Monday, July 23, 2012

Jeff & Blondie's Open Forum

That picture is not really Jeff and Blondie. It is Jeff and Jordan from Big Brother, and yes, I am a BB fan!

Blondie petitioned me for this open forum after one of Jeff's comments quoting me. I agreed, so here you go.


AdvocatusDiaboli wrote: "Blah blah blah the crazy GATA/FG assumption is somehow blah blah blah."

Jeff responded: "Only a fool would lump GATA and the hard money crowd with FOFOA:

FOFOA (from Unambiguous Wealth 2): One of the biggest struggles I observe in newish visitors to my blog is that they instinctively try to reconcile everything they learned from the hard money camp—ZH and GATA being two bright stars there—with what they read here. Their effort inevitably leads to contradictions that cannot be resolved. And because ZH, GATA and the rest of the hard money camp is so much more ubiquitous than my little blog, they win by default in minds that are unable to think for themselves.

Here are a couple of the irreconcilable concepts found on this blog that noobs must either reject or ignore in order to hang on to their ZH/GATA CB thesis.

1. Remember when Aristotle wrote this? "In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."

Have you ever seen anyone in the hard money camp write anything like this? Or can you imagine them ever doing so? Yet this is one of the core fundamentals necessary to understanding Freegold.

2. And FOA wrote this: "Several years ago, many gold bugs and gold advocates missed the path as the trail turned." "Yes, the war now is between the Euro and the dollar! The Washington Agreement [a Central Bank agreement] placed gold 'on the road to high prices'." "The war between gold and the dollar has been over for a while now… Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."

Again, have you ever seen anyone at GATA or ZH write anything like this? Or can you imagine them ever doing so?

First let me state that Zero Hedge and GATA both provide a great service and they both do fantastic work, ZH comments section notwithstanding. It is their underlying thesis about fiat currencies and central banks in general that I have a problem with. And this is not a problem with only ZH and GATA, it is a problem with the entire hard money camp.

Their foundational thesis is that fiat currencies and the CBs that manage them are the most fundamental flaw in today's system from which all other problems flow. This directly conflicts with my thesis that using the same medium in both the primary and secondary monetary roles is the fundamental flaw from which all other problems flow. My thesis applies to both hard and easy money systems. Their thesis points to the CBs as the bad guys. My thesis holds up a mirror and says, "We have met the enemy, and it is us."

Blondie petitioned: "Good one Jeff,

That FOFOA quote should be a stand-alone post on this blog, just so it can be linked to regularly. The difference in thesis really is as simple as that comment states: all our monetary problems (and the problems that those problems then cause) all stem from the single act of using the medium of exchange as a store of value. Period."



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Jeff said...


DP said...


I'm thinking the angle that e_r (and costata?) is persuing is if any weaker economies might once more (not mentioning any names) get themselves a leg-up by feeding off the strength within another, stronger economy. By competing vigorously against producers within that stronger economy, tracking down with (faster than?) the steadily weakening currency of the formerly more vibrant economy - as their own economy (and currency) should naturally strengthen and reduce their competitiveness, but that dynamic isn't allowed to play out as it "should". I don't argue with the suggestion some economies might choose to persue this kind of policy. They probably will.

On a long enough timeline, perhaps all economies are finally equal, so then there will be little to be gained(?). I suspect that isn't something I have time to concern myself with personally.

However, I don't see it is necessary to continue directly extending an exorbitant privilege to your competitors, when their currency is no longer artificially supported by the rest of the world employing it as their primary SoV - you can simply manipulate your own currency down against gold rather than the dollar, I mean "their currency", therefore weakening your yuan, no I mean "your currency", against ALL more prudently-managed currencies (define "prudent" - good job I didn't say "less expediently"...).

All you'd need is a population that'll quietly suck up the price inflation that will rain down on them, and of course a Central Bank that will carry out your wishes. Maybe you show people how to mitigate the effects of the game somehow, then they're good with it? Hmmm, OK perhaps if you'll show them how to protect themselves, then it might be a good idea not to game the system TOO much - or you might find you can't do what you want after all.

Freegold = independant economic policies. No longer are RoW's economic policies subordinated to US economic policies.

You'll no longer need to stack the currencies/bonds of other economies, in order to win the Currency Manipulator prize.

DP said...


Mundell: […] maximize the efficiency of money, as a unit of account, medium of exchange. Reduce transactions costs. […]

Alles klar - money is not a store of value.

KnallGold said...

While our European leaders are in midst of their most difficult job, below are a couple of vid's to fill the summer hole and lighten up, (and to complement Sir DP's FGT work). I don't have the technical merits but I could see on how to get together along the lines a wonderful clip for FreeGold tube ;-) , "the cult's anthem" just kidding of course...

Clearly the Italian create the best sounding engines of all times (nah, neither the US nor the, sorry, Germans), all the fine "upper wave" finesses, what a concert of furiousity and grandessa (and never mind the beauty of the cars...)! Best automotive musical conductors and I think the Maserati V8 is the best of all times (the new Gran Turismo not lagging behind if you ever heard one accelerating with open pipes).

You might discover a Golden Trident on blue ground in one clip (maybe citing FOFOA's pyramids and triangles).

(btw don't criticize anyone after such a short time, and as a Swiss I know what it takes to walk the balance to hold the cultural differences together. Go Mario Draghi go, I wish you and your team "Godspeed" so to speak!).

A sight for sore eyes resp. a sound scape for sore ears (thi's only for males I fear though). A word to Lady Kaminska et al, NEVER call ME a cult follower, I'm probably the last one if you'd know me personally, ask my Mother ;-).

Turn up the volume and just listen ! I have a hard time not to use that darn decadent USamerican four letter word, but the sound is
f:-o insane ...


DP said...


I think Mundell has been stealing ideas from your bedside diary or something, because he seems to think Greece would gain nothing from leaving the Eurozone and going back to the drachma, because their debts are all denominated in euro - so it would be significantly better for them to remain within the Eurozone and default on the debts, or wait for them to become manageable through inflation.

You'd better change the secret password.

KnallGold said...

Interesting read on the Trident (where can I buy Golden one?):

Now leaving with my Maserati Ghibli 2 (no Ghibli 1, unfortunately) to buy food and maybe some Goldcoins...

Woland said...

Nice interview over at Spiegel Online with Mario Monti on the
whole Italy/Germany contretemps, as well as the big euro
issues. Also, Evans Pritchard over at the Telegraph gets a part
of the Draghi/Monti picture right, in the article, "Germany and
Italy near blows over the Euro". The part he gets right is what
he calls the "venetian diplomacy" being practiced. Both are
worth a look, IMHO.

costata said...


Post-transition I don't think it will be possible to manipulate your currency globaly. Localy, sure, but not globaly and not globaly for long.

BTW thanks for not mentioning the Olympic medal tally.

PS. I'm on the 'l' diet. Only one (1) 'l' per word, literacy be damned.

costata said...

Sorry, in the interests of consistency that should read:

BTW thanks for not mentioning the Olympic medal taly.

DP said...

One can never have too many L's in ones life.

Give 'em L, I say.

Nickelsaver said...


Sorry, but I still gotta ride American ;-)

JR said...

Hi e_r,

Here are some ideas, let me know how they sit with you, okay?

Trade has to balance. In freegold, gold will flow opposite goods and services as a final settlement of a trade imbalance.

Today, paper flows to offset trade balances - Once Upon a Time

In freegold, there will be "some paper" aka investment demand. Not like today, but some.
So, to some extent, soem paper may also flow to offset trade balances.

How much paper I can't say, but it will be mostly gold at first after the transition, and then paper flow may grow as confidence is restored. People will want to invest. But this will ebb and flow with the brake and spur forces.

As the currency price of gold rises, the incentive is to dishoard gold and consume more. Not just consumption of consumer goods,. remember, one way you consume is to consume higher order goods, aka capital goods. This is often called investing. So the price of gold and investment are related.

A high price of gold is a market signal to entrepreneurs that there is wealth saved in that currency zone looking to consume in the future, and this encourages entrepreneurs to plan to supply that future production by investing today.

So if people are mad investing and not saving in gold, the price of gold in the currency falls and gold goes elsewhere. Gold becomes more dear in the zone.


A related idea that gets to gold as savings final settlement is the scrip at the Medieval fair analogy from Euro Gold. There is always a lag between initial settlement in scrip/currency aka indirect trading (not direct barter) and later final settlement in gold. During that lag people hold paper, be it in currency or direct debt.

This short term paper will show up on the BOP as an imbalance one way or another. There will always be some paper held due to the lag, but it won't grow to systemically destructively levels because trade partners won't hold the currency of another nation, they will settle in gold.

Paper can clear at night, and only the leftover paper is what needs gold for final settlement. This final settlement will not be held in paper.

Cheers, J.R.

JR said...

The Gold Must Flow

Spur and Brake

Once gold is flowing at a high enough price to balance international trade, it will start accumulating in countries that run a trade surplus excluding gold (including gold, trade will balance). Likewise, it will start disappearing from those countries running a trade deficit ex-gold (excluding gold). This is how the spur and brake forces work on an economy in Freegold.

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

At this point the large quantity of gold in the "surplus zone" will have a lower purchasing power against goods in its own zone, but a higher purchasing power abroad in the "deficit zone" and demand for imported goods will grow while exports will start to fall. This growing demand from abroad will be felt in the "deficit zone" and will be met with new supply. Likewise, the falling demand for imports from the zone with a declining volume of gold will be felt in the "surplus zone" and be met with decreasing supply. Incrementally, the "surplus zone" will slow production and increase consumption while the "deficit zone" experiences the opposite effect. Excluding gold, the balance of trade will shift back and gold will start to flow in the other direction.

Notice, please, that I'm not even talking about the flow of currency or price inflation/deflation in currency terms. Inflation or deflation in currency terms can be happening in either zone depending on how the monetary authority is managing the currency. But what matters in terms of the real trade flow will be the purchasing power of Freegold (not in currency terms, but) vis-à-vis the rest of the trade flow of goods and services.

If you have high currency inflation in the "deficit zone" because the government is printing like crazy, the price of gold will be rising even faster than the price of goods and services. On the contrary, if you have high inflation in the "surplus zone", the price of gold will be rising more slowly than the CPI, exerting its brake force on the economy because gold will still be found to have increasing purchasing power abroad and decreasing purchasing power on goods from its own zone. In other words, gold will be exported to other zones where its purchasing power is higher, spurring those other zones to produce more and putting the brakes on the overheated economy in the "surplus zone".

This flow will continue reversing back and forth forever, as it should be, because there is no such thing as a perfect equilibrium. And again, I want to draw your attention to the fact that I'm dealing only in the physical plane, ignoring the monetary plane. This is what Freegold does. And it doesn't matter if the "surplus ex-gold" and "deficit ex-gold" zones each have their own currencies or if they share a single currency. It still works the same way. Savers run the economy. Savers are the marginal surplus-producers and consumers. When the savers start saving more, it means the economy is producing more. When the savers start dishoarding and consuming, the economy is producing less vis-à-vis its balance of trade. This is the spur and brake force of Freegold, the international demand driven by the fluctuating purchasing power of gold as felt by the savers, regardless of any transactional currency effects with which the debtors may be tinkering.

burningfiat said...

Thanks JR, for painting a clearer picture of the fact that the Spur and Break forces will also apply to capital goods. Not always appreciated in the simpler scenarios we usually paint!

JR: So if people are mad investing and not saving in gold, the price of gold in the currency falls and gold goes elsewhere.

Can we look at the current massive accumulation of gold in the East as a case of these spur and brake forces working even now (for those who are aware)? Maybe we Westeners (except few giants and crazy freegolders) are just too stupid to recognize when an Indian cowboy-boot with spurs hits us in the face?
It's almost like the RoW has been trying to tell us something by acquiring our gold at these cheap prices. We just haven't been getting it, since around 1980, because we fell for the paper market trick.
Once we wake up, I think it is safe to say that many generations will pass, before we again forget history enough to get this kind of value perception black-out.


Anonymous said...

Aaron -

Glad that you understand it. You're right, may be our timelines are different.

But I think JR is of the view that the saver perception is irreversible.

JR -

Thanks for your replies.

If I understand what you are writing - the currency price of gold post-transition will be a very important signal to all actors in the economy.

Because a high currency price of gold within a nation means that there's over-inclination towards saving and therefore an opportunity for productive enterpreneurs to participate.

A low currency price of gold means there's more risk taking and therefore the savings medium is selling at a discount, more attractive to save.

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

Freegold is all about the big players, right? Someone having an awful lot of gold hoarded, can have a severe impact on this signal.

I am attempting to comprehend whether this currency price of physical gold post-transition could be rigged for someone's advantage.

I hear a lot about free markets, automatic regulation, regulation because of self-interests etc. - I hope you understand my skepticism in this regard.

burningfiat said...

Hi e_r, Just want to share (my opinion) that your considerable efforts to find the weak points of the post-transition environment is appreciated. Makes for some interesting discussion and hopefully insights! /Burning

Flore said...

our pal

Anonymous said...

Excellent sounds, KnallGold.

I'm partial to American muscle cars:). A naturally aspirated big block sounds sooo nice.

Then there's these earth-shaking beasts of awesomeness. If you ever have a chance to see a nitro machine, DO IT! Better yet if you can stand on the line when they launch, now that's something you will never forget. Makes my hair stand up just thinking about it...

When I get high, I get high on speed

Indenture said...

"A scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it."
Max Planck

Anonymous said...


That's the hope. :)

Izabella's Gold QE post is very interesting.

The idea that the Treasury could once again become the gold buyer of last resort, in exchange for liquidity, is interesting to say the least. Not only would such a strategy ease the squeeze in the Treasury market, it would do so without compromising the liquidity effects of QE.

FOFOA: You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up. This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars. Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point.

Sounds like we're talking about Option 1 here?

Costata/Victor - does this look like something on the lines of what you were talking about in terms of USG making the move?

Anonymous said...

Deflationists take note:

Fed inching closer to NGDP targeting

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that the Fed should again expand its holdings of mortgage bonds and Treasury securities, and that the purchases should steadily continue until the Fed was satisfied with the health of the economy.

"Worthless dollars, of course, but no deflation in dollar terms!"

Aaron said...

Actually, to be honest e_r the more I think about it my comment should have read "but I also believe such a shift would only be possible after a couple-two-three hundred generations". You have to admit, gold as a store of value has a blackhole-like attraction for those with the need to store excess value indefinitely and I can't see any currency sustaining a stronger pull for any significant period across time.

After all this is really about the savers.

I think the gold has it hands down.

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