Thursday, August 9, 2012


"At times, when all the world's asleep, the questions run so deep, for such a simple man..."

We have had some discussion about international macroeconomics under a future Freegold system in the last two threads. And yesterday JR reposted an old comment of mine on the subject. As a companion piece to that comment, and also to add a new dimension to the discussion, I'd like to introduce a couple of new concepts. Let's call the first one "usable versus useless wealth" and the second concept we'll call "organic versus inorganic savings".

Usable versus Useless Wealth

For "usable" and "useless" wealth I'm calling everything in the physical plane except gold "usable wealth." "Useless wealth" would therefore be gold and paper/electronic savings. So obviously I am referring to the economic or living standard utility of something in the present. Gold would be the physical plane representation of "useless wealth" and paper/electronic savings would be monetary plane "useless wealth" because they both have little or no economic or standard of living utility to the saver. All they do is store purchasing power (more or less) with the promise of potential future purchasing power.

Let's look at an example. Costata wrote: "In other words I can't find an example of a country becoming rich via the monetary plane and then becoming wealthy in the physical plane."

In terms of "becoming wealthy" in the physical plane, I think we should distinguish between "usable" wealth (goods and services) and "useless" physical wealth (gold). One is usable right now for either production or consumption and the other is not.

It seems that the US became wealthy in "usable" wealth via the monetary plane exorbitant privilege granted by the ROW in 1922. It did have a period in the middle where it acquired a bunch of "useless" wealth (gold) while it provided the world with "usable" wealth in return, but lately that trend has reversed. And by lately, I mean the past half century.

So then the question would be how do you define "becoming wealthy"? Do you define it by having the most usable (in the present) wealth, or by foregoing usable wealth now in order to store useless (in the present) wealth for the future.

Here's one more example which JR sent me. It was published during the Great Depression on July 11, 1931 in the Magazine of Wall Street:

Gold Does Not Make Prosperity To men, as to nations, the possession of gold is a symbol of prosperity. Let's see. The United States has more gold than it ever had-and less prosperity. The banks are bursting with gold and barely meeting their dividends. Our great corporations have immense reserves of gold and their business is dwindling. All the nations are sending gold to us and our business with them is fading away. The truth is that large accumulations of gold are an inverse measure of prosperity.

Probably four-fifths of the gold in the Federal Reserve banks is idle - and nobody ever contended that idleness makes for prosperity. The fact is that except as it is used as the basis of bank credit, gold has no relation to prosperity. But when there is no business, there is no credit and gold is useless. In other words, business gives gold a utility value. Gold is dead until vitalized by commerce.

The piling up of gold in any country does not signify that it is prosperous; it merely shows that the country is giving other countries more goods than it receives; that it is parting with more usable wealth than it is getting back.

Today the United States is receiving gold and going without goods it would like to have. And because it is receiving gold it is selling less than it would like to. When we are prosperous, which means that credit is being freely extended, we need gold because it is the one commodity that mankind has agreed to accept on balance in place of the goods it would rather have. It is merely a balancing item in the offsetting of credits against debits. It might be epigrammatically said that prosperity "makes" gold and "unmakes" it instead of gold making or unmaking prosperity.

Okay, so that's the "usable versus useless" concept. You can disagree with my semantics if you want because I'm only trying to get the concept across.

Organic versus Inorganic Savings

What I'd like to call "organic savings" is when economic actors net-produce (produce more than they consume). "Inorganic savings" is when the monetary authority in a currency zone increases its reserves. And here reserves mean gold or foreign currency reserves. Assets denominated in a CB's own currency are not reserves. (I wrote more about the distinction of reserves in this post.)

For this concept I would like to draw your attention to a statement I've made many times that any gold inside a currency zone, public or private, is a viable reserve. That is, any gold inside a zone is "savings". But now I'd like to distinguish public and private gold and we'll call the private gold "organic savings" and the public gold (held by the CB or the government) "inorganic savings".

This concept works for paper savings as well as for gold savings, but we'll be looking at the future Freegold BOP machinations from a physical perspective which will exclude paper savings. So "organic physical savings" would be gold in private hands which is the product of an economic actor producing more than she consumes and purchasing "useless physical wealth" (gold) with the excess currency left over from "underconsuming".

"Inorganic physical savings" on the other hand would be gold purchased by the CB by printing currency. "Inorganic paper savings" would be like the PBoC purchasing US Treasuries by printing yuan. "But wait" you say, "the PBoC purchases Treasuries with US dollars it received through trade." This is true, but it also printed yuan in exchange for those dollars regardless of your perspective on the mechanism driving that transaction. You see, if the Chinese exporter had bought those Treasuries for his own savings, no yuan would have been printed. That would have been "organic paper saving". But by exchanging printed yuan for the dollars the PBoC is making those savings "inorganic" and at the same time it is managing the exchange rate of its currency. This equates to the PBoC printing yuan to buy gold as a currency management tool in Freegold.

The reason I am making this distinction is that I plan to show you that, in Freegold, the CB's inorganic "saving" and "dishoarding" actions will generally be the opposite of (or countercyclical to) the net-actions of organic savers in its currency zone when it manages its currency. Freegold will be much more smooth and balanced (than the $IMFS) even without CB interference, but we all know that in the real world CBs gotta do something to justify their existence, right? So I hope to show that their natural response will actually smooth cycles out even more than they would be without the CBs. And that's with everyone acting in their own self-interest.

Freegold BOP

The monetary plane is merely a reflection of the unsettled portion of the physical plane. It is simply remembered debt; it reflects uncompleted physical-plane trade. It, the "m-plane", reflects open transactions, those not yet extinguished. And the BOP, or Balance of Payments is the m-plane account for showing what has transpired and explaining what is presently happening from a macro perspective. It is often said that the Balance of Payments must balance. This is a tautology. It is like saying a sphere must be spherical. What it means is that if the BOP doesn't balance, you've made an error in your calculations, not that something needs to be done to bring it into balance.

The BOP never balances perfectly because they use aggregated, government-collected data which is inherently imperfect. It is only a tool that helps us understand what's happening out there in the real world by compiling macro data. It is a lens for seeing, not an active participant.

In a previous thread costata called current BOP accounting methods an anachronism. That may well be true, but I think he was trying to imply that it has some negative effect on reality. I don't think it does. And whether or not they change BOP accounting in Freegold, I think we can still use the current methodology to explain what will be happening in Freegold from a macro perspective. Again, that's all the BOP is—a lens that helps us understand what's going on.

I have done the "Freegold BOP" exercise a number of different ways and it seems to be hopelessly confusing trying to conceptually traverse a paradigm shift of this magnitude from a monetary plane perspective. What I have found is that the aggregated marginal actions of the various players in Freegold are counterintuitive given our immersion in the current paradigm. So I think we need to begin with the physical plane in order to understand how the macro m-plane will look in Freegold.

First of all, "useless" gold will flow in the opposite direction of usable goods and services at the margin. It's just like Another said, "gold and oil will never flow in the same direction." The same is true of the net-flow of "usable wealth" (goods and services) versus "useless wealth" (gold) in Freegold. "Usable wealth" and "useless wealth" will flow in opposite directions at the margin (deficit/surplus region). [1]

But physical gold exists in a (nearly) fixed amount (by weight), so we can imagine it "sloshing" back and forth (by weight) like the ocean moves back and forth expressed in the tides. What will prevent all gold from flowing uncontrollably into one country is the price of gold in that country.

And it is important to understand that savers alone determine the trade surplus. Non-savers trade goods for goods, but savers are the ones who "underconsume" thereby creating a trade surplus. We also need to distinguish between organic savers (you and I) and inorganic savers (CBs like the People's Bank of China). In Freegold these two types of savers will act in opposing ways which will have a damping effect which will smooth out the cycles, similar to the way opposing waves cancel each other out.

When you provide more usable wealth to the external world than you enjoy for yourself (consume), you will record the difference by buying gold. So when we see someone accumulating a lot of gold, we should think, good lord he's providing a lot of usable wealth in exchange for "useless" yellow metal. But on an aggregate (national or regional) scale, something like this could not go on forever or else all the gold would flow into that region. What stops this from happening is that gold's price will rise, rewarding the earlier savers while "punishing" the ongoing (newest) savers (underconsumers) with less gold by weight.

At some point the early savers will see enough reward (high priced gold) while the ongoing (new) savers will sense a "top" in gold and the flow will reverse. Savers in aggregate will start net-dishoarding. So how does this translate into the m-plane in Freegold? Let's view this as the organic hoard-dishoard cycle within a currency zone.

The upleg, when organic savers are accumulating gold and gold is flowing in, while the price of gold is rising and the country is exporting more "usable wealth" than it is importing, we'll call Leg A of the cycle. Then Leg B will be the dishoard leg of the cycle, when the zone is importing more usable wealth and exporting gold as the savers net-dishoard. (This is counterintuitive right now because we're thinking in terms of China and the US under the $IMFS. Seems like gold should be rising (dollar falling) in the US right now, but under Freegold it would be the opposite --> counterintuitive! --> because the trade deficit (more goods flowing in) would mean that savers are dishoarding (gold flowing out)!)

Freegold Currency Management

In Freegold, a currency manager will influence exchange rates by buying or selling gold. If a currency is trading higher than he wants, he'll purchase gold on the open market (doesn't matter where thanks to arbitrage) with freshly printed currency to weaken his currency. This will exert pressure for gold to flow into his zone and usable wealth to flow out. Normally he'll do this in a countercyclical way to what's happening with the "organic" savers. So our currency manager would most likely be inflating the currency (printing) and using that new currency to buy gold (weaken the currency while increasing reserves) during Leg B of the cycle described above (where the savers are strengthening the currency (to a point above where it "should" be given some measure of Purchasing Power Parity with its trading partners) by dishoarding gold).

If a currency is showing unwelcome weakness, he can sell his gold reserves on the open market. This will exert pressure for gold to flow out of his zone (or at least counteract the ongoing inflow driven by organic saving) and for usable wealth to flow in (or at least slow down the ongoing outflow (trade surplus)). He would do this during Leg A of the cycle described above, so as to be countercyclical to the organic savers. (Again, this is counterintuitive given our present immersion in the $IMFS. Who'd expect the PBOC to be selling official gold right now to reduce the trade surplus. Yet that's what they'd be doing in Freegold.)

So obviously a currency manager has nearly unlimited ability to weaken his currency (to counteract Leg B of the savers' hoard/dishoard cycle) but he is constrained by his accumulated reserves as to how much he can strengthen (defend) it (during Leg A). This actually makes sense because Leg B is when savers in the zone have stopped buying gold in aggregate (so that gold is no longer flowing in) and the printer can get them to start again by debasing their currency while simultaneously driving up the price of gold. In extremis the printer can stop the outflow of gold from dishoarding savers (and stop the net-inflow of goods and services) by buying every ounce sold by domestic (organic) savers with freshly printed currency.

I don't know if I would call that "pegging" a currency since gold is not the currency of a specific trading partner. But if you want to know how it would look on the FOREX, just imagine a steady gold price in the trading partner's currency and a rising gold price in your currency. The obvious arbitrage would lower your currency on the FOREX relative to the trading partner's currency with a stable gold price. Arbs would buy gold in the trading partner's zone and sell it in your zone delivering you an inflow of gold and the requisite outflow of "usable wealth".

I hope it is obvious to you that a zone which is experiencing an inflow of gold (in Freegold) is also experiencing an outflow of usable wealth. Gold is the symbolic token that implies you are providing more usable wealth to externals than you are using for yourself. Counterintuitively, the transactional currency of a zone experiencing this (in Freegold) is likely lower than it deserves to be on the FOREX. That's why its exports seem cheap to foreigners. So foreigners are buying more usable stuff from this country than they are selling to it. The currency manager would resist this by selling his own gold locally to stop the inflow of ("useless") gold which reflects the outflow of usable wealth. He is strengthening his currency by doing this and slowing exports of real goods (while also slowing imports of gold).

A currency manager can induce exports of real usable wealth and imports of ("useless") gold by inflating his currency to buy gold. This weakens the currency inducing the inflow of gold and the outflow of exports of real usable wealth. I realize this is counterintuitive (it seems obvious that a strong currency should buy more gold), but the easiest way to picture it is to imagine a currency manager doing this in isolation. He's printing and buying gold to weaken his overvalued currency. This is going to first cause gold to flow in but then the price of gold will rise. The currency manager could continue buying, say $10B in gold every day forever. And we could say that $10B in gold would flow into his reserves every day forever. But the reality is that the flow of gold by weight would slow and stop very quickly because the price of gold would rise so rapidly. At some point your $10B/day inflow of gold would be a fraction of an ounce.

So gold starts flowing out of a zone (and "usable wealth" starts flowing in) when the price of gold peaks and starts falling. The currency manager can counter this (for stability) by inflating the currency and buying some of that gold that the savers are dishoarding, slowing the export of gold and thereby slowing the import of "usable wealth".

So… When savers are hoarding gold, the CB is dishoarding. When savers are dishoarding, the CB is buying their gold with fresh currency. Over time this will minimize the flow of gold between currency zones and because the flow of gold is a reflection of an imbalance in the flow of "usable wealth" we can deduce that trade will be balanced and disruptive cycles and corrections will be minimized.

Will there be some paper debt involved across zones? Yes, because there is a time lag involved. But as long as savers and CBs aren't using that debt as their long term reserves/savings, it won't build up and it will reverse sides regularly. I think that this short term debt (call it the buffer) will still be reflected in the "Capital Account" of the Freegold BOP and the cross-border flow of gold will be reflected as a normal trade good. I don't think Freegold requires a revised BOP methodology.

As a parting thought, just remember that this BOP discussion is looking at Freegold from a macro (aggregated) perspective which is different from the personally subjective (micro) perspective in which it is usually discussed here. Things appear very different from the mountain top on the other side of a singularity. ;)


[1] A relatively tiny amount of gold will flow as a "usable" good along with the rest of the "usable wealth". There are a few electronic uses for which gold is irreplaceable. At the current price there are about 300 tonnes consumed every year in electronics. But, even at today's price, substitutes are being created for the less important ones. My brother is a materials engineer working for a major medical equipment manufacturer. He personally administers the physical application of gold to these vital electronics.

They coat vital electronics with gold not because gold is a good conductor (silver and copper are much better) but because a very thin layer of gold prevents the lesser metals from corroding. Corrosion inhibits conductivity. In one product he makes there is 10-cents-worth of gold at today's price. That product costs $2,500 to manufacture and sells to medical professionals for $10,000… and it contains 10 cents of gold. Even with a 40X revaluation the gold component will only be $4.

On these high-end medical applications they use sophisticated techniques for applying the gold. Much more sophisticated than the gold plating used on cell phones and thumb drives. My brother uses evaporation and sputtering which deposits a layer only a few atoms thick. Gold electroplating from a liquid onto cheap electronics deposits a much thicker layer, and those lesser electronic uses will likely be substituted with something like this.

It's kind of funny that a $50 cell phone today contains 50-cents-worth of gold while the gold-plated piezoelectric capacitor in a $10,000 piece of medical equipment only contains 10 cents. That's right, an ounce of gold is required for every 16,000 of these devices. And that particular capacitor requires a lot of gold, about 10 sq cm of surface area to be coated. For comparison, an integrated circuit chip requires anywhere from 0.1 to 2 sq cm of surface area to be coated in gold. An ounce of gold covers about 160,000 sq cm using these high-end techniques at a thickness of 1000 angstroms (0.1 micron, 0.00001 cm).

My point is that I foresee the amount of gold being used in electronic applications dropping significantly to maybe 100 tonnes per year in Freegold. That's out of the 170,000 tonnes of gold in storage. A 1,700 year supply overhang perhaps? Somehow I don't think Freegold will interfere with any vital industrial uses for gold.


PS. I'd like to take the opportunity of a postscript in a fresh post to highlight Victor the Cleaner's explanation of what Mario Draghi meant when he said "whatever it takes". Reposted from Screwtape Files:

It seems that most people don't understand the ECB. If Draghi says "within their mandate", he is referring to their inflation target "below but close to 2% annually" in the medium term (i.e. 2-3 year average).

He said he would save the Euro "whatever it takes". He didn't say he would save government debt whatever it takes. Some people seem not to get it that these two are completely different goals.

If you take the 2% inflation target seriously (and every single step by the ECB is consistent with the assumption that they do), you conclude that:

1) The ECB will print money in order to create inflation as soon as the medium-term inflation rate gets substantially below 2%.

2) In order to create this inflation, the ECB will have to purchase consumer debt with new base money (this is how you create price inflation). So their standard choice will be to buy government debt - government expenditures are largely consumption, either directly or through salaries, pensions, benefits.

3) In the inflation rate drops substantially below 2% in some countries, but not in others ("policy transmission distorted"), the ECB will buy government debt of these countries, but not of others - most governments spend mainly in their own economy which allows the ECB to target where they want to create inflation

4) The ECB has no mandate to create more inflation than the mentioned 2% annually. So they will make sure this doesn't happen either.

5) How will they do it? Well, that's easy. A lot of debt is being written off (Spanish home owners defaulting on their mortgages etc.), and several governments had to sharply cut down on their deficit spending. Both are deflationary. So the ECB could simply leave the market alone, and the Euro zone would get some price deflation. So the ECB has enough tools to limit the inflation rate at 2% annually.

6) What is the main mechanism that might cause an inflation rate higher than 2% in the medium run? This would happen if the commercial banking system or the ECB monetize the running budget deficit of their governments or if they monetize other consumer debt beyond about 2-3% of GDP annually.

7) How can this be prevented? Well, some governments have gotten into serious difficulties raising funding, and Ireland, Portugal, Greece, Spain are forced to cut down on public spending. How precisely? The interest rates they would have to pay for additional debt are going up.

See? Some idiots claim "Draghi wants to print and buy all government debt in order to lower the interest rates" and then "ECB is too stupid to really lower interest rates"?

How about this: ECB has purchased some government debt in order to create inflation in those countries in which inflation was dropping too much below 2%, but ECB never intended to lower interest rates?

Much easier explanation, isn't it?

8) So what do we conclude if we assume that the ECB is doing nothing other than their job, i.e. to maintain their 2% inflation target?

8.1) They will buy government debt if the inflation rate drops too much below 2% annually. In particular, if this happens in some countries, the ECB will buy the government debt of these specific countries (SMP).

8.2) Although the ECB may buy government bonds for this reason, they will make sure they do not artificially suppress the interest rates (in contrast to the Fed or the BoE).

8.3) As long as the inflation rate stays around 2%, the ECB will not monetize government debt, simply because this would create more inflation. In particular, this indicates a limit of the annual budget deficits that will end up on the balance sheet of the combined banking sector (commercial banks and ECB): no more than around 2-3% of GDP which would cause about 1.4-2.1% consumer price inflation in the steady state (assuming roughly 70% of government expenditures is consumption - you can adjust these figures if you have better data, the ECB certainly do have better data).

8.4) So while some debt will be bought by the ECB in order to maintain 2% inflation, some other debt will most likely be defaulted on. How much? I guess this will still be a lot.

8.5) If some politicians try to give the ESFS or ESM a banking license or to use government run banks in order to monetize their own debt, the ECB will have to obstruct these attempts, for example, by changing the requirements on the collateral they accept from these banks. Also, the northern countries will not like this and presumably already be influential enough to stop it.



When I was young, it seemed that life was so wonderful,
a miracle, oh it was beautiful, magical.
And all the birds in the trees, well they'd be singing so happily,
joyfully, playfully watching me.
But then they send me away to teach me how to be sensible,
logical, responsible, practical.
And they showed me a world where I could be so dependable,
clinical, intellectual, cynical.

There are times when all the world's asleep,
the questions run too deep
for such a simple man.
Won't you please, please tell me what we've learned
I know it sounds absurd
but please tell me who I am.

Now watch what you say or they'll be calling you a radical,
liberal, fanatical, criminal.
Won't you sign up your name, we'd like to feel you're
acceptable, respecable, presentable, a vegtable!

At night, when all the world's asleep,
the questions run so deep
for such a simple man.
Won't you please, please tell me what we've learned
I know it sounds absurd
but please tell me who I am.


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Anonymous said...

Are you just trying to bury discussion by spamming links after people raise questions?


Now you are simply showing us your ass. We have seen enough asses over the months and years on this blog and we certainly do not need to see yours.

On second thought, maybe you are simply not cut out to understand Freegold. In that case this blog is definitely not for you. Perhaps you should call it it day and leave rather than insulting a person who gladly offers his time and effort in order to bring to you some comprehension.

What a jerk.

Anonymous said...

I get it, some of you think the answer to every question is to re-read the entire site. If you think the question is so stupid or obvious that you can't even be bothered to type out a yes/no answer, why don't you just ignore it or remain silent?"

In that case your questions show how little you have absorbed, sorry. I think you have offered some decent advice, I will indeed ignore you.

Good luck.

Michael H said...

2. If the ECB is planning for the Euro/freegold to emerge after the collapse of the dollar, what is the USG planning for? What is China planning for? Are these countries aligned with the ECB/EU or do they have their own (opposing) goals?

USG is planning to keep their exorbitant privilege for as long as possible, and to milk it for all its worth. “Apres moi, le deluge” and all that.

China is a vampire sucking the US dry – they are preventing the US from collapsing so they can be bled longer. After the US collapses, China will have a vibrant economy, maybe not as strong as today but way ahead of where they were a few decades ago. After they stop supporting the US, they will trade with whoever has a viable economy, mostly Europe at that point.

3. Who is actively front running freegold? Given that there hasn't been so much as a peep from any governments, central banks, or billionaires in the last 15 years -- Doesn't this necessitate a rather impressive conspiracy of silence?

The first rule of front-running something, is that you do not talk about front running it. Governments and central banks might be preparing for it, but are not necessarily front-running the transition, at least as the term would be commonly understood (in this case, buying up all gold possible to maximize personal gain during the transition). Rather, those that would be in the know would be expected to work to prepare for a post-USD world in whatever way they could.

As for billionaires: yes, they would be expected to front-run the transition, but they are also busy owning companies and other assets. Besides, I wouldn’t expect any of them to make public announcements, except, as was noted, to misdirect the masses.

4. Is physical gold in size currently being purchased at prices much higher than spot? If so, what recent transactions/transactors are suspected as an example?

Others here might disagree, but I don’t think physical gold in size is currently being purchased at prices much higher than spot. But, I think it is being deliberately ‘under-purchased’ by those who could buy a lot more, so that they can continue to accumulate over time. Another way to look at the ‘under-purchase’ is that it is being *valued* at higher than spot by those who are buying.

5. Freegold requires forced austerity for debtor nations as all trade deficits must be settled in Gold or immediately eliminated, how will countries like the US deal with this? Greece is already showing increased signs of violence and unrest.

To borrow from Aragorn (the character, not the commenter on USAGOLD): ‘Austerity is among us, whether we will it or not’. Austerity will come to the US regardless. The exorbitant privilege cannot continue forever. Freegold is a way to stop this eventuality from crashing the entire world financial system, and bringing the whole world to bartertown.

As for the US: those 8000 tons of gold will sure come in handy to smooth the transition.

7. Post freegold, trade balances are settled by purchasing Gold on the open market. Later this gold will be sold to purchase local currency, again on the open market. If the US is no longer exporting inflation ($USD is no longer the world reserve currency) and countries presumably have more control over their own currency (internally isolated MoE) and trade balances oscillate around zero, why not simply hold local currency and cut out the middleman (Gold)?

The bolded word, ”Later”, holds the answer. For immediate needs, currency will do. This includes paying all the cost of running a business, wages, materials, short-term emergency funds, etc. “Later” could mean “decades from now” or longer, hence the desire to not trust the SoV function to the currency.

Michael H said...

1. Are these prominent world leaders (e.g.) expected to have a full awareness/understanding of freegold, yes or no:
a. Barack Obama?
b. Hu Jintao?
c. King Abdullah?
d. Mario Draghi?
e. Ben Bernanke?
f. Rothschilds/Rockefellers?
g. Soros/Paulson/Buffet?

a-e: No.

f: Yes, but they wouldn’t term it ‘freegold’. It’s just the way old money thinks.

g: No. They are relatively new money, born of the $IMFS, and so they would not necessarily have an awareness of freegold. That’s not to say that specific new-money people haven’t educated themselves about it, however.

The more important question is: why do you care?

Anonymous said...


I appreciate your contribution as I have personally downloaded your .PDF summaries of the FOFOA posts back to 2008.

maybe you are simply not cut out to understand Freegold

It's arguments like this that severely discredit this blog. I'm sorry but freegold is not that difficult a concept. Yes, the nitty gritty, gory details require a very strong understanding (such as that possessed by FOFOA/costata/victorthecleaner) but the high-level ideas can be explained to your grandmother.

I am not discussing the gory details because that is not my realm of expertise. If you notice all of my points are raised on high level, practical issues. You don't think whether the world leaders know about freegold is important as to whether it is a viable theory?? Anyone who has read even the freegold summaries should be able to discuss these concepts.

You attack my "reading comprehension, baggage, and personal agenda" yet you know nothing of my background. Making assumptions is not showing me to be the jerk, but perhaps one's self.


JR said...

I'm sorry but freegold is not that difficult a concept.

Obviously that's not true WRT to you.

We keep posting links because your leading questions built on erroneous assumptions and ill-conceived worldviews make it obvious that you still have lots of baggage you are beholden too and are missing huge chunks of the pictures.

Try to understand Freegold before you pose lots of questions trying to resolve the cognitive dissonance you feel as your closely held world view clash with an unfolding understanding of reality.

Jeff said...

Just because you don't like the answer doesn't mean your questions weren't answered, repeatedly, in multiple posts, over a period of years.

JR said...

We can give you a fish or teach you to fish? Direct answers haven't and won't make any sense, because your baggage is apparent form the predicates built into your questions.

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.

Unambiguous Wealth 2 – The MF Global Chronicles

You must try to embrace Freegold and think for yourself.

I realize that some of you already have your defensive wall up as you sense that I am about to attack the dogma with which you identify. But I invite you to bear with me here. The view is quite nice from where I sit. As Aristotle wrote, "it is the mark of an educated mind to be able to entertain a thought without accepting it." Costata took some flak in the last post for asking the reader to suspend disbelief. But this is all he meant. Try thinking in terms of the principles and concepts I will present, and then you can apply that view to both my conclusions as well as your own established beliefs. This is the proper way to take in a new view, and then you can decide to either accept or reject it, but at least you will have seen it.

The Return to Honest Money


Yes, Mario Draghi was governor of the Italian Central Bank prior to becoming head of the ECB.
Hmm, I wonder what the relationship between the NCBs and the ECB is?

The ECB is simply the core of the Eurosystem. Actually, there are two systems. The ESCB or the 'European System of Central Banks' which is comprised of all the CBs in the EU, even those not using the euro as their currency. And then there's the Eurosystem which is comprised of all the CBs using the euro, with the ECB at its operational core.

The ConFinStat, put out weekly with quarterly MTM revaluation, is the balance sheet of the whole Eurosystem which includes all of the NCBs using the euro. It is not the balance sheet of the ECB. If you'd like to see the ECB's balance sheet, you can find it in the Annual Report for the ESCB and the Eurosystem which is published every year at the end of the first quarter to be presented to the European Council, Parliament and Commission. In last year's report, which can be found here, the ECB's balance sheet appears on page 214.

The actual ECB balance sheet includes 16,122,143 ounces, or 501.5 tonnes of gold which was valued at €17B as of December 31, 2010. That gold comes from the "foreign reserve asset" capital subscription to the Eurosystem by the NCB's of which at least 15% of the subscription fee had to be in gold. And the amount of each member country's fee is based on a “capital subscription key” which reflects the respective country’s share in the total population and GDP of the EU. These two determinants (population and GDP share) have equal weighting. The ECB adjusts the shares every five years and whenever a new country joins the EU.

The ECB marks its 501.5 tonnes of gold to the market price each year, but the unrealized gain from the revaluation goes into a special "Revaluation Account" which is credited to the NCB's according to the subscription key. In other words, the NCB's own the ECB, use it as their system's operational core, and benefit directly from the revaluation of their share of the ECB's assets including its gold.

Party Like It's MTM Time

JR said...

You attack my "reading comprehension, baggage, and personal agenda" yet you know nothing of my background. Making assumptions is not showing me to be the jerk, but perhaps one's self.

No one is commenting on your background. They are commenting on your obvious and apparent unwillingness to listen to others.

Your cup is too full, there is no room for you to learn because you think you already know it.

I have no idea about your background. Nor do I need to consider it or make any assumptions about it. No assumptions of any kind are needed - your actions speak for themselves.

Anonymous said...

Here is my line of reasoning, which might help frame why I am asking these questions.

1. Based on FOFOA's posts (for example the 2010 post JR linked) and the perception in the media, it does not seem that any world leaders / billionaires are aware of the freegold concept.

2. Based on Another's writings, his background points to being a Central Bank insider. This implies that those currently in office have access to the same information.

3. Based on the posts, comments, and sentiment on this blog, it appears that many countries are actively accumulating gold or preparing for the transition.

4. Based on Another's comments and those by FOFOA, gold deals have already been made behind closed doors to purchase gold at a price much higher than spot.

I. So here we have conflicting evidence: Another being a central bank insider, sovereign nations accumulating gold in preparation of a transition, Euro mark to market on balance sheets, and behind closed door transitions -- all of which require world leaders being very much "in the know." Yet posts by FOFOA and answers by commenters here seem to suggest that these same leaders are NOT aware of freegold. This is a contradiction and the reason I raise these questions.

II. Of the three parties: US leaders, EU leaders, and Chinese leaders, who is aware of freegold is a very important matter. If the US is not aware of freegold, then they no doubt have their own plans for what happens "after the collapse." I do not buy that the USG has no plan in mind. They know they cannot kick the can down the road indefinitely. I do not believe they will roll over and "take" whatever proposal comes from Europe/China. Why would they not have their own agenda?

Same story for China, either they are aware of freegold and actively front running it, or they are not aware and are making their own, potentially opposing plans.

In short, if everyone is aligned behind freegold it clearly has a much higher chance of emergence, and on a shorter time frame. If however, the only actors behind freegold are the ECB, then there are potentially many very strong interests opposing it with their own agendas.

III. One possibility to consider is that over the decade and a half since Another held power at the ECB, the concept or ideas of freegold may have not been passed down to every successor. If there is even one broken link, the concept could have been lost. If Mario Draghi is not aware of freegold, this would be one explanation.

Anonymous said...

As you can see, I am not basing my views on a worldview but rather a logical combination of the arguments presented...

To continue,

What if Another's successors did not agree with freegold? What if they had their own ideas? What if that is why he went public on gold forums, in order to spread the message to a further audience and perhaps have other key players (world leaders, central bankers, giants) take the relay?

If those leaders did not take the relay, then the only proponents of freegold are now those residing on this blog.


Motley Fool said...


1. If they were aware, would they make that knowledge public? Stop thinking like a ant.

2. Probably.

3. Some countries Are buying gold, and some countries have adopted the MTM model. This is not apparition, this is fact.

4. In effect yes, in not in fact.

World leaders eh? Presidents are not central bankers, nor privy to all the same information. Stop thinking like an ant.

China's current plan seems to be for the yuan to be used as the new reserve currency, perhaps gold backed. Refer to point 1.

The USA's plan likely involves use of their gold stock to create a gold standard again, their plan Z. Victorthecleaner has shown quite nicely on his blog why this plan won't succeed.

You seem to imply that there must be active proponents of this concept for it to realize. What then do you think is the likely effect on the price of gold in the coming inevitable collapse? It will be shunned like lepers?


JR said...

1. Based on FOFOA's posts (for example the 2010 post JR linked) and the perception in the media, it does not seem that any world leaders / billionaires are aware of the freegold concept.

It does not seem these matters are discussed in public, yes? You would agree you do not know much of these folk's private affairs, yes? But we do know from the actions of ECB/Euro entities that they are clearly aware of this. We have seen the WAG and now we know CBs are net buys of gold, yes?

FOA: "Yes, the war now is between the Euro and the dollar! The Washington Agreement placed gold "on the road to high prices" as it signaled a phasing out of Euro support for our American gold values."

Some big money is draining GLD, seems they are pretty apparent what is going on.

And of course most of all, the world gold market is changing before our eyes. Lots of folks understand what is going on, as evidenced by the fact it is happening.

The Architects

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

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


What we learned from ANOTHER thirty years later was:

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

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

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

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

Once Upon A Time

JR said...

oops, Who is Draining GLD? link!

Jeff said...


You ignore the evidence that things are proceeding as planned. You want to see politicians and billionaires on tv chatting about the transition. What if a giant gold meteor slams into Manhattan; couldn't that change things? Yes, yes it could. In the meantime...

JR said...

If those leaders did not take the relay, then the only proponents of freegold are now those residing on this blog.

Purple unicorns could fly out of my butt too!

Good thing we know the relay team did not fumble the baton!

What we learned from ANOTHER thirty years later was:

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

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

Jeff said...

FOFOA: Everyone will understand this eventually, although it may not specifically be called "Freegold" in the end. Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money.

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve."

FOA: "It has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, [and here's the all-important caveat] everyone that is positioned in physical gold will carry this storm in fantastic shape."

Edwardo said...

I'm not sure that even the venerable FOA could have imagined how reviled the old system would become. In short, I think he is incorrect about how many, if not most, will feel about the new system.

Tommy2Tone said...

Freegold is/will be. It is not a plan. It is happening, been happening.
I recall being at a place where it seemed very important to know who knows about freegold and whether they could stop/slow it down by making a choice not considered ....I kept reading and eventually the answers came. I found my way out of that dead end.

FWIW, I was the one who said you were thinking like a shrimp. You are. When that no longer insults you, you will be closer.

enough said...

If Vic is around,

Harvey Organ is showing "registered gold" at comex having fallen 200,000 oz from yesterday. I believe that is 10%ish.........

Is this true and is it important?

I noticed GLD has recovered almost all the physical it lost since end of June.....

One Bad Adder said...

FWIW - I think the "Freegold" concept is not so much one of design, but one which will evolve (IS evolving) ...out of necessity.
The Euro architects (in their wisdom) decided upon a "system" to firstly run with the foxes ($IMFS) ...and (as global market demand dictates) can ALSO hunt with the hounds.
They (IMHO) had the vision to anticipate this relentless market-driven transition - of which it is our privilege to be witness to "in real time"

KnallGold said...

1)And for the umphteenthtime&%#°§¬, Mario Draghi is not stupid, and central bankers are not stupid!

(miner49er used to insist on that repeatedly; just to add a "Knallige" voice to the choir to make a difference for a certain audience).

2) if you like Gold- and Silverpandas, Australian Lunar coins and the likes, get your stock asap, I'm having ever more difficulty spotting them (for reasonable prices).

Bars are still an easy find, but I sense for "ROW- currencies" they are starting to get pricy because every currency is now officially weak (hey, maybe the will re-vive the Bikini Atoll as it seems quite silent, finally, on the radiation front, and start issuing a super strong Bikini$, making Gold cheap in THAT paper, for a certain time frame but this is just my fantasy going wild ;-)

JR said...

One of the ideas in EMU Heads of States and Gold Man at the BIS that is further explored in FOFOA's comment at neutralnetwriter is the key theme of the $ camp, of which the IMF is a part (the $imfs - $ international monetary and financial system) as opposed to the ECB/BIS camp.

Learn to fish, aka to see the world from Another perspective, and what seems distant and complex may appear more obviously apparent and straightforward.

JR said...

Hi athrone,

You declined my invitation to GET RANDY!! Your loss.

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

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

De facto natural phenomenon; market driven. Go go superorganism!!

Anonymous said...

@anand srivastava

“By advocating for 100% reserve banking you are advocating for a much more powerful govt. You are actually looking for a socialist state where the govt directly controls banks.”

No banks will go back to their traditional role of matching short term (MoE) savers with businesses (i.e. Commercial Banking; think Real Bills, Money Markets, receivable factoring on consumed goods etc.) and Investors with Innovators (i.e. Investment Banking; think speculative, potential long term gains, higher risk, venture capitalist etc.).

Low risk, Long term savers will convert excess MoE into gold. The gold received by these current net producers in exchange for excess (MoE) will be from past net producers now looking to turn wealth (SoV:Gold) into income (MoE).

Second, I agree with JR, the second you make a MoE loan/extend credit you start down the path of fractional reserve banking. Fractional reserve banking is not at the heart of the problem though. The problem is that the fractional reserve requirement of the deposit base (liability) is not aligned with the term of loan (asset). Thus even fractional reserve banking at 100% can fall apart ‘if’ the deposit can be liquidated before the loan matures.

The difference in interest rate between the deposit and loan (i.e. the bank’s gross profit) will go to bank operations, net profits and default losses. This is a true private banking system, not to be confused with what is happening now.

So in sum, for profit private banks are very much still an important component of the private flow of capital even if the MoE in circulation is a non-debt based Sovereign money. No socialism there. In fact the moral hazard of banks (backed by FDIC) net consumers (backed by FHA) receive the rewards while net producers and taxpayers take all the risk is the very definition of socialism/crony-capitalism (i.e. 2008)

The power to tax (clearly a sovereign power) is fundamentally no different than the power to increase or decrease a nation’s money supply.

"Give me control of a nation's money and I care not who makes its laws" — Mayer Amschel Bauer Rothschild

Amen to that. Private Banks effectively control 90% of the World’s money supply. Which is why we have regulator capture in which banks write the laws that govern them (i.e. City of London, Wall Street).

Unfortunately short of a collapse I don’t see a way out of this conundrum as the governments the world over are very much in on these various soft money Ponzi schemes being perpetrated on net producers and savers.

“Please rethink your premises. There is a lot of wrong in Hard Money. Freegold is naturally superior.”

I don’t think you understand my position (please reread prior posts on this thread if you can)? I strongly agree with Freegold and have embraced the FOFOA dilemma and thus am 100% against hard money and non floating MoE.

What I’m advocating is that the most ‘efficient’ partner for Freegold is non-debt based MoE issued by sovereign nations. Not the only MoE partner option mind you just the best one.

Anonymous said...


I’m still confused by ANOTHERS two tier gold market hypothesis.

Why don’t Giants just buy physical gold in the common man market and then use it to pay off debts at the BIS? Using one dollar to pay off twenty dollars of negative trade balance sounds like a good return to me? Why wouldn’t this create a bidding war between CB in the common man market until the price was similar to the higher BIS clearing price for physical Gold?

Second, why couldn’t the two tier market continue indefinitely cutting out the common man (i.e. Shrimp) from the significantly higher BIS insider price indefinitely? It sounds to me that Freegold at the CB, BIS level is already in operation even while 2/3 of the physical gold is held privately outside the CB/BIS system and circulating at much lower common man price?

In sum, what is preventing the merger of these two pricing tiers? Basically the big pop all us physical Gold Shrimps are hoping for?

Come to think of it, can a foreign nation buy the production of another nation’s mines/population dishoarding directly (lower price tier) or must they go thru the local CB via BIS (i.e. higher price tier) first before physical importation?

I may have just answered my own questions but I would appreciate your take on this.

JR said...

Spaul you are not getting freegold, you talk about today's world as if it were relevant to the discussion of freegold. Your whole tack is I agree with freegold let's talk about my ideas. That you don't get freegold is apparent because your ideas reflect today's paradigm.

I don't know what else to say other than pretending to agree with people through empty platitudes will curry you no favor, it just exposes you for who you are.

Anonymous said...


“Spaul you are not getting freegold, you talk about today's world as if it were relevant to the discussion of freegold.”

No I ‘get’ freegold, I may not be as long winded as some but I get it. Don’t let my ‘significantly’ shortened version of the basic concepts confuse you.

All I’m trying to do is get answers to other completely rational and logical questions having read through all the source material + comments at least once over the course of a couple years. What I have found is if there is something I don’t yet understand there is deeper meaning I have yet to eternalize.

Now unless your suggesting freegold is some metaphysical transformation it will very much be a part of this world’s ‘reality’. In fact all futures are always and every a product of the past. Point of fact is that freegold is just a return to an international monetary system that once was generations ago. So it’s not even all that new, in fact it’s very old, just new to us.

Given your choice of an Ad hominem attack rather than an answer I’d like to assume you’re just grumpy because its late where you live. Either that or you don’t have good answer just yet. Fine hard question can take time to fully answer, I can wait. Regardless the question remains on the table whether you want to answer it or not.

So for you in the morning or anyone else on this board please explain to me how a two tier ‘physical’ price for Gold can exist? (ie a low price for shrimps and a high price for giants).

Unknown said...

I think I am belonged to useless wealth, having gold and money isn't an assurance you go all you want in this world, now I realized that wealth is sometimes very useless! BTW I got my blog

Anand Srivastava said...

"No banks will go back to their traditional role of matching short term (MoE) savers with businesses (i.e. Commercial Banking; think Real Bills, Money Markets, receivable factoring on consumed goods etc.) and Investors with Innovators (i.e. Investment Banking; think speculative, potential long term gains, higher risk, venture capitalist etc.)."

How is this 100% reserve banking? I am probably wrong but 100% reserve banking to me means no money leaves the bank except for withdrawal, after deposition. How can 100% relate to the length of time of the loan, when it should be the ratio of money that can be loaned.

What you are talking about is real bills. Where the banks take a deposit with a minimum deposit period and give loans for a maximum loan period, so that the two can match without problems. This is still fractional reserve banking IMO, even though it is vastly more reliable. It can still fail during a catastrophe.

"Give me control of a nation's money and I care not who makes its laws" — Mayer Amschel Bauer Rothschild

Who gives the control, the govt. It can take back the control. Yes banks can bribe the govt to play along. But only as long as the people don't throw out the govt. In crisis situations people do throw the govt out. And you get a dictatorship :P.

Anand Srivastava said...


"What I’m advocating is that the most ‘efficient’ partner for Freegold is non-debt based MoE issued by sovereign nations. Not the only MoE partner option mind you just the best one."

Non debt based MoE is certainly possible, but only at the central bank levels. There it will be enforced by RPG. At the consumer bank levels it will always be debt based. They will get debt by giving loans and they will trade amongst themselves this debt.

How would you stop it without govt decree? More laws means more government for the enforcement of excess laws. Let people decide where to save money.

Unknown said...

Hi spaul67,

Why don’t Giants just buy physical gold in the common man market and then use it to pay off debts at the BIS? Using one dollar to pay off twenty dollars of negative trade balance sounds like a good return to me?

There are two problems here:

1. How can a giant force the BIS to buy his gold? [Perhaps offering a discount on shrimpgold price?]
2. I'm not seeing any giant sucker, who would pay freegold prices instead of shrimpgold prices.

Why wouldn’t this create a bidding war between CB in the common man market until the price was similar to the higher BIS clearing price for physical Gold?

Read the two problems above.

Second, why couldn’t the two tier market continue indefinitely cutting out the common man (i.e. Shrimp) from the significantly higher BIS insider price indefinitely?

Because giants like shrimpgold prices! But this comes with a price tag, as when increased demand meets the same supply, prices must rise.

It sounds to me that Freegold at the CB, BIS level is already in operation even while 2/3 of the physical gold is held privately outside the CB/BIS system and circulating at much lower common man price?

It is not that likely, because shrimpgold price is a lot cheaper!

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