lumber down south, but they(US)slapped tariffs on it to protect their own interests. Free trade! Guess a lot of it now goes to Asia.

I don't see the advantage to Canada or ANYONE else to be trading with an entity who pays you in basically worthless shit(HI dollars) if you plan on holding them as reserves. Why would you date a leper when you could date a super-model? Wouldn't it be to your advantage, in the long-term, to isolate yourself from the leper?

Sure certain manufacturing sectors would suffer, but wouldn't they anyway if they're giving away their products for free? And they're at half capacity due to a massive depression? Might be time to diversify and adapt, or die.

We're going to see a (placer)gold rush of epic proportions, where everyone and their dog wants to get a piece. Much like in the old days, when many thousands of people chased the rush around and towns popped up over night on various creeks and rivers throughout Canada.

They will certainly TRY to regulate it, but they will need a team of(ex factory workers?) to police and regulate it. I mean many thousands of people. This is a very big country. Either that, or it's a free-for-all, which I don't see happening.

Mining in a post-freegold world is a topic worthy of its own post...


I also don't see any advantage to hyper-inflating your local currency. Why? To stay competitive so you can trade with the crusty leper? Give away your resources? I don't think so. Only if something of value is a part of the equation, like gold?

I would think countries with vast resources in the ground will see much investment from dollars chasing stability. The commodity currencies will be strong by default.

Just $.02 from this grubby miner.

Nickelsaver said...

Aquilus,

Thanks. I read all that and it doesn't exactly make sense too me. I'm hoping in time that it will.

NS

Anonymous said...

Thanks for all you replies so far. How about strategies such as

1) Australia can keep the AU$ steady with respect to the Yuan; seize the gold mines in order to acquire a reserve; and let their citizens buy certificates for gold-in-the-ground in order to absorb funds that want to move out of paper.

2) Canada might keep the C$ at a steady level with respect to the US$ (i.e. perhaps hyperinflate with it). They might seize the oil.

An interesting question is whether is would or would not make sense for them to take the gold mines, too. As I understand, they are not as bis as Australia as a gold producer, but they have all the exploration companies with their head offices in Canad.

What would Canada offer to their citizens in order to absorb funds that try to get out of paper? Nothing - the paper just burns? Or perhaps oil in the ground?

Victor

Aquilus said...

@Victor,

Out of curiosity, why should these governments offer their citizens anything? I mean, the stock and commodity market is still there, land is still available, why should there be some "government solution"?

One Bad Adder said...

Victor: -

Firstly Sire, the systemic mechanics leading to an assumption that $US is going to explode into a HyperInflation aren't evident IMHO ...not UNTIL it (buck) loses it's pre-eminent Reserve status.
We(in Oz)are struggling with a Commodity Currency on a tear (thanks to China) juxtaposed with a "domestic" economy that is anything but healthy (thanks largely again - indirectly - to China.)
Our good friends at the RBA are powerless to intervene (weaken $A) as the Market is a much greater force relative to their available arsenal, our share of G-GDP being roughly 3%.
I suppose what Oz craves in the here 'n now is a marked softening in Chinas commodity demand ...which in turn will see $A come off and provide some relief to the domestic economy.

As far as trying to glimpse a very opaque future is concerned, I think "we're ALL US-Dollars now" so unless something changes dramatically Victor, the point is moot.

Michael H said...

Aquilus,

My interpretation of victor's comment regarding the government 'offering' something is not as a 'governmet solution' but rather a 'monetary management tool'.

I.e.: under freegold, if a government with gold reserves wants to take base money out of circulation it can sell gold for local currency. Likewise for increasing the base money supply by buying gold on the open market.

How would a central bank that does not have a gold stockpile regulate its monetary base in a manner that is independent of the USD? I think this is what victor is getting at.

Aquilus said...

@Michael

Sure. What's wrong with the traditional methods of government bonds our even running a surplus (if they don't want to increase taxes) ? I mean the central bank will still exist, bonds will still exist, right? So taxes, government surpluses and sale of government debt should still take care of base money, right?

I personally see freegold in my mind as the entire area's gold, not the government repository of gold. So government gold does not have to be mobilized usually.

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