Tuesday, August 23, 2022


I remember writing Seven! like it was yesterday. I started with a tribute to the "lucky" number seven. My public blog's view counter had recently passed 7,777,777, and I included a screenshot of that. I hadn't captured the actual moment, so it did require some photoshopping. And if you look at the post, it has exactly 777 comments under it. I wonder how that happened.

The year was 2015, and it was just three months after I had switched from a public forum to the Speakeasy. That happened on May 10th, 2015, and how I made the transition was that I wrote a post for the Speakeasy, and posted part of it on the public blog. I announced "A new post is up," and then I turned off the comments. That was the final comment, and at the bottom of the partial post, I explained what the Speakeasy was, and how to subscribe.

So, if you subscribed, you then got to read the rest of the post and join the discussion under it. There was no more discussion on the public blog after 5/10/15. Too many trolls. Anyway, the point is that the Speakeasy comments have now been going as long as the public blog, plus 3 months. So I thought it would be interesting to see which blog has more comments.

I figured it would be close, but the public blog was open for anyone to comment, while the Speakeasy is only open to an exclusive group. Plus, just looking at the view counts, 7.77M compared to 1.9M here, I thought for sure the public blog comment count would be at least a little bit higher. I was wrong. Fofoa.blogspot.com has a grand total of 62,600 comments, and the Speakeasy has more than 74,600! To me this indicates that the subscription format is more conducive to a vibrant discussion than the open format, and it has fewer trolls. 😉

This year is also the 25th anniversary (what's that, silver?) of ANOTHER (THOUGHTS!). ANOTHER and FOA posted for about 5 years total, from 1997 to 2001. The USAGOLD discussion forum was active for 11 years, from 1998 to 2009. And I have now been here for 14 years, 7 at the public blog, and 7 at the Speakeasy. A few of you have been here that long as well!

While my New Year's posts are a time to look back at the past year, and to make predictions about the coming year, I think of these anniversary posts as a time to look all the way back, to when I first became aware of the things I write about, and to take stock of where we might be in the big picture of this history through which we are living, the history of the end of the $IMFS.

So, to kind of put a pin in the big picture for this year, I often say that there are times when the $IMFS is more prone to having an accident than others. I call it the Danger Zone. It's not about predicting that something big is going to happen immediately, but rather identifying times when something big is more likely to happen than at a random time.

It's like the DEFCON system used by the military, and I have raised the alert level to the Danger Zone a number of times. In the DEFCON system, DEFCON 5 is the lowest level, the normal state of readiness, or alertness. So, when I raise it to the Danger Zone, it's like raising the DEFCON level to 4. In military terms, DEFCON 4 is called the "double take," or "above normal readiness." For me, it's when I start topping off my preps, and paying close attention to everything.

So far, every time we've entered the Danger Zone, we eventually retreated back to DEFCON 5, the normal state of the $IMFS. So, my pin for this year in the big picture of all years so far, is that we are now in the permanent Danger Zone. That is, we are now stuck in the Danger Zone (or higher) until the $IMFS ends. I will try to explain.

[The middle 80% of this post goes here, and can be found at the Speakeasy. But here's how it ends…]

Looking back over the past 14 years, I'm amazed at how well this Freegold lens has worked! I know you're probably thinking, "But it's been 14 years, and still no Freegold." You're right, but it was never about timing. It's about seeing and understanding what's happening, the best and most useful way possible.

The lens is backward-looking. It explains what happened, correctly. It's not a crystal ball. My future calls are my own. They come from properly understanding what has transpired.

I think I have a pretty unique perspective on the last 14 years. Being a blogger, I have a time-stamped log of my daily thoughts on current events, from posts, comments and email. It's kind of like an electronic journal, but I'm constantly refreshing my memory by going back to search for where I've written about this or that in the past.

Every year on this day, I do some sort of a retrospective in the post. At the end of every year, I look back on the past year. And as you've probably noticed, I quote myself a lot, and link to posts and comments from the past.

There's a lot of searching involved in doing that. Something will cross my radar which harks back to something in the past, but with 700 posts under my belt and 140,000 comments on my blogs, it can sometimes take a minute to find what I'm looking for. And through this process of repetitively refreshing my memory of my past takes, I have built a kind of 3D model of the past 14 years in my mind. I don't have that kind of clarity for other periods of time, so I don't think it's too common.

It's my lens, and I formed it through the process of deconstructing Freegold.

And as I now look back over the past 14 years, it all makes sense. It works. This lens works!

Someone who shares this lens, although he doesn't comment very often anymore, is Aquilus. Knowing I was working on Fourteen, he sent me his own pithy summation of today, which was so good I thought I'd share with you:

14! Quite a difference from a few years ago. Recession to borderline depression all but guaranteed in Europe and China, while the US is talking soft landing, LOL. Re-onshoring and near-shoring in full swing with just-in-case more important than just-in-time, super-high dollar probably doing enormous damage to all emerging markets and then some with eurodollar debt, a US that is so split that the other side is considered sub-human as a rule, great local powers re-emerging and the Pax Americana retreating to around US interests only.

And we can't forget the willing separation of the $IMFS from a huge chunk of the planet's real assets like energy, food, metals, etc. with these sanctions in place. Then there's the EU 15% reduction and re-distribution of energy, which will go over like a lead balloon when countries that are somewhat ok energy-wise have to freeze their population out of "solidarity" with Germany, France, etc's poor planning.

On the Asian side, let's not forget Japan rearming for real for the first time since WW2, same thing with South Korea. Taiwan itself is in mass production with Mach 3 or 4 rockets that can hit the 3 Gorges Dam and Beijing, and that China cannot stop in bulk. See this video for what a 3 Gorges Dam burst would do and what the Taiwanese rockets are all about:

Yeah, quite a year!

Gold is still the only pure, no counterparty wealth item left, everything else is mired in debt and related to existing credit flows (see crypto busts). So, from that standpoint, 14 is a good number. 😉

I also heard from DI today. He says hi. He wrote:

A lot has been happening this year! Thanks to your lens, I can take it all in stride. No worries. :-) The freight train seems to have some real speed wobbles now!

Funny, "speed wobbles" is a reference to a comment I wrote way back in 2008. I was discussing positive feedback loops with a commenter who was some kind of an engineer. In positive feedback loops (sometimes called vicious circles), any disturbance in the force, or perturbation in a system, will result in an increase in the magnitude of the perturbation as the system overcorrects one way, then overcorrects back again. It can quickly get out of control:

Imagine a child on a skate board being pulled faster and faster behind a small motorcycle. And then down a small hill. The skateboard's sensitive turning mechanism and small wheels cannot handle the speed, and even the smallest tilt in one direction causes an overcorrection in the other, and an even bigger correction back again. This happens 3 or 4 times almost instantaneously and totally unexpectedly and results in what we used to call a "face plant".

That same month, in 2008, Ender wrote:

Keep in mind that large changes happen at a snail's pace.

He was right, but eventually things must speed up. Has there been any perturbation in the system lately? Any disturbance in the force? I love this video. It's how I visualize the end of the system. I have it cued up to where we are now:

We're in the final stretch. The transition has begun. No more DEFCON 5 until Freegold. It might get brutal for a while, but hopefully you're prepared, and you know what to do.

Because we are speaking of currencies here,
the transition will be brutal! -ANOTHER

However, everyone that is positioned in physical gold
will carry this storm in fantastic shape. -FOA

Thank you all for sticking around! I wouldn't have kept doing this for this long if it weren't for all of you! :D


Thursday, May 26, 2022

Is Bitcoin Money?

I wrote this post back in 2017, when Bitcoin was hitting new highs daily. It was at $16,501 the day I published this post at the Speakeasy, 12/9/17, and it peaked at almost $20K less than a week later. Since then, it dropped to around $3K, rose again to a new high of almost $65K, and came back down to about $29K. But even with all that exciting action, my opinion hasn't changed. So, for the first time, I'm sharing this post publicly. Enjoy…

I know that many of you are tired of all the Bitcoin posts, because you couldn't care less about Bitcoin. I feel the same way. But in this case, Bitcoin is simply a useful foil for a more interesting discussion about money. In case you don't know what a "foil" is, it's a literary object used to contrast the difference between two things, in this case, the difference between money and not-money. So don't think of this as just another Bitcoin post. Think of it as another fantastic post about money. ;D

The Key

The question in the title is, I think, the key to the future of Bitcoin. I have spent a lot of time over the past few days learning about Bitcoin, and I have some new insights to share with you. For starters, I think I was wrong about Moldbug. In my last post, I included an email I sent to him in which I wrote, "I assume you do not see it as undergoing monetization, or do you?" I have changed my mind since then. I now think that he probably thinks it is undergoing monetization, or at least I think that he's probably changed the odds he gives it from a million to one to, perhaps, even money.

It's just a guess based on what I've learned over the past few days, both about him and about Bitcoin. But I also think he's wrong. Not because I think I'm smarter than him. I don't. I think he's way smarter than me. But I think he's biased in favor of Bitcoin, and handicapped in his understanding of money. Of course I'm biased too, but I think I have a far superior view of the money concept. He's biased because he's a computer programmer, and his handicap is that he comes from a hard money background in Austrian School economics. Incidentally, Satoshi Nakamoto was also a programmer with a hard money background in Austrian economics.

Bitcoin can be very complicated. They say it's constantly changing, and takes years of study just to understand the possibilities it presents. And while I've been aware of it for over seven years, I have only dedicated a few days of study to it, and I'm certainly no programmer. I claim only a superficial understanding of the technical side of bitcoin, but I also claim that something very simple, the question of whether or not it is money, is all you need to understand in order to know where it's going to end up.

The reason is simply that money is money, whether people understand the concept or not. The concept of money is not going to change to fit Bitcoin. Bitcoin, on the other hand, can change if it got something wrong. As you will learn, it could potentially adapt by fixing what it got wrong, in order to fit with the true, unchangeable concept of money. But that doesn't matter, because to be money, or to become money—to undergo monetization—is a very special process, not something that can be forced like shaving off the corners of a square peg in order to pound it into a round hole.

Anand says that Bitcoin is more of a store of value asset, like gold, than a medium of exchange or unit of account money. This is an understandable observation coming from someone with a Freegold background who has, with all due respect, drunk the Bitcoin Kool-Aid. And he's not alone here at the Speakeasy, he's just the main one who has spoken out. But I'm pretty sure he's wrong. And I'll give you all a chance to sip the Kool-Aid with him here in a moment, and then I'll try to pull you back from the brink. ;D

Besides, even if Anand is more right than wrong about Bitcoin's best function or purpose, he's in a tiny minority among bitcoiners. Most influential bitcoiners believe that Bitcoin is and/or will be, or will become, money in the sense of all three functions, MoE, SoV and UoA. And I think they're right insofar as it would have to become all three in order to be a long term store of value asset like Anand believes. It would have to, but it won't. It can't, because it has the money concept all wrong.

Bitcoin has a bunch of serious scalability problems, both as its price rises, and as more and more people start using it, for any function or purpose. These problems may possibly be able to be overcome, but only if Bitcoin is worth it. Only if it's truly special. And by that, I mean, only if it really is money, and not just something that a bunch of Libertarian Anarcho-Capitalists want to be money, and will try to shape into money with each hurdle it encounters. No, I think we can know today whether or not it is fit to make the journey from obvious Ponzi bubble to money, without being fatally derailed along the way.

My Gut Instinct

I had a gut instinct about Bitcoin from the beginning, and over the past few days I wanted to check that initial instinct to see if maybe I got something wrong. Because if I did get it wrong, then there's still time to get in. Yes, it's in a bubble right now. And yes, it will probably crash by 90% any day now. But this is really its third or fourth bubble, and if I'm wrong, then there could be several more on its way up to millions.

In 2011, Bitcoin rose 3,000%, and then collapsed 94%, all in one year. It went from under a dollar, to $31, and back to $2 by the end of the year. In 2013, it rose 2,000%, from $13 to $266, then collapsed 74% down to $70, followed by another 1,800% rise up to $1,242, then back down to $600, all in the same year. By 2015, it had dropped back down to $200, an 84% decline from its high.

Price at time of posting.

For comparison, this year's bubble has taken it up 2,200% from its low in January. A 75% collapse would take it to $4,125, and another 3,000% bubble would take it up to $123,750 from there. Run that scenario only two more times and we're at $7M/btc, well within Moldbug's monetary standardization and F-U money range.

Buying some at $4,125 after this bubble pops and riding it up to $7M would be like buying in 2011 at $9.50 and hodling till now, at $16,500, a 175,000% increase. That makes a 5,000% Freegold reval look like peanuts, so it's worth considering if that's what's happening. It's worth considering whether my initial gut instinct was wrong, because if it was, there's an opportunity to ride it the rest of the way. It won't be a lottery ticket like riding from 90 cents up to $7M, but it's still worth looking into.

So that's what I did, and why I'm writing this post. SPOILER ALERT: I'm sticking with my initial gut instinct, and I'm going to try to explain why. To me, it's binary. It's either/or. Either it monetizes, or it disappears. I can't really see a middle ground. Either Bitcoin is money, or it's not. So let's get started. :D

An Unholy Alliance

Since I first really looked into Bitcoin back in 2011, I have been saying that its fatal flaw is that it was invented to solve a problem that simply doesn't exist, except in the minds of certain types of people. That non-existent "problem" is, basically, banks and fiat currency, or paper money, or "easy money" controlled by banks and governments.

The financial crisis and bailout of the banks in 2008 validated this idea of banks being a "problem" in the minds of the types of people I'm talking about. The anti-bank bias runs much deeper than just 2008, of course, but that year gave them validation, and purpose.

The "problem" of fiat currency, paper money and easy money, is only a problem for savers, and only if they save in that easy money. Other than that, it's not a problem at all—in fact it's a good thing. It's not a problem for investors, because they profit from risk. It's not a problem for traders, because they profit from volatility. It's not a problem for speculators, because they profit from bubbles. It's not a problem for debtors, because they want easy money. And it's certainly not a problem for governments, because they like the flexibility and control it gives them.

So as you struggle with the idea that fiat currency, paper money and easy money are not a problem, but are actually a good thing, even for us savers, recall Ari's powerful words: "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... 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."

2008 brought together the anti-bank segment of the political left (as identified in the Occupy Wall Street movement) and the hard money segment of the political right (the gold bugs), in a kind of rare, unholy alliance. This unholy alliance, in my opinion, is personified in Max Keiser, who, I'm proud to say, once called me a dick (after one of my silver posts). :D

2008 also gave birth to Bitcoin. Bitcoin.org was registered in August of 2008. The white paper was released in October. And in January of 2009, the bitcoin network was launched when Satoshi Nakamoto mined the first block on the chain, known as the genesis block. In that first block, he embedded a permanent "Easter egg", a single line of text that refers to bank bailouts.

It's no coincidence, IMO, that Max Keiser was more into silver than gold, and has now switched to Bitcoin. The anti-bank contingent with only a cursory crossover into the precious metals sphere prefers silver over gold, not only because silver offers more volatility and leverage, but because the central banks only have gold, not silver. So silver is seen as the bankster-busting precious metal. Max Keiser is the also the one who started the whole "Buy Silver-Crash JP Morgan" nonsense.

Bitcoin, too, is all about getting rid of the banks. That's not to say it's an activist movement like "Buy Silver-Crash JP Morgan" was, but more of a passive belief that it's inevitable. It's inevitable that Bitcoin will change the world, just like the Internet did 25 years ago. People said the Internet would never catch on, that it was only good for distributing pornography, but it did catch on, and it changed the world.

In a similar way, they say, Bitcoin is like the Internet, only for money. In other words, it's an analogy: Bitcoin is the internet of money. And like the Internet, the world of money is never going to look the same. In 10 or 20 years, they say, there will be no more banks. There will be no more central banks. Children born today will never use paper money, never have a bank account. Their phone will be their own personal bank. And it's already a done deal. Like the Internet, it has already been unleashed on the world, so you can fight it or join it, but either way it's coming. Unstoppable. Inevitable.

Andreas Antonopoulos

If you don't know this name, and I first heard of him only a few days ago, he's a 45 year old computer scientist who got into Bitcoin in 2012, and has since become its top evangelist. And he's very convincing. He travels around the world giving talks, and they say he has converted more people to Bitcoin than anyone else. They say he once converted a staunch anti-bitcoin bankster into a pro-bitcoin promoter in a single sitting.

He has written a technical book for Bitcoin programmers, titled Mastering Bitcoin, has another one coming soon on Ethereum, and has a non-technical book titled The Internet of Money, which is a collection of sermons he has given.

He's very good on the concept of money. He calls it a language we use to communicate relative values, which sounds an awful lot like the pure concept of money. I want to you watch this short video. It's a talk he gave just a couple of weeks ago in Sweden. It's 18 minutes long, but trust me, it goes by quickly. He's that good. And I'll bet he converts a few of you, at least until you read the rest of this post. ;D

After the video, I'll give you links to a few more videos I watched which I found very compelling. If you can spare the time, watch more. He really does address almost all of the common criticisms quite brilliantly. Then, after you become a Bitcoin convert, allow me to deprogram you at the bottom. ;D

In the description under that video, which is on his own Youtube channel, he lists a bunch of others. I watched them all, and I added the times so you know what you're in for. If you've got 3 hours to spare, I recommend watching them all, and then you'll really be a convert. Otherwise, just watch whatever titles appeal to you. I watched The Stories We Tell About Money first. ;D

Introduction to Bitcoin – 37 min.
The Stories We Tell About Money – 47 min.
Money as a System-of-Control – 17 min.
Delivering Liberty, At Scale – 30 min.
Bitcoin: Where the Laws of Mathematics Prevail – 23 min.
Decentralization and the Architecture of Trust – 22 min.

"Bitcoin is this strange being. It really is. It violates everything we think we know about money, and it forces us to consider whether we actually understood money in the first place."

A brilliant opening, and then he goes on to point out that no one understands money because money is not taught in school, and then he wows us with what sounds like an erudite explanation of the standard understanding of money. That's from The Stories We Tell About Money.

Had I not, myself, spent so much time and effort on the concept of money, with all credit of course going to FOA and Gold Trail III, I could imagine myself being awed to the point of conversion. But alas, I have spent a lot of time and effort on this concept. And while I don't really want to call him a sophist, I will at least point out that he's Greek (where the art of sophistry originated, ICYDK). ;D

He even talks about the debtors and the savers (here), and how debtors want a money that becomes "worth less," so that they can repay less. If you are a saver, he says, you want the money to be worth more, so that you can earn more on it. And this, he says, creates a conflict of interests between the savers and the debtors, especially since the governments, who are the biggest debtors of all, have the power to depreciate the money through printing. Through this process, he says, they transfer wealth from savers to debtors. I listened to this twice, and I can't shake the feeling that he read my Debtors and Savers post.

Then again, maybe he didn't, because he says the solution to the problem is hard money. Hard currency. Bitcoin. Which he says has a fixed, diminishing, geometrically-reducing supply, that cannot be modified no matter how much you try, because the more you try to extract value from it, the harder it gets. He then says there's only one thing in the world that shares those same characteristics, and that's gold. Except, he says, you can't email gold. But you can email bitcoin. And suddenly, he says, "you notice that this thing may have a bigger impact than any of us participating in it could even imagine." (Or not.)

"This is not an investment opportunity. It is not a get rich quick scheme. It's a technology," he says. It's a technology that has radical disruptive implications for the world at large. Children born today will not drive cars, and will not know a world that has banks, or paper money. Bitcoin will bring money to the "unbanked" and the "underbanked", 6 billion of the world's population, he says, that is cut off from the… well, let's just say, doesn't have full access to the $IMFS. The third world nobodies, who have no access to Wall Street banks, can finally have their own money, on a cell phone no less. How on earth did they ever get by without Bitcoin?

So let's start there. This is one of his main theses for the broad adoption of Bitcoin, that it will finally bring money to the 6 billion "unbanked and underbanked" in the world. He says the banks won't give them accounts, because they don't have proper ID, basically. But with Bitcoin, they'll have their own bank, right on their cell phone, and banks will eventually disappear altogether as a result. Well, that is kind of what he's saying.

I don't know about you, but it sounds a little condescending to me that he thinks they will prefer bitcoin over whatever they're already using as a medium of exchange. And giving them access is not the same thing as giving them money, or purchasing power to be more precise. It almost sounds like he's saying that bitcoin will bring them more purchasing power. Perhaps he does mean that. Because Bitcoin is deflationary, perhaps he thinks it will always increase in value over time, in which case it becomes more of a store of value than a medium of exchange.

In fact, he says this. He says that during the adoption process, it will swing back and forth from being more of a store of value to being more of a medium of exchange, and over time it will gradually acquire the unit of account characteristic as well, as people start to think of prices in bitcoin terms. Eventually, he says, it will have all three functions of money, MoE, SoV and UoA, without the fourth, which he says is SoC or System of Control.

Today's money, he says, is issued by Kings and States, controlled by banks, and has four functions, MoE, SoV, UoA and SoC. It's how governments control their people, and each other, by being able to keep an eye on you through your transactions, and cut you off from your money if necessary. He points out how the US controls entire countries with its ability to cut them off from the SWIFT wire transfer system if they don't behave.

I think it's time to point out the obvious, that a lot of what he views as problems with money and banks, is really just a result of the $IMFS. A quick refresher: The $IMFS exists in the first place because the US came out of WWII not only victorious, but also with the only intact economy capable of helping rebuild Europe with the help of a coordinated monetary system. After that scheme first worked, then didn't, then changed, the $IMFS was supported by European central banks to ensure continuity until they could bridge the gap to the next system. The gap was bridged, but the $IMFS carried on, for reasons we all know. (For more, read From Bretton Woods to Freegold - An Epic Road Traveled)

Bitcoin doesn't seem to have this historical perspective, or any for that matter, but rather, quite simply, sees banks and money and problems, and proposes to do away with the banks and the problems by creating a new kind of money. The problem is, it just doesn't work that way in the real world.

I also see a touch of the techno-arrogance we see so often coming out of Silicon Valley. It's the utopian fetish of a generation with a technical advantage over those that came before it, but which has little historical perspective, and known no existence other than inside the fishbowl. As FOA said, they have never had that "loss of currency 'Experience'," yet they propose to fix the world's problems with a new kind of money.

Don't get me wrong, though. I'm not suggesting that resistance is needed. Resistance is unnecessary. I'm simply trying to explain why it's not going to work out the way Andreas Antonopoulos thinks it will. He says resistance is futile. I say it's unnecessary. He says that if "they" shut down Bitcoin, any 14-year-old with a copy of his book can start it up again, and again, and again. The cat is already out of the bag, and it's not going back in. All I'm saying is, look, that's not a cat. You can call it a cat all you want, but that won't make it a cat.

Bitcoin is not money. But it is kind of like a commodity that could potentially be used as a currency. In this way it is like gold… or silver, or iron, or zinc, or copper… but it doesn't have any industrial uses, at least not yet, so I suppose it's most like gold in that regard.

So, one of the arguments is that a commodity with currency-like similarities to gold can just become money, practically overnight. You'll hear people say that Bitcoin is a commodity money, meaning that it is like gold and silver (in their understanding of money), but that statement is not true. It takes a long time and a long process for something to become money, and the Great Bitcoin Bubble (GBB for short) just simply doesn't qualify.

It is obvious that gold holds a special place in the history of money, currency and tradeable wealth over thousands of years, and we so often run down the litany of properties "that make gold money." It's fungible, durable, divisible, portable, recognizable, limited in supply… you know the list. But doing that is basically like doing a postmortem on the tournament of history, an after-the-fact analysis to understand why the winner won. Recreating those properties is simply not sufficient to create another winner.

I've written about the tournament effect before. It basically says that there's an unpredictable element, call it luck, in winning a tournament. And history is like a bunch of tournaments. If it was simply the best properties that determined the winners, then Betamax would have won over VHS.

Now, understand that Bitcoin was specifically designed to have gold-like properties, based on the designer's belief that gold-like properties make good money. It was designed to be in limited supply in the end, and to be mined, and to get harder to mine as more and more gets mined, and to be divisible down to 2.1 quadrillion units once all of the bitcoins have been mined. In dollar terms, that's like dividing 21 trillion dollars down to the penny. $21T in pennies would be the same quantity as all of the "satoshis" (the smallest unit of bitcoin) in existence, once all of the bitcoins have been mined, 123 years from now.

Here's where I will remind you that money is essentially credit. But gold has been used as base money in the past, which means it was used as both cash and, simultaneously, the unit of account for credit money. So, in that sense, it was in fact a global currency, and as it was held in monetary reserve around the world, it was the global reserve currency of the time. I want to give bitcoiners as much credit as possible here, so I will assume that this is what they see bitcoin becoming when they say it is money. Once, in all of the videos above, he does say that Bitcoin will become the "reserve currency" for a bunch of other currencies, here.

Furthermore, I'm not even going to make the argument that being base money was not the best use of gold, because like the litany of properties, that is really just a postmortem conclusion, and a prediction for the future. Instead, I'm saying that, although it is theoretically possible for Bitcoin to monetize in the sense of becoming stateless base money, a form of cash, and a global reserve currency, to use the Queen's English, it just ain't gonna happen dude. ;D

Andreas Antonopoulos says that money, at its essence, is the communication of value. He says that Bitcoin is the decentralized communication of value, i.e., decentralized money. But the truth is, it's more like a monetary base than money per se, which are two different things. When gold was the monetary base, what made it money was the unit of account function, that we thought of and communicated the relative value of other things in terms of a specific weight of gold. That's what made it money.

So, the key to Bitcoin actually becoming money, even base money which is a derivative of it being money first and foremost, is that we start knowing values in bitcoin, and communicating them to each other in those terms. That seems like a catch-22 to me, because how can we possibly think about relative values, let alone communicate them, in bitcoin terms when its own price is so volatile, changing minute by minute? We can't. It needs to stabilize first, which it will do when it becomes money, but it can't become money until we start thinking in and communicating value in bitcoin. See the catch-22?

It's not just about things being sold for bitcoin. Nothing is actually priced in bitcoin. Things that are sold for bitcoin are priced in dollars or some other currency, and the bitcoin price is a derivative of the item's dollar price and bitcoin's dollar price. Can you imagine something being priced in bitcoin? Take gold. Right now, the price of an ounce of gold in bitcoin at APMEX is BTC 0.08, or 8/100ths of a bitcoin.

Imagine what would happen if they left the price fixed in Bitcoin. As the price of Bitcoin rose relative to gold, no one would buy gold with bitcoin anymore. In fact, they might try to buy bitcoin from APMEX with their gold. It would be cheaper than buying bitcoin with dollars. And if the price of Bitcoin plunged below its current price relative to gold, then it would be cheaper to buy gold with bitcoin than with dollars. Either way APMEX would eventually go bankrupt if they tried to honor that price long enough.

Gold's probably a bad example, because it's a commodity too, and its price is constantly changing. But the point is that bitcoin is just another commodity, not money. I can buy gold with silver at APMEX as well, and vice versa. Alpaca socks might be a better example. Alpaca socks used to cost 50 bitcoin for a single pair. You can see here. Imagine if they kept the price at 50btc. They certainly wouldn't be sold out, they'd be out of business.

Again, the point is that bitcoin enthusiasts with businesses accepting bitcoin for their goods and services does nothing toward turning Bitcoin into money. It's simply a gimmick.

Regression Theorem

This is how something becomes money—very gradually, and in a long-running chain of connections to previous monies. I have written about Mises' regression theorem in many posts, and it basically tells us that we accept a currency because we think in terms of it, we remember in terms of it, because we did yesterday, and the day before that. From my 2011 post, The Return to Honest Money:

If you would like, you can think of my "two monies" concept as "the recurring duality of money" because it will recur throughout this post as we deconstruct the money concept. What we'll find is that even with many potential monies in play, we'll always naturally end up with two that attain "monetary status" in different time-related roles through the forces of regression, the network effect, game theory's focal point and a dash of legal tender dictate.


The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level.


Mises' regression theorem… connects modern money to… emergent money through our time-value memory and expectations of a money's ability to store value. And what I hope to show you is that the natural progression toward Freegold… is consistent with… Mises' regression theorem, while the difficult regression back to [hard money] is not.


So, basically… Mises' Regression theorem explains the long-running connection of modern money to its ancient origins. Regression kinda gets a "bad" money "in the door" and then human memory and expectations provide inertia.


It is because we think in dollars, or pesos, or rubles that we continue using those units as the primary media of exchange. It is human inertia that keeps them working. You can no more easily switch to a different unit, like a Bitcoin for example, than you could switch America to the metric system (like they tried in the 70s) or get an entire people to switch languages.


Murray Rothbard: Money, however, is desired not for its own sake, but precisely because it already functions as money… Hayek should be free to issue Hayeks or ducats, and I to issue Rothbards or whatever. But issuance and acceptance are two very different matters. No one will accept new currency tickets, as they well might new postal organizations or new computers. These names will not be chosen as currencies precisely because they have not been used as money, or for any other purpose, before.

One crucial problem with the Hayekian ducat, then, is that no one will take it. New names on tickets cannot hope to compete with dollars or pounds which originated as units of weight of gold or silver and have now been used for centuries on the market as the currency unit, the medium of exchange, and the instrument of monetary calculation and reckoning.


FOA: It wasn't going to happen, no matter what, short of nuclear war. All we had to do was look around and see how people the world over were attached to using fiat currencies. The economic system itself was morphing into new ground as world trade learned to function very efficiently with fiat digital settlement. And that's something the 70s crowd said could never happen. That was how many years ago?

…Even the third world didn't want to hear it. They figured that any return to a hard money system would harken back to a time they remembered well. These guys suffered during the early century and no one was going to tell them that the gold standard wasn't the fault. The US is today, and was then, robbing them blind, but the situation seemed, to them, that this new dollar standard was building them up…

When it came to using fiat money in our modern era, it made little difference what various inflation rates were in countries around the world; 50%, 100% 1,000%,,,,,, they went right on playing with the same pesos. There have been countless third world examples of this dynamic, if only we look around. Mike, look at what happened in Russia after they fell,,,, the Ruble stayed in use and function with 6,000% inflation. My god they still use it now.


If you're still with me, I hope you are starting to see some of the problems with all of the various "hard money" propositions. Even competing currency ideas like e-gold or GoldGrams are unlikely to be adopted according to Mises' Regression theorem:

Timothy D. Terrell on Regression and new currency viability: ...If the digital currency plan requires people to trade and quote prices in terms of something other than the widely used dollar, yen, mark, euro, or other established currency, Mises’s regression theorem would imply that the plan is doomed. Well before e-money became possible, Rothbard addressed this problem:

Even the variant on Hayek whereby private citizens or firms issue gold coins denominated in grams or ounces would not work, and this is true even though the dollar and other fiat currencies originated centuries ago as names of units of weight of gold or silver. Americans have been used to using and reckoning in "dollars" for two centuries, and they will cling to the dollar for the foreseeable future. They will simply not shift away from the dollar to the gold ounce or gram as a currency unit.[4]

What will work is a plan that simply facilitates the exchange of already-recognized currencies...

This kinda throws a wrench in the whole competing currencies idea to which the hard money crowd has somewhat retreated. Just like Mexico still uses the peso and Russia the ruble, we'll likely be thinking in terms of dollars long after it collapses.

The great flaw in this whole anti-fiat currency, anti-bank fantasy is not just that it's wrong, it’s useless, because it is never going to bear fruit. Banks and fiat are not going away anytime soon, no matter how high the GBB goes.


Disintermediation, or the removal of banks as middlemen, even for long distance transactions among total strangers, is often touted by Andreas Antonopoulos as Bitcoin’s greatest claim to fame. But the whole idea of decentralized, disintermediated, peer-to-peer money transactions over long distances, IMO, was just a bad idea from the start.[1] It reminds me of my “three spheres of trade” in Money or Wealth.

It was the emergence of centralized international intermediation by banking families like the Medicis during the Renaissance that expanded the money concept from the local to the distant. Even modern Hawala systems use intermediaries. Understanding the money concept helps us see through the faulty reasoning behind decentralized, disintermediated cryptocurrencies. It’s not so much the crypto part, it’s the decentralized, disintermediated part that will be their downfall. They’re just a fad, because they don’t make monetary sense.

For many of you (hello Toolmaker! ;D), I'm sure this goes against your Libertarian ideals and sensibilities. I probably sound like an evil banker just for saying it, but try stepping back from your ideals, just for the purpose of seeing a concept. As Ari said, we live in an imperfect world, and one of the hardest things about understanding Freegold is accepting what the real world has to offer, and adjusting our own thinking to that reality, rather than hoping that the world will change to accommodate our preferred reality.

Here's a refresher on my "three spheres of trade":

Building upon FOA, I tend to think of three spheres of trade in which the ancients would have engaged each other. The three could be described as distant, local, and "among trusted acquaintances" or what we could call "super-local". As FOA explained, gold was best suited for distant trade, and, therefore, gold was always "On the Road," a phrase he used 15 times in Gold Trail 3.

Credit would have been mostly used on a "super-local" basis, or "among trusted acquaintances," and other media of exchange, other forms of tradable wealth, would have been used "locally", like at the town marketplace. Credit is scalable, both in quantity and duration, or length of time required for clearing, and it would have been scaled in proportion to the level of trust between trading counterparties.

As an example of the "super-local", I like to imagine a bar like Cheers in ancient times, where everyone knows your name and, therefore, everyone drinks on credit. Everyone runs a bar tab. The bar tab is a handy device because it is generally one-way credit. The bar owner extends credit to all of his patrons each night, and they settle up on a regular basis rather than having to barter for each and every drink. It's merely a convenient device for a mental exercise.

The point of this exercise is many-fold. It is to understand how money (credit) and barter (settled or completed trades) coexisted at the same time, not that money emerged from barter. It is to retrain your brain to be able to separate the money concept from barter, even where gold coins or other tradable wealth items were traded. And it is to be able to visualize the process, over time, whereby gold became the focal point tradable wealth item.

In order to run a super-local credit system, you need a unit of account. It could be anything. It could even be different for each patron. Perhaps our ancient bartender simply kept track of the number of drinks for each patron, and then settled up later depending on their trade. Or perhaps he kept track using each patron's trade. Like the egg farmer owes so many eggs. Or perhaps he used some other unit of account, like pieces of silver or gold. It doesn't really matter, and it could have varied from bar to bar, and community to community.

Over time, of course, a standard unit of account would be easier and would therefore spread from town to town until everyone used the same unit of account. Perhaps it was pieces of silver. One of FOA's points was that it is more common to find hoards of silver coins in ancient digs than gold. That's because, as FOA said, silver would have been a common item of trade, and it would make for a good unit of account in ancient credit.

In terms of local (but not super-local) trade, barter would be the order of the day. You can imagine a bustling marketplace where trade consists of haggling over relative values and goods on offer. Over time, gold and silver would emerge as good media of exchange, but still that would not entail the money concept as explained by FOA. Eventually a system of scrip would emerge, as in Fekete's 'Fairy' Tale (found in this post), and in that case, the scrip would represent the expansion of the money concept from the super-local sphere into the local sphere.

A scrip system is a system of short-term credit amongst a limited group of relative strangers. The scrip itself becomes a medium of exchange, but only for the limited scope of the fair itself. The clearing of the scrip would entail the return from the monetary plane to the physical, from money back to barter. You don't want to go home carrying a credit slip from a stranger. You want to go home carrying either a good or a tradable wealth item.

Beyond the super-local and local was distant trade. This was where gold was used. As FOA explained, a very small amount of gold in the world carried a tremendous value in antiquity because of the way it was used.

"All throughout these early times, prior to BC and into some AD, people didn't see these gold coins as we think of money today. These various gold coins had tremendous value, but they were just gold pieces. They were wealth for trade like everything else was.. That's simple logic, I know, but the vessel of oil, for instance was just as tradable as a gold coin. In fact, within most of the medium sizes city states of that era, barter of like goods was just as good or better than gold coin. One's life was better if he owned wealth he used."

Gold's highest value in antiquity was to be, as FOA would say, "On the Road." Imagine you are a trader in antiquity, heading out to distant lands in search of fine silk or whatever it is you are after. You will need to bring something of value with you to trade for those things you hope to obtain. So, whatever wealth you have before you hit the road, you will want to trade it for the item that carries the greatest value in the smallest package and lightest weight. That was gold.

If a stranger rolls into your town wanting to obtain a cart full of your fine oil or furs, you will engage him in barter, not credit, because he is an out-of-town stranger. He will offer you gold and you will take it. You will take it because you know how valuable gold is to "on the road" traders, and you know that when the next one leaves your town he will trade all of his wealth items for gold, because that's what you take on the road. That's what gives gold its tremendous value—the way it is used.

There were a number of points that FOA was making in Gold Trail 3:

1. Gold was not money, in fact it was practically the antithesis of money in ancient times. If you understand that money was credit, and that credit was used proportionately at the local and super-local levels, gold was the tradable wealth item used where money (credit) couldn't be used, over long distances between strangers.

2. Gold had a far higher value in ancient times than we tend to imagine. Too high, in fact, to be used as "savings" by normal people. Too high to be hoarded! Lifetimes were shorter, wealth scarcer, and he who underconsumed to save for later would save, as FOA said, "wealth he used."

"Humans of that period didn't live all that long a time span. Even though some accounts prove otherwise, the majority of life went by rather quickly. If you were a regular part of society in general, your wealth was what you had and consumed during those short days. There were no banks or investment houses and the average person's return on a wealth unit was his length of use and its quality of life enhancement. More to the point, this logic made these guys spenders of gold, rather than savers! If you had gained gold in trade, for your services or goods supplied, you had no reason to save it. There was no other money that needed to be hedged against value loss…

For longer savings, even for those of above average means that had all they wanted, people tended to spend their most valuable gold coins first, while saving the least valuable (bronze, silver, iron) for emergencies and later use. To us, today this sounds strange, but place yourself in that time. It was better to build your most useful and needed store of things while times were good."

3. A much smaller quantity of gold existed (and sufficed) in antiquity than we tend to imagine.

"It's becoming more and more apparent that average people of that time quickly traded (spent) their gold for something useful of value, for both them and their family. They didn't have the excess we know today. In modern nomenclature; this logic dictates that a much smaller amount of gold money circulated and circulated faster than many supposed. All forms of jewlery and art objects were in the same situation."

This last point was, I think, what sparked the discussion about ancient gold in Gold Trail 3 in the first place. Just prior, at the end of Gold Trail 2, the subject of vast hoards of "black gold" had come up in the discussion forum, and this was how FOA chose to address it.

My point in revisiting this discussion here is that gold's true value comes from the way it is used, which is not necessarily the way it is described by the hard money/gold bug camp.

Now jump ahead, in your mind, from antiquity to the Renaissance period, and think about the differences. Witness the emergence of international banking families and the beginnings of an international monetary system. Yes, coins, both gold and otherwise, were a big part of the system's development. But as we earlier witnessed the expansion of the money concept from the super-local to the local with the use of scrip at the fair, here we can see the expansion from the local to the distant with the addition of international clearing organizations in the form of these big "evil" banking families.

A busy scene in a 15th century Medici bank.

Also remember that, in terms of FOA's pure money concept, it was the numbers stamped on the coins, and not the metal itself, that was money. The fact that gold was used in this way was probably an essential step, or at least a helpful one, in the expansion of the money concept from super-local to local to distant. But, as FOA said, it was not the best use of gold:

"To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item. In proper vernacular; a 1930s style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature."

So, in antiquity, gold was tradable wealth just as it is today. But, in antiquity it was "on the road," which is not necessary today, because we now have a functioning international monetary system enabling money to be used in distant trade. Also, today, we have the need to save for retirement, which was a little different in antiquity for the reasons FOA explained.

Let's take a quick look at gold's unique set of physical properties:

Scarcity: It's not all that scarce relative to other things, but it also doesn't grow on trees which is actually what is meant by scarcity as one of gold's properties. It takes considerable effort and luck to find it directly in nature.
Fungibility: This is what sets gold apart from, say, diamonds. An ounce of 24K gold is the same anywhere, they are mutually interchangeable, and we can specify an amount of gold without having to be specific about which actual piece of gold is being referenced.
Recognizable: Gold is easily recognizable and relatively easy to authenticate.
Divisibility: This is what sets gold apart from, say, the Mona Lisa. Gold can be divided almost infinitely without losing its value.
Portability: This is really a function of gold's high value, but it was very important in antiquity. It's a little bit circular and self-referential in that gold was portable because it was very valuable, and it was so valuable (back then) because it was so portable, because it was so valuable, because it was so portable, and so on.
Malleability: Gold is easily shaped, which is how and why it traded in many different forms, like jewelry, art and coins.
Durability: This is the big one. It's very hard to destroy gold. Easy to lose, but difficult to destroy.
It's pretty: And shiny. I imagine its shine was always more alluring than its yellow color, but that's just my personal bias. Gold has high reflectivity, but silver is even more reflective than gold.

I think these properties offer a good explanation for the beginning of gold's journey through history, but not its true value. Value comes from how we use it. To explain what I mean, let's look at which of the properties were most important to its "on the road" use in distant trade, before we had an international monetary system. I think the facts that it was both portable and recognizable were of the greatest importance. And remember that portability is a circular, self-referential property based on value. So, in essence, I think the fact that it was recognizable anywhere you traveled was probably the singular physical property that led to its highest value use, a value that was imparted on all gold, even that which wasn't "on the road," simply because it potentially could be.

Now let's think about the way gold is used by Giants today, including CBs and governments. It is being used primarily in large bar form, buried and secured out of sight in underground vaults for decades on end. Gold's beauty doesn't factor in at all, since the vast majority is hidden and unseen. It's just lying still and not circulating, so the facts that it is portable, easily recognizable and fungible hardly matter at the moment. Divisibility doesn't matter much, although some of the larger bars are being divided into smaller kilo bars and coins, and malleability only really matters to those who are making gold jewelry for the Indian wedding season. Scarcity is not a big deal since we have literally doubled the above-ground supply in the last 45 years, so I'd say the most relevant physical property today is gold's durability.

Those are just the relevant physical properties though. In antiquity it was that gold was universally recognizable. And for the Giants of the last few hundred years, it was that gold is durable, because what else matters when all you are going to do is bury it for the long haul?

It is probably true that in recent decades a massive portion of formerly-Western gold disappeared into Eastern "jewellery demand", but don't let that distract you from the point I am trying to make. That large "jewellery demand" is both an artifact of the $IMFS (from what I understand, the gold jewelry was, how shall I put it, smaller(?) 60 years ago), and evidence that "so many people worldwide [still] think of it as [store-of-value] money." My point is that gold's true value comes from its best and highest use, and jewelry is not it. Neither is currency, base money or monetary specie.

So, we have the money concept expanding, over thousands of years, from the super-local (friends and family) to the local (thanks to some form of paper scrip or paper money as a short-term credit instrument) to the distant (anywhere in the world, thanks to the emergence of international banking families). Those banking families were no more trusted or liked back then than bankers are trusted and liked today, but the system worked.

Gold never was "money" itself, but it was base money, which helped in the clearing process that allowed the expansion of the money concept from local to distant. Gold was always just a tradeable wealth item, i.e., the best barter item for long distance trade, even if as a symbolic name and weight it was used as the main unit of account, i.e., money, and hoarded by the banking families as reserves for clearing and redemption purposes.

But today it's not even needed in distant trade anymore, because today we have a functioning international monetary system, enabling true money to be used in distant trade. Today gold just sits in a vault, collecting dust (and preserving value).

Think about this…… in terms of Bitcoin being specifically designed by Satoshi Nakamoto to have gold-like properties, based on his belief (i.e., misunderstanding) that gold-like properties make good money.

In antiquity (which means a very, very long time ago), gold's most important properties were that it was open sourced, decentralized, disintermediated, neutral, borderless, censorship-resistant, unforgeable, universally recognizable, the main unit of account, rare, and most importantly, portable. All of the properties that Andreas Antonopoulos regularly espouses in favor of Bitcoin becoming gold-like money. But today, the only property that matters for gold is its durability. That, and the fact that it already won the 5,000+ year history tournament, but I guess that's part of the durability property too. Isn't it? (Oh, did I accidentally forget to include durability in Bitcoin's property list? No, I don't think so. ;D)

In Conclusion

I love using this subheading, because I always laugh to myself knowing that some of you will jump down here and only read the conclusion, or at least read it first, hoping to get the gist in a paragraph or two. Well here's the gist in one sentence: Bitcoin will not monetize because it was flawed from its inception.

It is, however, quite understandable that certain members of our Freegold community would fall for it (not mentioning any names down here in the conclusion, gotta read the whole post for that kinda juicy information ;D). It's also understandable that others might not join the cult, but might throw some good money into it, for fear of missing out, for the experience of trading a true bubble, or simply because of regret over not hodling those few bitcoins we once had, like Moldbug recommended. I had some once. I traded them in for a couple hundred bucks and a little bit of gold. Dang, I could have gotten serious money for them today! No regerts though, because I've got sound logic and unquestionable integrity instead. [2] :D


[1] This was a comment by me in response to another comment under the post:
“But the whole idea of decentralized, disintermediated, peer-to-peer money transactions over long distances, IMO, was just a bad idea from the start.”

I’m still not sure why this is a bad idea. Now, I can see why bitcoin is not the one for that, being so inefficient and all, and if anything having more the properties of a SoV rather then a MoE. But theoretically speaking, if it could be achieved, why is it a bad idea?

Hello Joe,

Good question. I should have covered that part more.

Money is fungible credibility. To be credible, you have to be known to someone. Cash is the exception, where transactions can be anonymous. But with Bitcoin, all transactions are essentially cash transactions. Decentralized, disintermediated, peer-to-peer money is cash. As I've written recently, cash is only a subset of the effective money supply, and a small subset at that. An important subset, but small in the big picture.

"Decentralization, disintermediation and peer-to-peer" are touted as Bitcoin's claim to fame as a new kind of money, but as an idea, it misses the lion's share of what money actually is. That's why I said it was a bad idea from the start. It was a poorly conceived idea.

A real money system, credit, requires some intermediation. I think Andreas is starting to realize that. If you watch this video, he is aware that there's no way Bitcoin can scale up to be a cash system for the entire planet, and he hints at an intermediated credit system growing around it, with Bitcoin being the global monetary base used for clearing by the Bitcoin banks. It's the only way it could scale up.

But again, it's not going to make it that far unless it becomes money first, so here we see another catch-22 developing.

As for the long distance part, Andreas says that what the Internet did for communication, Bitcoin will do for money. Think about my "three spheres of trade" concept. Before intermediation, for long distance trade there was only basically barter, the trade of goods for goods, one of the goods being the tradeable wealth item gold. Call it cash if you want, but a cash trade over long distances is inefficient at best.

Centralization and intermediation through banking families brought the possibility of credit to long distance trade, an improvement on efficiency. Even today, long distance trade operates on bank-intermediated credit. Can you imagine if that went away and you had to pay in cash, even if it was digital?

I understand the appeal of dealing in cash. I understand the appeal of anonymity. And I understand the appeal of avoiding banks. But in the real world, that's simply the best system. There's a reason it's what evolved over time.

That's why I said it was a bad idea from the start. Not bad as in evil, must be resisted, but bad as in ill-conceived, not a step forward, and won't work in the end like they imagine it will.

Now, CBCCs are a slightly different story. They too would be like cash, but they would be born into their proper role as a subset of the money supply. They would be issued by a central authority, but transactions could still be peer-to-peer over long distances, like cash. The difference is that being a subset of the real money supply, which is mostly credit, they would trade at a fixed exchange rate with credit. Bitcoin, whether volatile or just deflationary, would make poor base for credit money.


[2] Another response to a comment under the post:

"no regerts, eh? first misspelling ever, no?"

Steerpike, sometimes a typo sneaks through, but I try not to misspell words. Plus I have spellcheck, so you should always assume it was intentional first. ;D

Saturday, January 1, 2022

Happy New Year!

Year of the ________?

You'll have to go to the Speakeasy to read the New Year's post, but here I'm giving you three sample posts from earlier in the year. The first is from back in July, titled Will Basel III End the LBMA? Update!, and it is timely because the Basel III rules, which some said would end the paper gold market and usher in a physical-only market, are supposed to kick in today, for the UK (which obviously includes London and the LBMA).

Also, this past year I had a series of hyperinflation update posts, titled Hyperinflation Update, Hyperinflation Update Update, Just Another Hyperinflation Update, and Just Another Hyperinflation Update #2. A section of the new New Year's post could be considered the fifth in that series. I'm going to give you the first two here, from back in April and May, so enjoy, and have a happy new year!

Will Basel III End the LBMA? Update!

Back in May, I wrote the post: Will Basel III End the LBMA? To recap, people had been asking me to comment on a number of articles that suggested Basel III would indeed end the LBMA and destroy the paper gold markets. The PRA or Prudential Regulation Authority, UK’s banking regulator which is actually just part of the Bank of England or BoE, had put out a CP or Consultation Paper on the "Implementation of Basel standards" back in February, and the LBMA had responded on May 4th, one day past the deadline.

I went through the LBMA's response in detail in my post, and my conclusion was encapsulated in this sentence:

The abstract for this post is that I basically agree with the arguments the LBMA made in their response, and in the absence of something “unforeseen” happening in the meantime, I think they’ll work.

It turns out I was right. The LBMA paper proposed three solutions, and the PRA/BoE granted one of them. I summarized the three proposals like this:

The LBMA paper basically proposes three solutions, any or all of which are valid in my opinion. One is to simply change the classification of “gold” (i.e., “unallocated gold”) from a non-liquid asset to an HQLA or high-quality liquid asset, thus dropping its RSF factor to 0%. Another is to treat bullion banking as what it de facto is, a separate currency banking system denominated in gold ounces such that unallocated physical is essentially the cash in the system. This would separate it from the need for “stable dollar funding” for gold-denominated assets, because “no other currency besides gold [is] used in these transactions.”

The third proposal is to do what Switzerland is proposing, and “treat precious metals assets held by banks resulting from precious metals loans as interdependent assets and liabilities,” which “would exclude the majority of precious metals assets held by Swiss banks from the NSFR calculation.”

They shot down the first two, but granted the third in a limited way. Here's the relevant section from the LBMA proposal back in May:

5. Proposals

5.1 Clearing and Settlement


Interdependent assets and liabilities: We note that Switzerland proposes to treat precious metals assets held by banks resulting from precious metals loans as interdependent assets and liabilities (therefore relying on an equivalent of Article 428f(2) CRR II). This would exclude the majority of precious metals assets held by Swiss banks from the NSFR calculation.

We believe that 428f CRR II may offer a viable means to at least safeguard clearing and settlement for precious metals transactions. We believe that the system should be considered a market utility without which precious metals transactions would take many days to settle, resulting in increased settlement risk for all market participants. Within the four clearing bank members of LPMCL that provide this service, there will always be a corresponding asset and liability for every transaction that is placed through them for clearing purposes. Note that this is not a novation agreement whereby a central counterpart takes on all credit risk but is simply the mechanism where a client instructs the clearing bank to make or take delivery of gold and the clearing member bank therefore checks that the other counterparty can indeed make or take delivery.

It is therefore proposed that the PRA exclude the clearing and settlement of precious metals transactions, from the NSFR.

Today the PRA/BoE released Policy Statement PS17/21 – Implementation of Basel standards. Here's the link to the actual PDF. And here's the relevant section, from page 65 of the PDF:

13.90 Respondents thought that the PRA’s proposed rules could have a material impact on both firms and the precious metals markets more generally. Three respondents considered the proposed approach could result in increased costs for end users, and potentially result in firms exiting the market for these products. Three respondents suggested a number of alternative treatments of commodities-related transactions that they considered to be more appropriate. These included treating gold as a HQLA, treating gold as a currency, applying lower RSFs to precious metal assets associated with deposit-taking and clearing activities, applying the IA&L permission, and excluding physical unencumbered stock backing customer deposits from the NSFR.

13.91 The PRA has considered the responses and decided to amend its approach to precious metal holdings related to deposit-taking and clearing activities. The PRA has introduced an interdependent precious metals permission for which firms may apply in respect of their own unencumbered physical precious metal stock and customer precious metal deposit accounts.73 When the permission is granted, firms would apply a 0% RSF factor to their unencumbered physical stock of precious metals, to the extent that it balances against customer deposits. The PRA has decided not to amend its approach for other aspects of the treatment of commodity-related activities. The PRA considers its overall approach to commodities in the NSFR to be generally appropriate. The PRA notes that it is able to waive or modify rules under section 138A of FSMA where a firm can demonstrate to the PRA’s satisfaction that the application of the unmodified rule would impose an undue burden on a firm, or would fail to achieve its intended purpose, and where modifying it would not adversely affect the advancement of the PRA’s objectives.

73 Liquidity (CRR) Article 428f(2)–(3)

I'll leave you with a few thoughts...

First, it makes perfect sense, doesn't it? If a bank has its own unencumbered physical gold "stock" in its vault, and it is offset by gold deposits, aka gold-denominated liabilities, then it should be treated the same as physical cash in the vault offset by dollar-denominated liabilities (or pounds or whatever). And that would be a 0% risk weighting.

In fact, it's even spelled out as such, by the BIS, in the final Basel III document. From page 28:

A 0% risk weight will apply to (i) cash owned and held at the bank or in transit; and (ii) gold bullion held at the bank or held in another bank on an allocated basis, to the extent the gold bullion assets are backed by gold bullion liabilities.

So it's really a no-brainer, and one wonders why it even needed to be proposed, granted and stated as such. But here's the interesting part: it's not automatic. It's a "permission" that must be requested by the bank and granted by the PRA/BoE. On top of that, it is surprisingly specific in that it applies only to unencumbered owned physical stock ("their own unencumbered physical precious metal stock").

Normally, they (meaning the LBMA, central banks, bullion banks, the WGC, etc.) talk about gold in vague terms, like "bullion" or "metal" which make it sound like everything they do is physical, when the reality is that the vast majority of it is not. But here the BoE used wording that is so specific it can only apply to actual physical reserves. I find this interesting.

Take a look at this paragraph from my post back in May:

The Basel III Net Stable Funding Ratio (NSFR) or 85% RSF applied to unallocated gold assets does not only apply to the bullion banks’ reserves, it applies to all gold denominated assets on their balance sheet. But again, this doesn’t have to be as complicated as it sounds. Just like there’s no practical distinction between an unallocated gold deposit or liability that was created by depositing physical gold into the vault and one that was purchased using dollars, there is no practical distinction as far as the banking regulator is concerned between a gold-denominated asset and a gold-denominated reserve.

Well, here the banking regulator has drawn the distinction, and defined reserves very specifically. Not only that, but the bank has to request permission to apply the 0% risk weighting to its own unencumbered physical gold, and that permission has to be granted. In other words, the BoE wants the bullion banks to declare how much unencumbered physical gold they have.

I don't know if this is actually going to happen, or even if it's what the BoE is aiming for, but I do find it interesting, because I don't think the bullion banks have any unencumbered physical gold. Maybe they have a little, but to be more specific, I don't think they have as much as they should have based on the clearing data they've been reporting, which is about 600 tonnes.

Remember, each pallet is one tonne, so between HSBC, JP Morgan and ICBC Standard Bank, the three vaulting custodians, they should have at least 600 of these pallets sitting around totally unencumbered, not allocated, not in any ETF, not leased, wholly owned slack in the flow, and I'll bet you they don't. BTW, there are only about 50 shown in this picture, so we're talking 12 times this amount, and that's just for daily clearing:
As I have explained many times, I suspect they have been using GLD shares for clearing rather than unencumbered physical. They can do this because only bullion banks (the GLD APs) can actually own GLD shares. Shareholders that think they own shares really only own bank liabilities denominated in GLD shares. The GLD trading market is a secondary market (see this post for more). The primary market is the bullion banks because shares are in street name only, and since GLD is fully reserved in physical in the HSBC vault, it is likely being used for interbank gold-denominated clearing by the LPMCL, if/when it doesn't have enough "owned unencumbered physical precious metal stock" for clearing.

If I were a bullion bank, I would have kept my mouth shut and not responded to that February Consultation Paper. They didn't gain anything in the process. In fact, they lost something. They lost the ability to pretend they have 600 pallets of unencumbered unallocated physical gold just sitting around. And any pallets that they did happen to have, they could have applied a 0% risk weighting to anyway, without asking permission, based on both simple logic and the wording in the BIS Basel III final document, as I pointed out above. As they say, sometimes it's better to ask forgiveness than permission.

Reuters, who reported this today, contacted the LBMA clearing banks for comment. JP Morgan declined to comment, and HSBC, ICBC Standard and UBS didn't respond.

Ooh, that reminds me of something I wrote back in May: "It’s almost as if the BoE set this up, and told the LBMA to submit that paper." Hmm. 🤔


ADDENDUM: Here is some more explanation of this post from the comments...


This topic is always a bit opaque to me, so I might be on the wrong track.

Does this give them the opportunity to not apply for the 0% rating, therefore not disclosing the true amount of their unencumbered gold, and just living with the 85% default rule?

If so, is that significant?"

Hello Lisa,

No, I don't think this is a big deal. And you're right, it doesn't force them to disclose anything.

What I find interesting is that the whole exercise didn't do much for the LBMA. It seemed somehow contrived. It reminds me of this, from 2016:

The second thing about this BOE/subcustodian disclosure which I found puzzling was the request from the SEC to the WGTS, which ostensibly motivated the disclosure. It was in a letter dated 3/29 and filed on 3/30. Here's the official pdf of the letter. Simply stated, it asked GLD to "please disclose the amount of the Trust’s assets that are held by subcustodians." One day later (even though they were given ten business days to respond), dated 3/30 and filed on 3/31, the final day of the quarter in which the disclosure appeared, GLD's response letter replied, "We will, to the extent material, disclose in future periodic reports the amount of the Trust’s assets that are held by subcustodians. Please be advised that during fiscal 2015, no gold was held by subcustodians on behalf of Trust."

No big deal, right? Except that GLD has been disclosing subcustodian holdings in every 10-Q and 10-K filing since 2009! Here, here, here and here are just a few random examples which show that the SEC's letter was as unnecessary as GLD's response (really the WGC's response if you look at the letterhead) was strange. Just do a CTRL-F search for the word subcustodian in those filings, and you'll see that each one says, "Subcustodians held nil ounces of gold in their vaults on behalf of the Trust."

Of course now, in hindsight, it appears that those statements referred only to the last day of the quarter, that specific day of reporting, which wasn't obvious or even implied prior to the 4/29/16 10-Q filing, which for the first time differentiated "during the quarter" from the end date with regard to subcustodian holdings. Think about this, because I think there is a simple and plausible explanation.

The SEC's letter doesn't make sense the way it is written, at least not to the casual reader, because it asks for something that GLD had already been doing for seven years. Neither does GLD's response make sense, because it should have brought attention to the fact that GLD had been reporting nil ounces held by subcustodians since 2009. Both letters do make sense, though, if both letter-writers knew they were referring to "during the quarter" as opposed to on the end date of the quarter. But because this difference wasn't explicit in either letter, they only make sense if they were essentially staged, filed in order to explain and justify a change in reporting whose real motivation lay elsewhere. Indeed, both letters barely squeaked in before the end of the quarter.

If this explanation is correct, then it raises the question of why the change in reporting needed to happen for that specific quarter. There are basically three players involved—the SEC, GLD and the BOE. Of the three, the BOE is the new one, so perhaps it was the BOE that, for whatever reason, wanted to get this subcustodial disclosure on the record. Perhaps a request by the BOE was the real motivation.

What happened was that GLD added a big chunk of gold in February that it borrowed from the BoE. 29 pallets to be exact. In fact, the pallets of bars stayed in the BoE vault and GLD just added the bar numbers to its list, so the BoE became a temporary "subcustodian" for GLD. And someone wanted to make sure this was disclosed on GLD's quarterly SEC filing.

The quarter ended on 3/30, and on that day, an attorney for the SEC filed a letter addressed to GLD c/o the WGC, which gave them ten days to respond. They responded the very next day, and based on the content of the letters, they were clearly just for the record. The real question is what prompted them, and the only answer that makes sense is that the BoE wanted to make sure that GLD disclosed this fact in its quarterly filing.

So the letters were essentially staged to explain the appearance of the disclosure that the BoE was suddenly a subcustodian for GLD as being the result of a demand from the SEC. But how would the SEC even know this had occurred? They wouldn't, unless either the BoE or GLD told them. I don't pretend to know why the BoE would have orchestrated this disclosure, but it does give us an insight in to how the BoE may operate with regard to the bullion banks.

I'm getting a similar feeling with this Basel III thing.

This is just speculation, but say the BoE suspects that the LBMA is out of reserves, perhaps because they've been borrowing from the BoE again. Why would the BoE care? Well, remember that the BoE had to clean up the mess after one of the London bullion banks collapsed in 1984, and in the aftermath, it assumed the supervisory role over the whole London bullion market and demanded that the participants create a formal body to represent them as a group, the LBMA.

The LBMA is really just a trade association for the bullion banks, like the WGC is for the miners. The WGC is not a mine itself, and the LBMA is not a bullion bank itself, so one can imagine that it's easily manipulated by, say, its supervisor or regulator. Enter that response letter of May 4, signed by Ruth Crowell of the LBMA (not a bullion banker herself, not even a banker, in fact, just before joining the LBMA in 2006 she interned for the UN Commission on Human Rights according to her LinkedIn page), and David Tait of the WGC. Who do you think told them to write it? Someone at JP Morgan? Or someone at the PRA, aka the BoE?

It's also interesting to me that it appears to have been submitted a day after the deadline for submitting responses. Like it was a last-minute thing, and the BoE said don't worry about the deadline, we'll still take it under consideration.

I'm not trying to make a big deal out of this, just pointing out that things are not as they seem on the surface.

Take the Reuters article. The headline is "Britain carves out exemption for gold clearing banks from Basel III rule." It was written by Peter Hobson, a precious metals reporter for Reuters. Who do you think fed him the story?

It has been updated since yesterday. He added a response from an LBMA lawyer, and one from UBS:

"This is one of the key points that what we've been asking for all these years," said Sakhila Mirza, the LBMA's chief counsel. "Clearing will be exempt."

A spokesperson for UBS said: "UBS welcomes the PRA's decision, which supports stability in bullion clearing and avoids disruption to the London market."

Another update is that HSBC declined to comment. So JP Morgan and HSBC both declined to comment, and ICBC Standard still hasn't responded to the request. Only UBS responded, but UBS is not an LBMA custodian.

So it wasn't the banks or the LBMA that fed him this story (and the spin he put on it). I think it was someone at the BoE. I don't think he just stumbled upon it, because it's two paragraphs on page 65 of a dense 86-page document that's 99% about regular banking, and less than 1% about bullion banking. And Peter Hobson writes about precious metals, not banking.

It's all just a little weird. I showed you what the document actually says. It's quite specific. It's almost as if the people who commented from the LBMA and UBS didn't actually read the document, but only commented on the spin provided by the BoE via the Reuters article.

I hope that clears it up. There's no bombshell in this post. Nothing earthshattering. Just a little more color for the view.

"Interesting post, Fofoa. So if the Swiss proposal exposes the fact that there is much less unencumbered gold in the bullion banking system than previously reported, does it’s adoption change your views about the underwhelming effects of Basel III on the banks, i.e. will that cause any change in banking practices and/or have any effect on paper versus physical gold prices?"

Hello Jman,

Notice that I wrote in the post that they granted the Swiss proposal in a limited way. The Swiss proposal as it was presented in the LBMA response paper refers to "precious metals assets held by banks resulting from precious metals loans," and would therefore "exclude the majority of precious metals assets… from the NSFR calculation."

The BoE limited it to only unencumbered physical.

The BoE also included the reference to Article 428f(2) CRR II from the Swiss proposal. All that says is this:

"the following items shall be reported to competent authorities separately in order to allow an assessment of the needs for stable funding:

(f) other precious metals;"

This is the interesting part because it requires an assessment by the BoE of any unencumbered physical the banks intend to count as a 0% risk-weighted asset. That's not something that will ever be published, so it's not going to expose anything to anyone but the BoE. It's more like a warning, or a shot across the bow of the bullion banks by the BoE, that they already know.

Again, I'm not saying that anything big will come of this. The LBMA is going to fail on its own. Basel III is nothing in this case except for a tool used by the BoE to put the bullion banks in an awkward position. Why the BoE is doing this (if this is what they're doing) and what they have planned, I have no idea. Like I said, I expect the LBMA to fail when the $IMFS financial system collapses. But it's interesting to see these moves for what they are, rather than what they appear to be on the surface.

That headline, "Britain carves out exemption for gold clearing banks from Basel III rule," seems like pure spin to me. And it appears like it was handed to the reporter by the BoE (or the PRA which is the BoE). So on the surface, it looks like the LBMA won. But I dug deeper and sought out what the BoE actually wrote, and it's a little different than the headline. I'd say HSBC and JP Morgan were smart not to comment. But no, don't expect anything to come of this that you'll get to see.

"Thank you for this update FOFOA.

Do I understand you correct that we will possibly find out how much physical the bullion banks will really have themselves unencumbered?

So the important question also I think

Does this have any implications regarding their possibility of the delta hedging practice and all the other “fugazi” they do?

Thank you


Hello Koba,

No, I didn't mean to give the impression that this will force them to come clean publicly. Nosh posted the Reuters article yesterday, and with a little digging, I found it to be somewhat misleading. So I applied my lens to this thing, and presented the view. That's all. It's totally consistent with my view that the LBMA is running on fumes and will collapse quite easily when tshtf. ;D


Hyperinflation Update

A year ago, on 4/24/20, I used this graphic to illustrate where we were on the road to hyperinflation, and I think it's time for an update:
Before I give you the update, I should explain the graphic. It's not something you'll find in any textbook. They are illustrations that I created back in 2010 to show how I visualize the death of the $IMFS in my mind.

Think of them as end-of-life stages, or signs that death is near. They are not meant to show causation, why the $IMFS is dying, or what is killing it, but rather to give you snapshots of what's to come.

I find it interesting that I'm still impressed with my work on these eleven years later. As simple as they are, I must have put some serious thought into them. So I'm going to try to explain them a little better than I did last year.

The first frame is how the $IMFS operates under normal conditions, say, ever since the 1970s. Debt and savings grow in concert, feeding on each other in a kind of cancerous symbiotic relationship, where each enables the other to grow uncontrolled like undiagnosed tumors, until they ultimately kill the host (the $IMFS):
The second frame is how it operates under extreme stress. This has happened twice. The first time was following the Global Financial Crisis in 2008, and the second time was last year, with the central bank conducting quantitative easing, stimulus, liquidity and bailout operations as a kind of monetary life support for a broken system. The central bank expands its balance sheet, pushing out new base money to fill the cracks in a broken credit money system:
The third frame is where the government reclaims the power to print money from its central bank. It’s still the Fed doing the printing, but the USG is now in control, makin' it rain fresh base money, trillions at a time:
The fourth frame is full-blown hyperinflation. Debt and savings are erased in real terms. Credit money is gone, and all money in circulation is base money at this point:
And the fifth frame represents the emergence of Freegold:
An important distinction in these images is the difference between credit money and base money. In the first frame, the small circle in the center represents base money, just sitting there, hardly moving. The two outer rings are credit money flowing through the system. And in the last two images, the vinyl-record-looking disc is all base money.

I debated the best way to explain the difference here, and after reading that Daniel Amerman article someone linked the other day, I decided on a method that would also help me explain what I think he was trying to say (more on that later).

All money today is bank liabilities.

There are two kinds of banks, and two kinds of bank liabilities.

The two kinds of banks are commercial banks and central banks, and the two kinds of bank liabilities are commercial bank liabilities, and central bank liabilities.

Sorry to spell it all out like a 4th grade teacher, but it's a really simple concept that will help you understand so much about the monetary system once you internalize this difference:

Base money = Central bank liabilities
Credit money = Commercial bank liabilities

And just to be clear, physical cash is a central bank liability. Central bank liabilities are physical cash, commercial bank reserves, and money held by the USG in its account at the Fed (the Treasury General Account or TGA).

This gets to some of the confusion surrounding the Amerman article which I'll get to in a minute, and the debate over whether the Fed is technically "printing money" when it does QE or various other balance sheet expansions. Trust me, both sides are explaining the same thing in different ways. Both are correct insofar as they are useful, and both are useful to some degree in explaining different things.

Banking in the modern world is a complicated business, but understanding it from a big picture perspective doesn't need to be complicated. So while my definitions and explanations may differ from others, I'm always happy to explain the differences, and to explain how mine are more useful and therefore better. :D

So, getting back to base money being central bank liabilities, I take it even further and say that central bank liabilities are base money, thus the equals symbol (Base money = Central bank liabilities). Some would say that all base money is CB liabilities, but not all CB liabilities are base money. And you know who would say that? Yup, the Fed.

Here's a quick primer on the common base vs. credit monetary aggregates, or "M"s. People often use M0 to designate base money, but M0 is not the monetary base (MB). M0 is physical cash outside of the banking system, and it is only part of MB. MB, the technical monetary base, is physical cash plus "Federal Reserve Bank credit (required reserves and excess reserves)." So, technically, what the Fed considers the "MB" is all of the Fed's own liabilities except its liabilities to the USG. And commercial bank liabilities (credit money) are M1-M3*. MZM is money of zero maturity, or basically money on demand. It's what I refer to as the effective money supply. (*Note that physical cash outside of the banking system is included in all aggregates.)

Here's a handy table courtesy of Wikipedia:
This table should include all types of money, except assets like stocks and bonds which are clearly assets. It should include all bank liabilities, from both kinds of banks. And it does, except for CB liabilities to the USG held on account at the Fed.

That's the United States Government's main checking account. Its balance is currently around a trillion dollars, and was recently as high as $1.8T. That's clearly money of zero maturity or money on demand, yet it's not even counted as part of the money supply. And that's because it doesn't quite fit either category. It's a checking account, so it should be in MZM, but it's actually Federal Reserve bank credit, which is included in MB but excluded from M1-M3 and MZM. It should probably have its own category, but it doesn't, perhaps because it only really became an issue recently. Here's a chart of the USG's checking account balance going back 35 years:
There are lots of ways to describe what's happening in that graph. You've probably heard one of them over the past year that when the TGA balance goes up, it is draining money from the banking system. Another way to look at it is that the USG is providing needed collateral (Treasuries) to the banking system.

I think the most useful way to think about what's in that graph right now is the way MMT describes how money flows through the USG. In essence, the USG spends money into existence, and taxes or borrows it out of existence.

I'm talking about credit money here, commercial bank liabilities. If you add them all up, you come up with the aggregate number of commercial bank liabilities (credit money) in existence at any moment in time. Let's call it [M3-M0]. That's M3 minus physical cash in circulation (because physical cash is technically base money).

When the USG takes in money by taxing or borrowing it, that same amount of commercial bank liabilities disappears from the banking system. So, if the USG takes in $500B, we should see the TGA balance go up $500B, and the credit money aggregates (M1, M2, M3 and MZM) drop by the same amount.

Then, when the USG spends that money, we should see the TGA balance drop and the credit money aggregates go back up. So, the USG taxed or borrowed credit money out of existence, and spent it back into existence.

This is because the USG's bank is the Fed, which is a central bank, not a commercial bank. Fed liabilities are base money, and commercial bank liabilities are credit money. So when someone with a balance at a commercial bank transfers money to the USG (to pay for either taxes or Treasuries), the commercial banking system no longer owes that person a dollar, that liability to that person has been transferred and is now a liability to the USG. But the USG's bank is the Fed, and the Fed's liabilities are base money, so the credit money in the overall banking system simply vanishes.

What happens is the USG credits that person's tax account or issues him, her or they a Treasury, but that's not something that happens inside the banking system. Inside the banking system, the commercial bank deletes its liabilities to that person, and the Fed debits reserves (Fed liabilities) from the commercial bank, and credits them to the USG.

When the USG spends money, the reverse happens. Some lucky individual gets a check from the Treasury and deposits it in a commercial bank. There are no commercial bank liabilities to transfer since the Treasury check is drawn from a central bank account, so the commercial bank creates new liabilities by crediting that person's account. The Fed then debits reserves from the TGA and credits them to the commercial bank in exchange for the check.

Understand, this is all just bookkeeping. Nothing is actually physical moving around. Banks are simply communicating with each other, and they are deleting, creating, debiting and crediting their own liabilities on their own books in a coordinated manner. A commercial bank deletes liabilities to a customer, the Fed debits liabilities from that bank and credits them to the TGA, another commercial bank creates liabilities to some government stooge, and the Fed debits liabilities from the TGA and credits them to the stooge's bank.

If you're still with me, the next thing you need to understand is another insight from the MMT crowd. And it's that the USG is not like you and me. Its ability to spend is not nominally constrained by its checking account balance, its ability to borrow, or even its ability to "earn" (i.e., tax). The presumed (nominal) constraint we've been following for decades is merely an illusion, because in extremis, the USG can spend money into existence. It's what we call printing. And if there's no (nominal) constraint in extremis, then there's no (nominal) constraint. Of course MMT now acknowledges the theoretical concept of an inflation constraint, but they don't seem too worried about it.

It follows that if there is no link of constraint between income and spending as far as the USG is concerned, then they are not connected. They are separate operations that don't need to happen in any certain order, or at all in the case of income. In other words, the USG can spend first, and fund that spending later, or not fund it at all. In extremis, that's what will happen.

The way to visualize this from a bookkeeping perspective is that the USG will write a check and some stooge will deposit it in a commercial bank. The commercial bank will credit the stooge's account with its own liabilities, creating credit money from thin air. Then, in exchange for the check, the Fed will credit the commercial bank with reserves (Fed liabilities) that it creates from thin air because the USG's checking account is empty. The USG's checking account is empty because no one can pay taxes or buy Treasuries anymore due to very high consumer price inflation.

The Fed will then need a (quote-unquote) "asset" to balance against the new Fed liabilities it just issued to the commercial bank, for bookkeeping purposes. So the USG will issue an IOU (a Treasury) to the Fed which the Fed will hold as a reserve asset to balance its books.

See what happened there? The USG issued a check to a stooge and an IOU to the Fed, and in the process it printed its own money. It was still the banks that created spendable money units from thin air, but it was the USG that forced the printing. The USG spent money into existence, without taxing or borrowing any money out of existence.

I should note that the Fed is not really allowed to directly fund the USG. All that means is that, when it does, it needs a middleman to buy the Treasuries first (the primary dealer banks), and then it buys the USG debt from them and calls it QE or whatever it wants. So this is not a de facto limitation, it is merely de jure, which of course means it can be changed at a moment's notice, or even retroactively in extremis. And if it doesn't exist in extremis, then for all intents and purposes it never really existed at all.

Something else I should note here is that the banking system is a fractional reserve system, where the reserves are base money or central bank liabilities. What this means is that in normal credit money transactions between non-government entities, the amount of base money needed is a very small fraction of the amount of credit money changing hands. Normal transactions are netted out, and only the small imbalances that remain require base money for interbank clearing.

Government spending is different in that every dollar the government spends comes with a full base money unit, a Fed liability. This is the mechanism by which the money supply is converted from mostly credit money (as shown in the first frame) to entirely base money (as seen in frame 4). Eventually, the government stooge will cash his check rather than depositing it, because cash prices will be lower than other forms of payment.

Getting back to the USG's checking account balance, which currently stands at just under a trillion ($925B), this is all base money (Fed liabilities) that already exists. The Fed has already "printed" it. And while it doesn't show up in the official money supply aggregates, it does show up on the Fed's balance sheet. And that's just the general account. There are other government accounts that probably add up to another half trillion right now.

In fact, the Fed's balance sheet has grown by 86% since the beginning of 2020. It was $4.17T at the beginning of 2020, and today it's $7.8T, so almost double. That means almost half of the US dollar base money in existence (46.5% or $3.63T) was printed in the last 14 months. And at least 40% of that went right into USG coffers. In other words, 18.6% (46.5% x 40%) of all of the base money in existence was printed by the Fed, for the USG, in the last 14 months. And half of that (more than $700B) was spent in the last three months, since January 20th, with more than $400B going to those $1,400 stimulus checks. Here's what it looks like on the Fed's balance sheet:
And here's the TGA balance again:
I wanted you to have a way to understand that graph (as the USG's checking account balance), and now that you hopefully do, I want to tell you that it doesn't really matter to me in the way you're probably thinking it does. I don't care about the raw numbers that have already been printed. I don't even care very much about why we see that spike in the last year (because we'll probably never know), or how fast it's dropping now. And I noted four distinct phases in red, but only to make note of them. I don't know what they mean, and haven't given it much thought (yet).

I can't tell you why we had that spike up to $1.8T in July because no one knows for sure. There are some possibilities related to the banking system. For a while there was even a theory that Trump was building a war chest of cash to spend right before the election to help him get reelected. I never thought much of that theory. Perhaps it had something to do with COVID. I don't know what the answer is, and it doesn't really matter to me at this time or in the context of this post.

What it does show, in my opinion, the part I circled in red, is how the income process is separate from and detached from the spending process. It is linked through bookkeeping by the Fed and the illusion of nominal constraint, but I think we can see that whatever drove that spike, it had little to do with spending. And when that plunging line hits zero and the USG keeps spending at its current pace, it will then be clear that the spending process is separate and detached from the income process, just like MMT says.

This isn't new. They were always disconnected, because if they can disconnect in extremis, then they were never really connected to begin with. So it's not that that changed, it's just that we're finally here where we get to see it in action.

This brings me to my update:

Speaking of hyperinflation, there was some discussion recently about FOA's house story, where the seller had to keep raising the price, and I wanted to add a few thoughts that I didn't see covered.
tEON wrote, "the market can generally freeze-up, as prices fluctuate between purchasing and closing dates." This is probably true during the worst of it, so FOA's story is more of an allegory than a description of reality. The raising of prices we see now is more of a "hot market" phenomenon than what FOA was describing. The market right now is a "hot market" or a "seller's market" or even a bubble. In hyperinflation, or even after, it will be the opposite of a hot market or a bubble, and it certainly won't be a seller's market.

One reason is that one of the things that happens in hyperinflation is that credit disappears, and things like houses drop to their cash price even as the nominal price is rising. No one will be going to the bank for a home loan during hyperinflation.

Another thing that happens is that there’s a shortage of cash relative to the nominal prices of things. So there’s no credit, and not enough cash, even as theoretical prices are rising.

Here's the quote from FOA:

---- "Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling." ----

See? They couldn't get the cash together in time. No credit and a shortage of cash.

Now to the Daniel Amerman article. Kansasnate linked this article titled, Counterfeiters, Con Men, Mass Illusions & Funding The National Debt, and a number of comments ensued.

Hans wrote:

"From the Amerman article:

“What this mean is that much of the growth in the national debt was being temporarily funded by the U.S. Treasury itself, in a self-funding loop of sorts. The broker dealers bought the $1.6 trillion in debt as issued by the U.S. Treasury. The Treasury deposited the $1.6 trillion in its general account at the Federal Reserve. The Fed took the $1.6 trillion – which was a debt that it now owed the Treasury – and used those borrowed funds to buy the new debt from broker dealers. So, the Fed was the using the money borrowed by the Treasury to finance a big chunk of the growth in the national debt. Temporarily.

I know, I know, it sounds obscure and thinking through those loops can give a person a headache. But it matters, because it is a very dangerous and unstable way of funding the national debt.

The problem and the danger is that the Treasury borrowed the money in order to spend it. The Fed doesn’t have the money anymore – it already spent it all on the funding the national debt. So, when the Treasury wants its money – the Fed either has to borrow the money from someone else, or we have a BIG PROBLEM.”

The FED has to borrow the money from someone else? This sounds like the complete opposite of my understanding that the FED can just create new base money units (bank reserves) that can then be spent by The Treasury or used to buy USTs from the primary dealers. This would be the fusion of base money and credit money that FOFOA has put into the Go Full Retard category. Am I off base here?"

Bip wrote:

"Hans, if I have it mildly right, I think Amerman’s gist is that the Fed will indeed have to print, and that’ll be noticed by people watching for printing, but in the meantime this other mechanism is enabling the Fed to go to extremes before people even realize how far it’s gone."

attitude_check wrote:


Unlike commercial banks that can lend money into existence, the Fed cannot. Only the US Treasury can do that. The US federal debt is financed with Bonds, that have to be purchased. If commercial banks purchase them, then these become banks assets can then the be levered ~10x times by the commercial banks. The Federal Reserve is prohibited from directly loaning money I believe to anyone excepted Federal Reserve Banks, and even then only collateralized loans."

And Hans replied:


Hmmm then what is creating bank reserves to buy USTs from commercial banks defined as? It simply makes it so commercial banks can purchase the next batch of USTs from The Treasury. I understand it’s not credit money but this statement simply doesn’t make sense to me:

“The problem and the danger is that the Treasury borrowed the money in order to spend it. The Fed doesn’t have the money anymore – it already spent it all on the funding the national debt. So, when the Treasury wants its money – the Fed either has to borrow the money from someone else, or we have a BIG PROBLEM.”

So if The FED spends The Treasury’s checking account buying bonds… what happens? How is the checking account replenished? It seems to me the statement is just bunk to begin with. The FED wouldn’t use The Treasury’s checking account to perform QE. They’d just create to bank reserves and swap them for USTs with the primary dealer banks as they always do."

As I said above, what with repos, reverse repos, supplementary leverage ratios, IOR, IOER, the FFER, YCC and on and on, banking in the modern world is a complicated business. And Daniel Amerman apparently capitalizes on that. He seems to think understanding what's happening should be just as complicated, but it's really not.

Furthermore, I think Hans is right, and Amerman screwed up that paragraph he quoted. Let's break it down. I'll paste the full quote from Hans' first comment, and add my comments in red with brackets:

What this mean is that much of the growth in the national debt was being temporarily funded by the U.S. Treasury itself, in a self-funding loop of sorts. The broker dealers bought the $1.6 trillion in debt as issued by the U.S. Treasury. [Treasuries purchased this way are purchased with base money only, meaning Fed liabilities. The bank's credit money, its own liabilities, remains untouched. So the Fed's liabilities to the bank are transferred to the USG, and the Fed now has liabilities to the USG. Where those Fed liabilities used to be on the asset side of the bank's balance sheet is where the Treasuries now sit.] The Treasury deposited the $1.6 trillion in its general account at the Federal Reserve. [That's one way to put it. Another is that the $1.6T in Fed liabilities to the bank were debited from the bank's account and credited to the TGA, a simple shift of Fed credits (base money) from the bank's account at the Fed to the Treasury's account at the Fed.] The Fed took the $1.6 trillion – which was a debt that it now owed the Treasury [the reason they're called "liabilities" is because they are technically a debt owed by the bank to the account holder. When you deposit a dollar bill in your bank, your bank credits you with one of its liabilities, i.e., it owes you a dollar, but bank liabilities actually are dollars, so it's kind of redundant to put it this way.] – and used those borrowed funds [he's calling them borrowed funds because a deposit is essentially a loan to the bank. This is semantically confusing.] to buy the new debt from broker dealers. [Here's where he goes wrong. When the Fed buys a Treasury from a bank, that Treasury goes from the asset side of the bank's balance sheet to the asset side of the Fed's balance sheet. And on the bank's balance sheet, the Treasury is replaced with a Fed liability. He seems to be saying that's the same Fed liability sitting in the TGA, but it's not. If it were, then the TGA balance would have to drop when the Fed bought the Treasuries from the bank, but it doesn't. It doesn't disappear from the TGA or the Fed's own balance sheet. This is QE, the Fed expanded its balance sheet which created a new liability to buy the Treasury from the bank.] So, the Fed was the using the money borrowed by the Treasury to finance a big chunk of the growth in the national debt. [This is wrong.] Temporarily. [Supposedly temporarily, but only if the Fed can at some point unload $5T in USTs on the open market, in addition to whatever the USG is selling at that time. No, there's nothing temporary about it except the illusion.]

I know, I know, it sounds obscure and thinking through those loops can give a person a headache. But it matters, because it is a very dangerous and unstable way of funding the national debt.

The problem and the danger is that the Treasury borrowed the money in order to spend it. [This is true to an extent, but what's confusing about it is resolved by the MMT view that Treasury borrows credit money out of existence, and spends it into existence.] The Fed doesn’t have the money anymore [he's conflating credit money with base money here, and remember, credit money was never involved. The USG only ever took in base money from the bank. If the buyer had been a non-bank entity, then credit money would have disappeared, but because it was a bank who bought the Treasuries, credit money remained untouched] – it already spent it all on the funding the national debt. [No, it created new base money to do that.] So, when the Treasury wants its money – the Fed either has to borrow the money from someone else, or we have a BIG PROBLEM. [Here's where the money supply issue comes into play. Perhaps that's what's driving this (IMO) mistake. The Treasury's "money" is still right there on the Fed balance sheet. It's Fed liabilities sitting in the TGA. They're simply not counted in any of the "M"s. And because they were purchased by a bank and not a non-bank entity, no credit money disappeared. But when the USG goes to spend that money, the Fed will simply transfer its liability from the TGA to the recipient's bank, and that bank will credit the recipient's account thereby creating brand new credit money. So, you see, when banks buy Treasuries, and they are not then resold to non-banks, the credit money supply expands when the USG spends.]

This specific "mistake" aside, I do think I understand what Amerman is trying to say. He draws a distinction between whether we're seeing a "shell game Ponzi scheme" crime in progress, or whether it's simple money printing. It's both, and they are not mutually exclusive. In addition to the monetary expansion that's happening (the money printing), there are also some very complicated shell game Ponzi scheme things happening, which I've written about before.

You may remember the bond basis trade run by Relative Value (RV) hedge funds which Zoltan Pozsar wrote about, and I wrote about here. That basically had hedge funds funding the USG using really big leverage. Or the exclusion of Treasuries from the Supplemental Leverage Ratio (SLR) which I wrote about here, which essentially allowed Treasury to fund itself through commercial banks without needing new base money from the Fed. That program expired this month.

The point is, there are plenty of complicated things going on that could blow up and cause a financial crisis, and I think that's what Amerman was calling a "rogue moon zipping past our planet" when the USG started drawing down its checking account balance. But like I said, the base money is already there, and the commercial banking system simply creates new credit money when it credits anyone's account who deposits a government check, or anyone who had a stimmy magically appear in their account.

No one had to go hunting under shells to find that money, but there's plenty else that could go wrong. And that seems to be his focus, what could go wrong. But after clicking through a few of his articles, I got the impression that he may be missing the forest for the trees.

I'm not trying to pick on him, because I like him. But he came up in the comments here, and after reading a few of his articles, he turned out to be useful for this post. So apologies if you're reading this Daniel.

It seems to me that he's stuck in frame 2 thinking, which has all the complicated trees that he's really good at explaining…
…but without looking at the forest as a whole, I think he might have missed that, "with no big public announcements or widespread public understanding" (to use his words), we quietly slipped into frame 3:
He acknowledges that it could happen, but perhaps doesn't see that it already has. Here's a quote from one of his other articles:

"Even with no big public announcements or widespread public understanding, nonetheless, if reserves-based monetary creation is quietly replaced with MMT or some other variant of straight up money creation, then everything changes for all of us, right then, when it comes to our financial futures. […]

Higher rates of inflation return - in a potentially major way. It could take a while for this to develop, and things could look relatively normal in the interim - or it could happen relatively quickly. That said, the moment that reserves-based monetary creation is potentially replaced with actual MMT, then all rational medium and long term market expectations change, even if the immediate effects are not necessarily obvious. If this happens, and someone is not yet prepared, this will be a time to move fast to change expectations and strategies.

Even though he retired as Fed chairman many years ago, what is currently dominating the economy and the markets are two radical economic experiments, that Benjamin Bernanke first began proposing long ago. One is the Federal Reserve's use of reserves-based monetary creation, which was Bernanke's baby, and he fundamentally changed the U.S. economy, monetary system and financial markets when it was implemented. The other is showering the economy with "helicopter money" in the event of crisis, which sounded like a crazy, fringe theory when Bernanke first proposed it - but it is now official government policy and the economy is dependent upon it. Showering the population with repeated rounds of money that are funded by running up the national debt, with the rapid increase in the debt itself in turn being primarily funded by the Fed's use of reserves-based monetary creation - has never happened before, indeed we have never seen anything even close to this before…

How the United States government has been attempting to contain the current economic devastation could be called off-the-scale insane by the ordinary standards for governments over the decades and the centuries. A government simply doesn’t create dollars equal to close to a quarter of the size of the economy, taking on more national debt in inflation-adjusted terms in a single year then they previously had over two entire centuries, in order to flood the population with repeated rounds of big checks. […]

Of course, this won’t necessarily happen. Reserves-based monetary creation has held together for 13 years now, and it could yet continue to hold together for this now second round of the containment of global financial crisis…

The distinction he draws between "reserves-based monetary creation" and "actual MMT" is a technical one. But I would argue that the true distinction, the de facto distinction, is political, not technical. So, while he acknowledges this as one of several possible "paths," he misses that we're already on it.

Now, I want to reiterate that my graphic is not meant to show causation. This includes moving from frame 3 to frame 4. What you see in frame 3 does not cause the move to frame 4, but it makes it possible. It sets the stage for it. It's a powder keg ready to blow, but it still needs a spark.

I don't know what that spark will be. It could be something that spooks the markets, or something that panics the general population. Maybe both, but if I had to pick one thing to watch, I'd watch food prices at your local supermarket. Unlike lumber, when food prices jump, that will be something everyone notices. This isn't 2020 anymore. This is 2021, and when we finally get a big bout of consumer price inflation mixed with a little panic, some food hoarding, and some insane totalitarian government knee-jerk response, which will obviously include another emergency spending package, that might be it.


Hyperinflation Update Update

I responded to a few questions in the comments under the Hyperinflation Update post, and since not everyone follows the comments, I thought I'd put them in a post.

Yakalex asked:


Thanks for explanations.


From zerohedge article above – do I understand correctly, that current difference of almost $2.445 trillions between deposits and loans (MMT postulates that deposits = loans) at 4 largest Banks, represents real money created into existence by Treasuries since 2008 against central bank liabilities, without help from commercial banks?"

And here was my response:

Hello Yakalex,

MMT says that loans create deposits, not that the amount of loans and deposits should be the same. The purpose of that statement is to explain that a bank doesn't need someone to deposit money before it can loan it out. The very process of loan origination creates the deposit out of thin air. This is true, and that ZH article is incorrect when it says that loans creating deposits, "the anchor theory of MMT on which all its other laughable theories are built," is false. It's not false, it's true.

See, it's in my first frame. Loan origination and deposit creation:
"Deposits" in the MMT lexicon are basically synonymous with "commercial bank liabilities" in my post, which are synonymous with "credit money" in my post. So "deposits" = "credit money" would be the correct accounting identity, not deposits = loans. Loans create deposits, but not all deposits come from loans.

Also, while I'm on this topic, don't confuse "credit" and "credit money" in my lexicon. They are different things. When I say "credit" will disappear in hyperinflation, that's different from saying "credit money" will disappear. Credit (lending) will disappear first, but "commercial bank liabilities" aka "credit money" will still be circulating.

Eventually, reserves will nominally overwhelm assets on the commercial banking system aggregate balance sheet, and at that point "credit money" and "base money" will be equal. In other words, MB will be equal to MZM. That's frame 4. Once we reach that point, it'll probably switch to physical cash only pretty quickly, and then M0 will be the entirety of MB which will be the entirety of MZM.

So, when MB equals MZM, "credit" (lending) will have disappeared, and when M0 equals MB and MZM, then "credit money" will have disappeared. So credit goes first, and that's because credit can only exist if interest rates can be higher than the rate of price inflation. They can to a point. Not sure what that point is, maybe 100% or 200% APR at the most, under certain conditions like short term collateralized loans. But beyond that, it just becomes unserviceable and a guaranteed loss for the lender. So once consumer price inflation gets above that, credit will disappear pretty quickly.

Here's what a commercial bank balance sheet looks like under normal conditions, like in frame 1, say from the 1970s until 2008. The liabilities on the right are also known as deposits aka credit money. And on the assets side, the Rs are Reserves, or central bank liabilities aka base money, while the As are Assets, or loans in MMT terms:

Commercial Bank

Assets | Liabilities

Those are fractional reserves. See how there are 2 base money reserves and 12 assets? That's a fraction of 1/7th, or MB=2 and MZM = 14. That's frame 1.

Then, as that ZH article shows, lending basically flattened after the GFC and QE took over. Now the commercial bank balance sheet looks more like this:

Commercial Bank

Assets | Liabilities

See how the fractional reserves are now 50%? Those are the excess reserves created by the Fed and spent into existence by the USG. That's what frame 2 does to the banking system.

Frame 3 will keep expanding the Rs and reducing the fraction until hyperinflation erases the As altogether, in real terms. Then it will look like this:

Commercial Bank

Assets | Liabilities

That's frame 4. Credit is gone (no more As), but credit money still exists (the Ls are still circulating).

From that point on, there are different possibilities as to how it unfolds in terms of physical cash versus electronic debits or transfers. My thought is that if base money (CB) digital dollars were fully rolled out before HI, then it's theoretically possible it stays electronic. But we're still far from there today. Years away I would say, if not more.

It's not whether it's possible or not, or whether it's already on the drawing board or in the works, it's whether everyone is already using it. I can imagine the USG trying to push out some really big numbers electronically, but unless it can circulate through the economy, what's left of it, there won't be the demand for it. They'll be pushing on a string.

What good is a trillion dollars unless you can hand it to your daughter and send her over to the baker for a loaf of bread and some muffins? We aren't even close to there yet. I'm talking zero transfer or transaction costs or fees, just like cash, zero clearing time, just like cash, and no middleman, peer to peer as the kids like to say, just like cash.

Some of us don't even have smart phones. And that's another issue. If your cash is dependent on the internet or electricity, then the government can render it useless by turning off the internet or the power in your area. Not so with physical cash.

So while the technology for true digital cash may theoretically exist, if everyone's not already using it and totally comfortable with it before HI, then it's not really up to the preference of the Fed or the USG at that point. You need demand for your money, even in hyperinflation, and if you're trying to push out something new, no matter how big the numbers, it's not going to buy you what you need. So I think they'll be forced to print physical cash with lots of zeros to keep their stooges doing their bidding for as long as possible.

So yes, to answer your question, that is real money that was created by the Fed and spent into existence by the USG. It doesn’t matter if the Fed is buying old Treasuries or new, it still expands the effective money supply (MZM) when the USG spends credit money into existence. So that's all credit money too, it just wasn't loans to the economy. It was "QE", which was, in effect, a loan from the Fed to the USG, which became MZM once the USG spent the money.

I'll leave you with some food for thought. You've probably heard of YCC or Yield Curve Control. That's when the Fed controls the yield curve so it doesn't get out of control and blow the whole effing system to smithereens. Some say they're already doing it to some extent. But here's the thing. Nosh once explained the difference between QE and YCC to me thusly: A critical distinction between QE and YCC is that QE is about supplying a fixed amount of money for buying assets at any price. YCC, on the other hand, is about supplying an infinite amount of money to buy assets at a fixed price. So, to quote Nosh, "YCC is QE on steroids if you understand the technical dynamics."


"Thanks Fofoa for your explanations.

From memory. Before 2008 USG kept its collected funds at special accounts with some largest commercial banks. Introduction of excessive reserves and interest on excessive reserves to fight GFC resulted in creation of TGA at FED and closing of accounts with commercial banks. In addition, Congress introduced limit on TGA balance increase calculated as some percentage from previous average for the year. As result, TGA balance started growing with speed limited by Congress.

So, actually total deposits in commercial banks represent total liquidity in the economy, balanced by liabilities of commercial banks and USG (TGA at FED?)?

From ZeroHedge graph [“Big 4” bank total loans and deposits] – Aggregate Deposits are $6.9T and Aggregate Loans are $3.546T. Hence Aggregate USG liabilities should be $3.354T. But we know that at maximum TGA was $1.8T."

Hello Yakalex,

The TGA balance has no relation to those aggregate loan and deposit numbers. The TGA balance is not going to show up in the aggregate deposits until it is spent by the USG. What you're calling "USG liabilities of $3.354T" would have been spent into existence by the USG over the past 12 years. They represent past printing, past QE by the Fed, past spending-credit-money-into-existence-without-taxing-or-borrowing-it-out-of-existence. It has no relation to how much money was held in the TGA at any given point in time. It's an aggregate of credit money that the USG spent into existence over time.

Here's the graph you're talking about:
All it says to me is that the aggregate commercial bank balance sheet expanded normally (i.e., through lending) before 2008, and since then it has been expanding a different way, through QE or raw printing. Yes, all that QE money does end up in the MZM or effective money supply because the USG spends it into existence without taxing or borrowing it out of the MZM or effective money supply. You can see it in that graph.

In terms of my graphic, you can see the shift from frame 1 to frame 2 that happened in 2008 in that graph. The difference is that the Fed was controlling that printing for the last 12 years, and was doing it for reasons related to the financial system, to keep rates down or prices up or to add liquidity or whatever. What's changed now with the shift to an MMT-minded USG that wants to print as much as possible and isn't afraid of inflation or hyperinflation is that the printing is no longer going to happen for financial system management reasons only. It's now happening for political reasons. That's the shift to frame 3 that this post is all about. Notice also that Obama's Fed Chairman is now Biden's Treasury Secretary. The printer in chief has been promoted to the spender in chief, and she know how to make it happen.

But don't let the technical mechanics of the TGA confuse you. The TGA is actually a network of Treasury-approved commercial banks including the ones in that graph, and others around the world. They are "Treasury-designated depositories" and they accept over-the-counter physical cash, check and wire transfer deposits on behalf of the USG/Treasury, but they don't appear as deposits on their own balance sheets. They only appear as liabilities on the Fed balance sheet. Remember, it's all just bookkeeping. Here's the TGA on the Fed balance sheet, and you can also see the "other" accounts which I mentioned which have another half trillion in them as of April 21st:
As I keep saying, it's complicated business, but understanding what's happening from a big picture perspective doesn't have to be.

When money goes into the TGA, credit money goes POOF because the TGA-approved commercial bank doesn't put it on its own balance sheet, only the Fed does (as a liability to the USG). Then when the USG spends that money, credit money is created when the bank receiving the USG check credits the depositor's account. If the Fed buys Treasuries, even old ones, it creates new "excess reserves" in the commercial banking system that become new credit money when the commercial banks use them to buy new Treasuries and the USG spends that money. That's how the aggregate commercial banking system's balance sheet has been expanding since 2008, as seen in this graph (here it is again):
All that money printing wasn't really price inflationary, though, at least not for consumer prices. Right now, however, we have a stagnant or even depressed economy and a government driving the printing for political purposes. That's starting to cause inflation which is devaluing the currency. But remember, hyperinflation is a feedback loop that begins with the currency devaluing which causes the printing, which causes the currency to devalue even more, which causes even more printing.

It's the devaluation that's driving it, and the printing is just making it worse, like trying to put out a fire by dousing it with gasoline. But the printing is not driving it, it's trying to keep up. That's why there's a shortage of cash. If the printing was driving it, then there would be a surplus of cash bidding higher than asking prices. Instead, prices are outrunning the cash.

I mention this because someone just said that $1.8T is not enough to get his attention, but $18T would be. That sounds like someone who's expecting the printing to start the hyperinflation. That's not how I see it. The $1.8T continues to show the USG's new willingness to print, and that's what's important, not the number. The real printing will start once we have the systemic shock, whatever that is, in an inflationary environment with a disabled economy.

I mentioned YCC in my last comment. Here's what it could look like: Something happens and the USG starts emergency knee-jerk printing to save everyone from starvation. The bond market starts imploding so the Fed starts YCC. You'll hear everyone talking about YCC, but that's not what's really happening. What's really happening is full-blown actual MMT under the guise of YCC.

This is the Catch-22 the Fed finds itself in right now, and it's the classic sacrificing the currency to save the system. If they let the bond market implode, then the system (meaning the commercial banking system) implodes, but by "controlling" the curve through the infinite base money printing of YCC, they nominally save the banks but destroy the currency. Meanwhile, the USG is spending all that infinite base money into existence in the effective money supply (MZM).

So don't worry about the TGA or the past printing. That's all water under the bridge. That's all stock, not flow, and it's all about the flow. To me this looks like the perfect storm. We have an MMT-minded government ready to spend for even the dumbest of reasons, so you know what they'll do when the shit hits the fan, right? Spend! On top of that, we have a disabled economy and a broken financial system. What more could you ask for? Ben Bernanke as Treasury Secretary? Gideon Gono?


AuHiker wrote:


In regards to the expansion of the aggregate commercial banking system’s balance sheet from 2008 – 2019 you commented:

“All that money printing wasn’t really price inflationary, though, at least not for consumer prices.”

Was this due to the fact that although M0 expanded with QE, the majority of this money remained in the financial sector, boosting up stock prices while M2 maintained its growth (more or less) at the same rate as before the GFC? This in contrast to the drastic rise in M2 since 2020 which we are starting to see translated in consumer price inflation?"

Hello AuHiker,

I guess there are two separate points to tackle here. Did the money remain in the financial sector? And if not, then why didn't in translate into consumer price inflation?

First, a simple concept. There is no money in the asset arena, what you're calling the financial sector. There are only assets, and there's an inflow and outflow of money. Sometimes that inflow is insufficient to support both the outflow plus the addition of new assets, like new IPOs and new bonds, etc. The "outflow" of money is when people sell assets for money.

So, the answer to did this money remain in the financial sector is no. When the Fed buys assets, the money flows through to the seller or issuer of the assets. Even though it did contribute to the boosting up of asset prices, there's still no money in those assets. It flows through.

It is true that the Fed only prints base money (MB), and I've explained how that becomes part of the effective money supply (credit money) when the USG spends it. If you want to see how much fresh base money the USG spent into the credit money supply since 2008, you just have to look at how much USG debt the Fed has on its balance sheet today, and subtract how much it had back in 2008. The answer is, the Fed held about $750B in 2008, and today it holds $5T, for a difference of $4.25T. That's a little bit more than the $3.354T difference in this graph, but the graph is only four banks, JPMorgan, BofA, Citibank and Wells Fargo:
So that's all raw money printing. In theory, raw money printing should be price inflationary, but not if the rest of the world is overvaluing your currency and causing you to run a perpetual trade deficit. That's why we haven't seen the consumer price inflation that would otherwise be expected.


Jman1959 wrote:


“I mention this because someone just said that $1.8T is not enough to get his attention, but $18T would be. That sounds like someone who’s expecting the printing to start the hyperinflation. That’s not how I see it. The $1.8T continues to show the USG’s new willingness to print, and that’s what’s important, not the number.”

I see your point on our current printing not starting HI directly, but it seems like it has certainly caused significant inflation, which will drive people to spend money that they had previously been comfortable sitting on (as we see happening now in housing and other sectors). As you have said before, the USG doesn’t have to print another dollar for the currency to hyperinflate. So while it doesn’t lead directly to a HI feedback loop (even Volker era inflation was not HI), it seems like continued printing and the resultant inflation could set the stage for a huge increase in velocity, and that the combination of increased velocity, rising inflation, an adequate supply of dollars, and a rapidly declining economy could certainly kick off a dollar confidence crisis, especially given the limited options of the Fed to control it anymore. Am I off base here?"

Hello Jman,

Yes, hyperinflation includes an extreme velocity of money. But I view that velocity as an effect more than a cause of hyperinflation. People watch for increases in velocity as an indication of coming hyperinflation, or the reverse, they say how can we have hyperinflation when velocity is so low? I say, just wait, you'll see velocity turn on a dime once the hyperinflation starts.

And yes, hyperinflation includes lots of printing and lots of money. But same thing. I view that as an effect more than a cause of the hyperinflation. Like velocity, the rising quantity of money is part of the feedback loop that keeps it going, but again, people look for increased printing as a sign that hyperinflation is near, or the reverse, they say, $1.8T is not a hyperinflationary number, but $18T is. I say, just wait, you'll get your $18T once the hyperinflation starts. But it still won't be enough. By then you'll say $18T is not enough to get my attention, but $180T, now that would be some hyperinflation. See how this works?

People want to know how hyperinflation can happen here. They don't believe it can. They think that the US dollar is too big to go into hyperinflation. It's used globally, so there's just no way it could hyperinflate. You'd have to print too much money to drive up prices all over the globe. Hyperinflation has never happened in a global reserve currency, therefore it must be impossible. Smaller currencies hyperinflate against the reserve currency, so what's the reserve currency going to hyperinflate against? This is why I go above and beyond just predicting hyperinflation or repeating how it theoretically works. I try to show you how it's going to happen here and now in the global reserve currency.

I don't know if the printing so far is causing the inflation we're seeing. It probably has a hand in it, but there are many other causes in play right now as well. We have bubbles in almost everything, we have Chinese money driving up prices in certain sectors, we have people repositioning due to political changes. We have supply chains that have been suppressed for a year now. There are lots of things contributing to rising prices here and there, and they will all contribute to the ultimate demise of the dollar.

Yes, theoretically velocity alone could kill the dollar, but it won't. It's a whole bunch of things working together, and my point is that the stage is already set. I'm not looking for more printing, they're already doing it. Every new bill seems to cost $1.8T or $1.9T these days. It's like an acceptable price point. It's like the Overton window of MMT right now. It's like $89.99 instead of $90. Soon we'll break through the $2T barrier on a single bill and the MMT Overton window will shift. But it won't shift drastically, in orders of magnitude at a time, until hyperinflation causes it to.

You said the inflation will drive people to spend money they have been sitting on. Again, I see that as more of an effect than a cause, although yes, it is part of the feedback loop. I think that when that happens, hyperinflation will already be underway. I'm not sure this current inflation we're seeing will drive people to spend the money they've been sitting on, but hyperinflation will. As for housing, credit is still plentiful, so it's likely just a bubble combined with people fleeing certain locations and maybe some Chinese money coming in as well.

That doesn't mean it's far away. I think it could happen at any moment. All it will take is a spark, because I think the stage is already set in a way that it wasn't even a year ago. Yes, you're right, all those things you say are part of the feedback loop of hyperinflation, but to view them as a cause is wrong. Hyperinflation is not inflation on steroids. Hyperinflation is deflation with wheelbarrows. It's a bunch of bubbles popping simultaneously in real terms, including the currency itself.


Yakalex wrote:

"Went to FRED site to check figures and ratio and was lost, because numbers do not correspond to what I was expecting:

Reserve Bank credit (aka FED Balance) as of March 11, 2021 7,530,925

Loans and Leases in Bank Credit, All Commercial Banks as of March 10, 2021 10,443,012
as of Dec 30, 2020 10,371,721
Deposits, All Commercial Banks as of March 10, 2021 16,570,488
as of Dec 30, 2020 16,097.486
In addition, FED balance is not equal to Deposits – Loans."

Hello Yakalex,

The "FED balance is not equal to Deposits – Loans," but it is reasonably close, so perhaps we are forgetting something. Let's see…

The FED Balance (Reserve Bank credit) includes what's in the TGA ($1.31T as of March 10, 2021). And remember, what's in the TGA does not show up in Deposits until the USG spends it.

So, what we should expect to find (very roughly of course) is Fed Balance (Reserve Bank credit) minus TGA balance = Commercial Bank Deposits minus Loans.

Fed Balance – TGA = 7,530,925 – 1,310,273 = 6,220,652
Deposits – Loans = 16,570,488 – 10,443,012 = 6,127,476

That's pretty close! :D


Hans wrote:

"I get that paying back a loan destroys credit money. But does defaulting on a loan really destroy credit money?"

Hello Hans,

When a loan defaults, the credit money it created does not disappear. Banks expect a certain amount of defaults, and they factor it in as part of the cost of doing business. It's an expense. If the amount of defaults exceeds expectations, then they take a loss. It's not always a total loss, because they can try to settle, go after assets, or sometimes sell the note to a collection agency. The bank also gets a tax deduction for the loss. When it happens on a large scale, like in 2008, the USG prints the money to buy the toxic assets and throws a $700B TARP over them.
(TARP=Troubled Asset Relief Program)


And Hayes_meister wrote:

"FOFOA said,
In fact, the Fed’s balance sheet has grown by 86% since the beginning of 2020. It was $4.17T at the beginning of 2020, and today it’s $7.8T, so almost double. That means almost half of the US dollar base money in existence (46.5% or $3.63T) was printed in the last 14 months.

This is such a shocking statistic. But based on the way FOFOA has defined the 5 frames in his diagram, the transition from Frame 3 to Frame 4 seems to be something we can track the progress of:

Base Money = (MB + Fed liabilities to the USG)

But how to measure Credit Money? Is MZM the best we have? It seems to be:

Credit Money = M3 - Notes and Coins in Circulation + Money Market Funds

Has anybody got a handy chart tracking that?

Or perhaps the simplest thing to track is the Commercial Loan value, as FOFOA shared here:

If I understand correctly, that should continue to fall as the Gov spends more into the real economy, and as people default on their loans, and as banks loan less. When commercial bank loans reach zero, we've arrived in a pure base money Frame 4."

Hello Hayes_meister,

Regarding what to track, you can't track the money supply as a leading indicator of hyperinflation, because it's not a leading indicator, it's lagging. Plus, they'll probably stop reporting it once it really takes off.

You'll know hyperinflation is here by the prices at the grocery store before you'll see it in the money supply numbers. Those numbers will do what you see in frame 4 as a response to super high inflation at the grocery store, probably after they try price controls, which will really kick things into high gear. Price controls cause shortages in things like food, absolute necessities, and I think that government-induced shortages will really ramp it up faster than we can imagine right now. It may even be what severs Agm's PAM, turning it into SPAM (Severed Price Adjustment Mechanism). ;D [A reference to this comment by Agm1776]

In terms of the money supply, here's what you would watch, theoretically, but again, it's not going to do anything until prices are already rising at an incredible rate. You'd watch the ratio of this number:
Fed Balance – TGA = 7,530,925 – 1,310,273 = 6,220,652

to this number:
Deposits – Loans = 16,570,488 – 10,443,012 = 6,127,476

That's the ratio of Base Money (MB or CB liabilities) to Deposits (Credit Money or commercial bank liabilities). It's currently around 37% based on the March numbers above. Before the GFC, it was about 12.5%. If I had to guess, it might get as high as 80% or 90% before they start printing new cash with added zeros, but they likely won't be reporting it in real-time at that point. Then it will go to 99%, then 99.9%, then 99.99% and so on.

Here's how I get those number of 80% to 90%: I don't expect Loans to change much. Right now they're at a little over $10T, and I would expect them to stay right around there through hyperinflation. They will be destroyed in value, not volume. They will be "hyperinflated away." Even if they default, once high inflation is obvious, they'll just keep the nonperforming loans on their books at full nominal value since the loss will be disappearing in real terms. No point in writing it off when it'll be gone in real terms in a month. ;D

So the way we get to 80% is by Base Money jumping to $50T and Credit Money (Deposits) jumping to $60T (because Loans are frozen at $10T). 90% would be MB at $90T and Deposits at $100T.

Again, currently it's at 37%. Even with the USG just spending what's already in the TGA as of March (the numbers above), that 37% will jump to 42% (I just checked the latest numbers and it's already up to 40%). And another $1.9T spending bill will take it to 47%. So that's how it works. But even there, we're still at less than $10T in Base Money. And I don't see Congress voting on any $18T emergency spending bills until things get really bad. Before we get there, but after the really high inflation hits, I think the USG will be spending without congressional approval using its Ball of Twine National Defense Resources Preparedness powers. That's when each department can spend whatever it needs, and the biggest expense will probably be payroll.

This spending should show up in Deposits here:

And here's where you find the Fed Balance and TGA on the Fed Balance Sheet:
As I showed previously, Deposits minus Loans in the commercial banking system is a close proxy for MB, in case the Fed stops updating its balance sheet. Here's the link to Loans, but really you can get a quick estimate by just looking at Deposits and subtracting $10T:

Finally, here's the official MB put out by the Fed, but with a month lag, it'll be pretty much useless during hyperinflation:

One reason the Fed balance sheet may become useless is that, once the USG shifts to its emergency spending powers, the Fed may postpone or suspend the bookkeeping exercise of Treasury purchases. In that case, just use this formula to estimate the ratio:

(Deposits - $10T)/Deposits

Anyway, the point is that those frames are more to give you an idea of where we're going to end up than to give you something to track on the way there. It's more about understanding what's happening on a conceptual level, because that will help you make sense of things as they happen. That's why, in the last paragraph of the post I wrote: …if I had to pick one thing to watch, I’d watch Commercial Loan value food prices at your local supermarket. ;D