Wednesday, May 25, 2011

The Return to Honest Money


What is honest money?

And what does it mean "to return to honest money?"

The most common answers to these questions have roots in the Austrian School of Economics, developed and made famous by the Austrian economists Carl Menger (1840-1921), Ludwig von Mises (1881-1973) and Friedrich Hayek (1899-1992). At least the most common answers today come from modern followers of the Austrian School. And modern practitioners will tell you that gold and silver are honest money, and that the way to return to honest money is to make money harder and/or to limit or eliminate fractional reserve banking.

But this meme of honest money has been canonized in such a simplistic way that its proliferation has become a bit of a credibility problem for those who promote it, and a source of confusion among their more credulous followers. So I have a slightly different take on honest money that I'd like to share with you.

My definition is that honest money is simply money that does not purport to be something it is not. I'm sure this doesn't seem any simpler than saying gold and silver are honest money, at least not on the surface. But I think that once we explore this subject a little more deeply, you'll find that mine is a much more elegant view of a very important topic.

As you will see, I'm not here to challenge the Austrian forefathers, Menger, Mises and Hayek. In fact, my view is perfectly compatible with theirs. Where it differs is with some of the modern gold standard advocates and promoters. In my view they have improperly reconstructed the money concept that was deconstructed by their forebears.

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

I do believe that we are in the process of returning to honest money. I believe this transition is necessary, natural and inevitable (unstoppable). And that last part is why I sit back as an observer, rather than getting all worked up as an activist. To my way of thinking, all you can do now is take action to preserve your own wealth as we roll onward into this brave new world.

Sell the Gold in Fort Knox?

Congressman Ron Paul is one of the leading proponents of a return to honest money and a return to the gold standard. He is also a firm believer in Austrian economics and has authored six books on the subject. There was a curious headline on Drudge the other day that read, "RON PAUL: Sell the gold in Fort Knox." Here's the link and a quote:

The next big question on the federal debt limit could be whether to start selling the government’s holdings of gold at Fort Knox — and at least one presidential contender, Ron Paul, has told The New York Sun he thinks it would be a good move.

The question has been ricocheting around the policy circles today. An analyst at the Heritage Foundation, Ron Utt, told the Washington Post that the gold holdings of the government are “just sort of sitting there.” He added: “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.”


Mish then came out with a post saying that Ron Paul had not said this. He wrote that the Sun must have gotten it wrong:

People have been sending me an article all evening that says Ron Paul proposes selling gold to pay down the national debt. The article is nonsense and it took me all of 5 seconds to spot the error.

Somehow the New York Sun confused Ron Paul with some clown I have never heard of named Ron Utt, or the Sun misrepresented a statement Paul made.

[…]

Addendum:

I have read the Sun article several times now looking for other possibilities. The only other thing I can come up with is the possibility Paul may have said something to the effect of wanting the government to mint and sell more gold coins, but that does not equate to selling gold reserves to pay down debt.

Thus, I keep coming back to the thesis that the Sun is inadvertently mixing statements of Ron Paul with Ron Utt or the Sun has misinterpreted or worse yet, hugely misrepresented a statement Paul said.


I'm not trying to make a big deal out of this story, but I wanted to bring it to your attention because it got me thinking about Ron Paul and his honest money ideas. I'll admit that I'm not an expert on Ron Paul's ideas like Mish is, but I could certainly think of a few reasons why Dr. Paul might make that statement, not the least of which being that the gold that was nationalized in 1933 needs to get back into private hands.

Gold does the most good for any currency zone being in the private ownership of its productive citizens rather than the public ownership of big government. Remember that I, too, made a "crazy proposition" for the US gold with regard to Treasury's cash funding running out in Reference Point: Gold - Update #2. So I'm not sure Mish got this one right. Perhaps it will have been clarified by the time I publish this post.

Ron Paul and Honest Money

In any case, I know that Ron Paul advocates returning to "honest money," and to him that means some kind of a gold standard. So, because I'm not a Ron Paul expert, I did a little research. I wanted to get a general handle on what realistic and actionable ideas the gold standard crowd has today for returning us to their concept of "honest money," other than the simplistic dogma: ldo, gold and silver is honest money.

My hope is that if we can come to an understanding of the realistic propositions of the gold standard advocates, we can then compare them to Freegold in terms of practicality (feasibility), level of honesty (in terms of the money concept) and probability. And then I also hope to compare both concepts, gold standard and Freegold, to the words of the Austrian masters in their deconstruction of the money concept. One would expect them to be more consistent with the ideas of modern Austrian School hard money advocates than with the thoughts of the anonymous ANOTHER and FOA. I guess we'll see about that.

What I learned about Ron Paul from my research is that he sort of has two overlapping ideas about how to move forward into a gold standard. Over the last four decades he has somewhat gone back and forth between these two ideas based on the political climate of the time. The first one can be summed up as "End the Fed."

Ron Paul first became interested in economics in the early 60s when he read the warnings of Austrian economists predicting that the US would not be able to maintain the gold standard at $35/oz. because it was printing too much paper. He was skeptical but still interested for the next ten years while the gold price somehow stayed fixed at $35, despite what he had read. But then, in 1971, the Austrian economists were proved correct when the US suddenly abandoned the $35 gold fix and the entire gold exchange standard in one fell swoop.

This revelation is what got Ron Paul interested in politics, and even more interested in economics. During the 70s he became a proponent for ending the Fed and in 1976 he ran for congress and served (that time) until 1984. But then during the 80s and 90s we had "Paul Volcker saving the dollar" and Credibility Inflation, which changed the political climate somewhat. It was during this time that Ron Paul seems to have developed his second position, which can be summed up as "competing currencies."

Competing Currencies?

The idea with competing currencies, since the political will towards ending the Fed had pretty much dried up in the 80s, was to make it legal for gold and silver to trade as currency. With gold and silver contract settlement supported by the courts, "obviously" (presumably) they would win out over fiat in the currency competition of the free market.

It was during this "competing currency phase" in the 80s and 90s that Ron Paul spearheaded the American Eagle gold bullion program by presenting the idea to Reagan's Gold Commission which led to the Gold Bullion Act of 1985. You might remember the video I used in my Indicium post that was a 1983 debate between Ron Paul and Fed Governor Charles Partee. In it, Congressman Paul argues for the gold standard while Partee explains the value of a floating gold price:

In the video Partee said that he wanted the Gold Eagle coin as an "indicium of public attitudes toward financial conditions in the country" and that "you destroy that 'indicia value' when you have a gold standard." What do you think? Does this sound at all like Robert Zoellick's recommendation to use gold as a "reference point?"

Indicia—plural for indicium—comes from Latin for "sign," "clue" or "indication." In law it is sometimes synonymous with "circumstantial evidence." Partee elaborated saying he wanted gold to be an "indicator" and therefore the price needed to "vary" [Me: float].


Here's the clip as I posted it, set to start at 19:30 referencing the following two minutes:



I imagine that Ron Paul viewed the American Eagle gold coin program as merely a step in the right direction. But when he spoke of allowing a gold-backed currency to compete with the dollar, he was not necessarily talking about physical gold coins circulating. He was more interested in a paper or electronic currency that would be fixed to gold by weight, just like Bretton Woods, but redeemable to anyone, and possibly run by a private enterprise like American Express (which he mentioned).

His idea was that as long as you allowed the courts to enforce contracts essentially denominated in gold by weight, this hard currency would win out in the free market. Here is a clip from a 1995 interview with Ron Paul in which he explains that there is "no way they are going to go back on the gold standard now" and eschews the idea of a Central Bank sponsored gold standard. So the way he wanted to address that reality was to legalize a "parallel standard" that would allow the use of a private gold standard in the marketplace. It is set to start at 4:50 and my reference runs for five minutes until the end of this segment:



At 7:55 is where Ron Paul mentions Amex as the host of a possible private market money, backed by gold, and also backed by the government guaranteeing the fulfillment of contracts denominated in this hard, free market money. From there he is prompted by the interviewer to talk about money as "wealth". This is a key distinction that the modern hard money movement does not understand: the distinction between ANY circulating transactional currency and wealth.

FOFOA's Dilemma

There will be much more on this later, but very quickly I'd like to share with you a new "dilemma" coined by one of my readers. It is in the spirit of Triffin's dilemma which I wrote about in my post coincidentally titled Dilemma. The fullness of this post will hopefully explain the following in detail, but here it is in short, from my South African friend calling himself The Motley Fool:

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

Yes, thank you MF! This must be viewed in the context I laid out in The Debtors and the Savers. It is not only important, it is the key that unlocks the view. There is an interesting nuance in modern society that many miss. And it is that there is a significant number of people that are both debtors and savers. They have loads of debt through their mortgages and credit cards, but they also have saving in their IRAs, company 401Ks and union pensions. These camp-straddlers, on average, have a zero net-worth as their debt cancels out their savings. But they are useful, conceptually, in viewing how the future monetary and financial system will work.

Today we denominate both transactions and savings in dollars: the dilemma! So the dollar's collapse, today, will wipe out both their savings and their debt. Net-worth will remain zero. Remember that this is a conceptual exercise, a thought experiment to help you see. Now if you take the deflationists' view you must imagine their savings being wiped out but their debt remaining. They will be broke and owing. And somehow, the deflationists think, this will keep the dollar not only functioning transactionally, but make it even stronger.

Okay, here's the meat of the thought experiment. I want you to imagine the opposite; that these debtor/savers had their debt wiped out, but their savings remained intact. So their net-worth would go from zero to high, and their lifestyle would improve. How would this affect the bankers? That's right, it would not make them happy. And this is exactly how Freegold works to keep the currency honest and the banks chained to prudence. More on this in a moment, because I can hear some of you screaming disbelief.

Back to Ron Paul

So during the 80s and 90s the idea of ending the Fed had lost some of its political appeal and Ron Paul went for the more Libertarian idea of letting the people choose their own money in a free market. But then, lately, the Fed has been taking more popular heat, so Ron Paul has gone back in that direction with the 2009 release of his book titled 'End the Fed'. But even so, Paul is still hedging his position with the competing currencies idea because he is smart enough to know that you can't just end a 100-year monetary tradition without some seriously disruptive economic and financial consequences for which he obviously doesn't want to be blamed.

Here is Ron Paul in 2009, prior to the release of 'End the Fed', talking about competing currencies. And he's talking about a hard currency to compete with the Fed's dollar. This is obviously a secondary idea and a hedge to the popular "End the Fed" idea.



Here's a little bit of the transcript, beginning at 1:25:

Ron Paul: …and now we have a bigger problem. The transition would be pretty tough, and I've written and talked a lot about this and you’d have to devise a system where there would be a transition where maybe you could have a gold standard competing with a paper standard and then obviously gold would win out.

Reporter: Well sure.

Ron Paul: People would eventually go to gold because the paper, we’re getting down to the bottom right now. The last thing before they really rush to gold is the Treasury bill.

[…]

Reporter: This is a silver certificate that was issued, I guess they stopped issuing it about thirty, forty years ago something like that. But is this what you are envisioning? …there it says, “Silver certificate for gold or silver.” Is this what you want again?

Ron Paul: To some degree, but there’s been a lot of writings about how you might do this in the private market and not have a government monopoly, because we did have shortcomings in our gold standard because we had bimetallism and we had artificially fixed prices between gold and silver. You don’t want that, you either have to be on a gold standard or a silver standard, but you could… Hayek has written about baskets of currencies and having this work in the private market. A competing currency could be private but, yes, eventually what you’d want to do, a lot of people say, “Oh we don’t want no gold, we can’t carry all that gold around in our pockets."

Reporter: Right.

Ron Paul: No, I think your point that you’re making is right. You’re still going to have certificates or you’re going to have electronic entries. There are people today who are trying to promote this idea through electronic gold, but the problem is the legal tender laws force us to use dollars in all settlements, so one of my goals in Washington to move in that direction would be to repeal legal tender laws. Actually, all we need to do is obey the Constitution because it’s still very clear it hasn’t been repealed that only gold and silver can be legal tender. Believe it or not, they don’t even obey the Constitution anymore.


Two Monies

I couldn't agree more with Ron Paul above where he said, "we did have shortcomings in our gold standard because we had bimetallism and we had artificially fixed prices between gold and silver. You don’t want that, you either have to be on a gold standard or a silver standard." What he's talking about is a fundamental mistake that was made in the Coinage Act of 1792 that haunted the American money system on a few occasions over the next 200 years. From Ron Paul's book, The Case for Gold:

The Coinage Act established a bimetallic dollar standard for the United States. The dollar was defined as both a weight of 371.25 grains of pure silver and/or a weight of 24.75 grains of pure gold—a fixed ratio of 15 grains of silver to 1 grain of gold. Anyone could bring gold and silver bullion to the Mint to be coined, and silver and gold coins were both to be legal tender at this fixed ratio of 15:1. The basic silver coin was to be the silver dollar, and the basic gold coin the 10-dollar eagle, containing 247.5 grains of pure gold.

The mistake was price-fixing the two metals to each other, and this error cost the US Treasury a lot of gold 100 years later, leaving it to be bailed out by none other than JP Morgan. Now I want you to pay attention to this recurring concept of two monies, be it gold and silver erroneously price-fixed, or Ron Paul's hard currency competing with (floating against) the Fed's dollar. This is an important concept that will keep coming up, so I just want to draw your attention to it at this point.

End the Fed?

Even though Ron Paul is clearly a practical thinker, he is also a politician who enjoyed a groundswell of support in 2008 from the "End the Fed" crowd. Here is the opening of a 2009 speech to the US House of Representatives in support of the Federal Reserve Abolition Act in which Paul implored Congress to end the Fed and reinstate the gold standard, without offering much elaboration on how that would happen:

Madame Speaker, I rise to introduce legislation to restore financial stability to America's economy by abolishing the Federal Reserve…

…Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

In fact, Congress' constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation's founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans' standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.


Today it seems that Ron Paul is publicly more guarded with his 'End the Fed' specifics, but he wasn't always that way. In the following paper, Murray Rothbard (1926-1995) describes Ron Paul's ideas during his first stint in Congress (1976-1984) which included liquidating "the Fed's gold" (perhaps not so far off from the recent statement Paul reportedly made to the New York Sun about liquidating Fort Knox):

Rothbard: Abolition of the Federal Reserve would mean that its gold supply now kept in Treasury depositories would have to be disgorged and returned to private hands. But this gives us the clue to the proper definition of a gold dollar. For in order to liquidate the Federal Reserve and remove the gold from its vaults, and at the same time tie gold to the dollar, the Federal Reserve's gold must be revalued and redefined so as to be able to exchange it, one for one, for dollar claims on gold. The Federal Reserve's gold must be valued at some level, and it is surely absurd to cleave to the fictitious $42.22 when another definition at a much lower weight would enable the one-for-one liquidation of the Federal Reserve's liabilities as well as transferring its gold from governmental to private hands.

Let us take a specific example. At the end of December 1981, Federal Reserve liabilities totaled approximately $179 billion ($132 billion in Federal Reserve notes plus $47 billion in deposits due to the commercial banks). The Federal Reserve owned a gold stock of 265.3 million ounces. Valued at the artificial $42.22 an ounce, this yielded a dollar value to the Federal Reserve's gold stock of $11.2 billion. But what if the dollar were defined so that the Federal Reserve's gold stock equaled, dollar for dollar, its total liabilities—that is, $179 billion? In that case, gold would be defined as equal to $676 an ounce, or, more accurately, the dollar would be newly defined as equal to, and redeemable in 1/676 gold ounce. At that new weight, Federal Reserve notes would then be promptly redeemed, one for one, in gold coin, and Federal Reserve demand deposits would be redeemed in gold to the various commercial banks. The gold would then constitute those banks' reserves for their demand deposits. The abolition of Federal Reserve notes need not, of course, mean the end of all paper currency; for banks, as before the Civil War, could then be allowed to print bank notes as well as issue demand deposits.

This plan, essentially the one advocated by Congressman Ron Paul (R.-Texas), would return us speedily to something akin to the best monetary system in U.S. history, the system from the abolition of the Second Bank of the United States and the pet banks, to the advent of the Civil War.


Rothbard then proceeds to expand a bit on Ron Paul's early plan, taking it even further, which might set off a few warning bells amongst some of my fine readers:

We could, however, go even one step further. If we were interested in going on to 100 percent reserve banking, eliminating virtually all inflation and all bank contraction forevermore.

[…]

To go over immediately to 100 percent gold, the dollar would be newly defined at 1/1,696 gold ounce. Total gold stock at the Federal Reserve would then be valued at $445 billion, and the gold could be transferred to the individual holders of Federal Reserve notes as well as to the banks, the banks' assets now equaling and balancing their total demand deposits outstanding. They would then be automatically on a 100 percent gold system.

From the standpoint of the free market, there is admittedly a problem with this transition to 100 percent gold. For the Federal Reserve's gold would be transferred to the commercial banks up to the value of their demand deposits by the Federal Reserve's granting a free gift of capital to the banks by that amount. Thus, overall, commercial banks, at the end of December 1981, had demand deposits of $317 billion, offset by reserves of $47 billion. A return to gold at $1,696 an ounce would have meant that gold transferred to the banks in exchange for their reserve at the Federal Reserve would also have increased their reserves from $47 to $317 billion, via a writing up of bank capital by $270 billion. The criticism would be that the banks scarcely deserve such a free gift, deserving instead to take their chances like all other firms on the free market. The rebuttal argument, however, would stress that, if a 100 percent gold requirement were now imposed on the banks, their free gift would do no more than insure the banking system against a potential holocaust of deflation, contraction, and bankruptcies.


Getting to Hard Money

As I have mentioned, Ron Paul's honest money ideas have evolved since these early days. In fact, in many ways he is quite a bit closer to Freegold today than he was in the early 80s. He is still stuck to the idea of a fixed price for gold, but he seems to have evolved from a one-time government price-fixing to more of a market-based "decision" on how high the price of gold should be fixed. He still wants to denationalize the US gold hoard and get it into circulation, but he seems to have evolved to more of a Hayekian competition of privatized currency, which begs the question of how to denationalize the gold.

Basically, it seems that over the last 30 years he has evolved his ideas from strictly "end the Fed and institute a new gold standard" as described by Rothbard above, to a more measured approach of "allow a competing currency to circulate which will (presumably) win the day and weaken the Fed and lead to its end." But even still, I think Rothbard's description above reveals some important issues that are still lacking clarification; issues that I have written about on this very blog.

For one thing, as I have written several times, the Fed does not own the US stockpile of physical gold. It is a common misconception, even among some scholars, that in 1933 the gold was taken by the Fed when, in fact, it was taken from the Fed and placed in collective ownership via the United States Treasury. The gold had previously been base money inside the banking system (the Federal Reserve System) and was removed from the Fed and placed in the Treasury. In fact, today the Fed is custodian of only 5% of the Treasury's gold (418 m/t). The rest (7,715 m/t) is in the custody of the US Mint, which is part of the Treasury Dept., held in Fort Knox, West Point and Denver. So ending the Fed hardly implies the necessary denationalization of the gold.

(On a side note, I just noticed that Gary North came to Ron Paul's defense in saying the US should sell its gold to pay down the debt. Gary says Ron Paul is right, and he ends his short piece with this: "The gold bugs honestly trust the Federal government to restore a gold standard someday. There has not been one since since 1933 that any government on earth will do this, but somehow, the gold bugs believe, it will do it in the future.")

A few other thoughts that are addressed here at FOFOA but not above, and not in the hard money circles of today, are how do you define gold? Should we include paper gold like Bullion Bank liabilities, futures contracts, mining forward sales and ETFs in the new gold standard? And how do we define the link between the dollar and gold? How do we fix the price and then defend that fixed price? In the past we did that by running down the gold reserves from 22,000 tonnes to 8,000 in 20 years. And lastly, how will we transition from the dollar being the global reserve currency, held in bulk overseas, to defending a new fixed price of gold in dollars? These are tough questions, and I think I have a few of the answers.

Fractional Reserve Banking

There is another angle to Ron Paul's honest money ideas that deals with fractional reserve banking (FRB). There is a debate within the Austrian/Libertarian movement between those that say FRB should be illegal in a Libertarian society and those that say we should just institute a "gold standard" and let the free market take care of the FRB issue. Paul is Rothbardian in that he falls on the side of making it illegal. They believe that FRB (for demand deposits) as well as borrowing short and lending long (for time deposits) is fraudulent and creates the Austrian Business Cycle of booms and busts. You can listen to the very beginning of this for a quick view of the debate from Walter Block, another Rothbardian. And from Paul's End the Fed:

Rarely do people ask what the fundamental source of instability really is. For an answer we can turn to a monumental study published in 2006 by Spanish economist Jesús Huerta de Soto.[1] He places the blame on the very institution of fractional-reserve banking. This is the notion that depositors' money that is currently in use as cash may also be loaned out for speculative projects and then re-deposited.

[…]

The institution of fractional reserves mixes these two functions, such that warehousing becomes a source for lending. The bank loans out money that has been warehoused — and stands ready to use in checking accounts or other forms of checkable deposits — and that newly loaned money is deposited yet again in checkable deposits. It is loaned out again and deposited, with each depositor treating the loan money as an asset on the books.

In this way, fractional reserves create new money, pyramiding it on top of a fraction of old deposits...


This is obviously a problem, but I'm not going to spend much time on this FRB issue because there is a very simple and elegant solution that the remainder of this post will explain. Do you remember earlier when I drew your attention to the recurring concept of "two monies," be it gold and silver bimetallism or Ron Paul's hard currency competing with (floating against) the Fed's dollar? Well, we can apply this "two monies" concept to the term "fractional reserve banking" as well.

In this iteration of the concept, the "fractionals" are the easy paper notes circulating as currency and the "reserves" are the store of value for those paper notes. We solve the issue by simply cutting the parity fix between the two and allowing them to float in value against each other. Fractionals can then always be exchanged for an equal value of reserves and vice versa, but the floating reserves are never lent. More on this concept in a moment.

The debate mentioned above within the Austrian/Libertarian community boils down to a free market solution versus a government dictate against FRB. But either way, all Austrian Economists agree that the real issue is credit expansion, which is at the heart of one of Mises' greatest insights – the Austrian business cycle theory (ABCT).

Briefly, ABCT blames the boom-bust economic cycle on fractional-reserve banking, or the expansion of credit without an actual act of saving by someone in the economy. When credit is expanded beyond reserves, the resulting drop in interest rates is artificial (i.e. not due to actual increase in loanable funds). This sets in motion an unsustainable boom period of malinvestment and erroneous capital consumption that sows the seeds of the inevitable bust. This process is supplemented by government intervention to protect privileged bankers from being “caught” short by the market and allows credit to expand far more than it would without such intervention. This practice of absolving privileged bankers of their legal obligations via intervention was institutionalized in 1913 with the creation of the Federal Reserve.

And an understanding of ABCT provides the context for understanding why Freegold is unfolding. Freegold simply offers a different way of controlling credit expansion that is more effective than the modern Austrian suggestions of making money harder and/or limiting or eliminating fractional reserve banking. There is no need for all that convolution, just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch (which comes from this comment by yours truly). Snippet:

But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

It is easy to blame this on debt as a principle, but unless you don't mind being wrong, there are some deeper explanations out there. Debt under Freegold will not reach such destructive levels. "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.

________________________________________________________
Sidebar:

For more about why FRB and time deposit maturity transformation are not the root of the problem—the root is simply the lending of the monetary reserve, a problem that would still exist even with Rothbard's 100% reserve banking—please see my Reply to Bron. Here's a short excerpt:

** Spending Gold into the marketplace, whether by the owner or by a borrower, would tend to result in prices "that weigh more"--cost more Gold, that is.

** As ever more Gold is borrowed out of other people's savings to be spent into the economy, the Gold's purchasing power is lessened from what it otherwise would be...hurting those who have elected to hold their Gold instead of risking it by lending it out as a source of income.

[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]

** For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent! [Gresham's law alone is adequate to achieve this.]


And for a brief explanation of how Freegold-RPG is different than what we have now, see How is that different from Freegold?:

…it will be stable because of two main factors:

1. SUPPLY - Gold will trade on a stable supply of above-ground physical gold in the absence of external influences like "paper gold" (Bullion Bank "BB" liabilities that can be created on demand by a mere book entry on a BB balance sheet, etc.).

2. DEMAND - Gold will also trade on a stable demand due to the global clarity that will emerge as to gold's best and highest function—being only a physical wealth reserve asset and nothing else.

How we get there is easy to visualize. As the physical reserves within the BB system are all moved into allocated accounts, at some point the remaining claims will simply have to be cash-settled. At that point all paper gold markets will cease to exist and all that will be left is the stable supply of above-ground physical gold in the absence of external inflatable (or deflatable) influences.

________________________________________________________

Two Monies – The Separation of Monetary Roles

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.

Back in October of 2009 I wrote a series of posts called Gold is Money.

Gold is Money - Part 1
Gold is Money - Part 2
Gold is Money - Part 3

In this series I introduced the concept of the separation of monetary roles into different media, not fixed at parity to each other. It's like saying "fiat is for earning and spending while gold is for saving." Or you could even say "silver is for spending and gold is for saving" as Ender likes to say. It really doesn't matter what medium will win out for the spending role, but as you will see, the winner can be reliably predicted using the concepts mentioned above.

To some of my readers this revelation was like a light bulb suddenly lit. For others, this idea became a real barrier to understanding what I was writing. So in this post I'd like to take another look at the necessary separation of the monetary functions from a new angle. Hopefully this new perspective will add a few more into the "light bulb" group. But first, here are a few excerpts from Gold is Money.

From Part 1:

Functions of Money

"Money", as it is understood today, has three main roles. The late Dr. Willem F. Duisenberg, former President of the ECB, in his famous acceptance speech for the International Charlemagne Prize in 2002 stated it well...
What is money? Economists know that money is defined by the functions it performs, as a means of exchange, a unit of account and a store of value.

And from FOA in that same post:

Owning wealth aside from official money units is nothing new. Building up one's storehouse of a wealth of things is the way societies have advanced their kind from the beginning. What is new is that this is the first time we have used a non wealth fiat for so long without destroying it through price inflation. Again, a process of using an unbacked fiat to function as money and building up real assets on the side. Almost as if two forms of wealth were circulating next to each other; one in the concept of money and the other in the concept of real wealth.

This trend is intact today and I doubt mankind will ever pull back from fiat use again. Fiat used solely in the function of a money concept that I will explain in a moment.

Understanding all of this money evolution, in its correct context, is vital to grasping gold's eventual place in the world. A place where it once proudly stood long ago.

All of this transition is killing off our Gold Bug dream of official governments declaring gold to be money again and reinstitution some arbitrary gold price. Most of the death, on that hand, is in the form of leveraged bets on gold's price as the evolution of gold from official money to a wealth holding bleeds away any credible currency pricing of gold's value in the short run.

To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save.


In Part 1 I also introduced the Modern Money Triangle:


And I concluded with this:

The human concept of money is changing whether we like it or not. It is being torn apart. Gold, as a wealth reserve and wealth asset, will exist and trade parallel to the world of fiat, the world of credit and debt. Producers and savers will finally have the option to switch tracks so to speak. To get on a parallel track that avoids the inevitable collision with the debt-hungry collective their savings have always faced.

And as we pass through this phase transition, as gold switches from the transactional track to the wealth-reserve track, it will take on a whole new meaning... and a whole new value! The non-dollar part of the world already knows this. This is why they are buying gold now!


A Flaw

In Part 2 I explained how the evolution of the money concept over maybe 2,500 years led to what we think of as money today: the three functions all tied into one. And I also explained how the modern bastardization of the money concept led to a fatal flaw in today's system:

This system of lending a purely symbolic monetary CONCEPT instead of lending real wealth requires the perceived value of that CONCEPT to remain relatively stable or else the entire banking system will collapse. It is to this end that bankers, governments, politicians and economists always try to entangle (think: forced quantum entanglement) gold into the money system and control (manage) its value in order to keep their CIRCULATING DEBT CONCEPT viable and valuable.

This is the problem with the architecture of the dollar, versus how all non-reserve fiat currencies will work in a free gold environment. The dollar must cheat in order to retain any illusion of stability. There are other ways for a fiat to remain stable. Responsible currency management is one. And in a system where the value of all real things (including gold) float freely against the parallel universe of fiat currencies, this will be how they will work.

When the dollar became a mere concept in 1971, so did all fiat currencies in the world. Their only value lies in the tradable value associations we give them, based on what can be purchased in the parallel universe of real things. But because we have been encouraged to save these symbolic debt concept units in lieu of anything with real value, a mismatch has grown to epic proportions whereby not even a fraction of these debt units can be traded back into the real economy at anywhere near today's prices.

We have lent, borrowed, saved, sliced, diced, sold, resold and insured so many units of a mere CONCEPT while neglecting to pay attention to the comparative size of the real economy with which the CONCEPT must run in parallel.


I went on to explain how the value of the transactional medium of exchange will inevitably be sacrificed in a vain attempt to save the system. And that this is why it is so dangerous to hold your wealth in that same transactional medium today. This is why there are "two monies!"

You see they are now faced with a dilemma they will not discuss publicly. On one side is their product, the conceptual unit of credit account, their currency. And on the other side is their offspring, the financial system, Wall Street. What saves one will kill the other. They can save the present value of their product and kill their offspring through starvation. Or they can save their offspring by delivering what it desperately needs to survive... a constant expansion of credit (aka monetary inflation). But this will, of course, kill the value of their product, the currency.

They can save one or the other, but not both. And it was always known, but has now been proven, that the system will be saved at ANY cost. (Unfortunately for them, they did not think it through far enough to realized that the cost of saving their offspring will also kill it and a whole lot more. But that line of Thought is straying a little too far from the topic of this post.)

In order to survive, the system, the financial industry, Wall Street NEEDS a constantly increasing supply of CREDIT! If the population won't give their own blood to save this dying Frankenstein monster, then the CB's and governments WILL! It is happening now. Right under our noses. For more than a year now!

This is why it is SO important that we hold only physical gold in our own personal possession in order to escape this tangled mess. Only touchable, graspable physical gold metal under full ownership conveys ALL of the properties that have come to be attributed to this kingly wealth asset. By contrast, financial contracts denominated in gold as facilitated by bullion banks, gold derivatives, gold loans, gold depositories, gold pool accounts, gold ETF's, or known by any other name, are all at their core pure and simple... (wait for it)... CREDIT. And what feeds the monster?? All together now…………………
***CREDIT EXPANSION***!!


This is the very beginning of starting to understand the concept of "two monies" not tied or fixed to each other by value, but floating against each other in value. We understand this instinctively, but today's system fools us into doing something that is very dangerous to our wealth today:

Today's paper currencies are not just a medium of exchange, but they are still a pretty good store of value in the short term. The greater the rate of price inflation, the shorter the term that you will want to be holding the actual currency. Wealth assets, on the other hand, are the store of value for the long term. This differentiation is understood by almost everyone today. And it is so close to the concept of Freegold that it will not be "a giant leap for mankind" to get there.

The only difference is that right now, most of the public has come to believe that wealth is simply paper ownership of wealth producing industries and paper claims on real assets that can never be recovered at today's values. This is true for most all items, not just gold. And as we hold these paper documents for the long term, understanding them to be better than holding the actual currency because they provide a "yield", the recoverability of the underlying real asset is being constantly eroded away. In other words, we are unknowingly losing principle at the same time as we think we are gaining a yield!

[…]

Our ancient instincts have not gone away. We have not "advanced" as much as we think. Our use of "the pure concept of money" has not changed since the days when we engaged in direct barter trade. We still want to accumulate wealth items along side and separate from our transactional "pure concept of money" which is really just a number in our mind, or marked down on paper. We know that this "number" is not something to be saved, except perhaps for as long as it takes to arrive at the next transaction. (See: Fekete's
A ‘fairy’ tale)

You see our modern money concept has been surreptitiously eroded into only one half of our ancient barter understanding of the money concept, and one half does not equal a whole. Most of today's money, other than the monetary base, is borrowed into existence. It represents a debt, and a debt is an incomplete transaction. It is only one half of what our instincts require as a wealth reserve, which is a fully completed transaction resulting in an accumulation of hard value. And yet we still buy these "wealth assets" denominated in only "half a concept", half of the monetary concept that our mind intuitively understands.

This is a flaw! It is a big one, especially now as "the other half" is waving the white flag of surrender and default. Some very smart analysts see this as deflationary. They truly believe that the waving of the white flag will make this "half a concept" actually rise in value against its parallel real world economic counterpart. But that is not what will happen.


A Different Approach

I began Part 3 by sharing with you my position as an observer of what is, not an activist for what I think should be. My position is in stark contrast to what you get from the gold standard advocates of all stripes. Sure, they have their disagreements, but they all seem to propose what they view as the perfect solution, which always requires unlikely political choices. Gary North is one that gets this distinction well.

North's position is very close to Ron Paul's. North gets the benefits of denationalizing and privatizing the gold. North, like Paul, wants to outlaw fractional reserve banking, which means his eye is on the wrong culprit. And North, like Paul, wants circulating "gold IOUs" at a fixed parity with, and redeemable in, physical gold. And he also gets the difficulty of enacting his vision, so he, like Paul, wants to amend the legal tender laws to allow a private, competing fixed gold standard.

In this post North describes "Two Kinds of Gold Standards," public and private, and as for a government-run gold standard he concedes, "any call by conservatives for the State to adopt a gold standard is futile. No one will listen." And in this post called "End the Fed, Get the Gold," North describes a complex idea he has for de-nationalizing the gold through a massive gold give-away. But alas, he must confess "This is why this essay is hypothetical."

I responded to the ideas presented in that second post (not directly to Gary) in this comment, in which I wrote:

If you cannot see that a two-way market (between the debtors and savers) for gold (that's buy and sell - "two way") is infinitely better than a mass give-away, then I really don't know what to say. You are what FOA and Aristotle would call a "Hard Money Socialist."

Getting the gold back into circulation is done through a free market price, not through a suppressed price give-away.

Gary North "realizes" this, even if he doesn't realize it: "If the price of gold rises, it pays someone to own gold. So, people begin to buy gold. Gold-using producers start buying."

But debtors don't hold gold. Only savers accumulate. Producers! As he says. Gold is for saving, fiat is for spending. The debtors will immediately sell their gold claims to the savers.

In my mind, it would be infinitely better for the USG to acknowledge Freegold, declare a starting price of, say, $10,000/ounce, and then open the vaults and let the price float. They buy and sell at the market price through the banks, starting at $10K.

The price would soon stabilize, much higher than $10K of course, but the two-way market would be in effect. The gold would not be gone. The currency would be stable once again.

You give it all away to the debtors at $42/ounce and let them sell it to the savers for their final $1,350 welfare check, where does that leave you?

Half the population wants easy money. The other half wants to save what they earn in gold. Can't you see this? It is not about "the elites." They are all mostly in the easy money camp. If they give the gold away at $42/oz the elites will buy it right back from the poor and then lock down the price for a new gold standard. Buy themselves another 67 years in power perhaps. Is this what you want?

Gary wants to divvy up the gold and then inflict Freegold. If you cannot see the disaster that this is, I don't know what to say to you. All to take power away from the central banks? This is the mistake. It is not their fault. As Greyfox said, “We have met the enemy and it is us.” We are at fault, for saving in promises. We give THEM power.

And Gary's proposal would do more harm than good to the overall modern economy. And it's not gonna happen anyway. It's a dream. A fantasy. A picket sign.

Would Gary's solution be okay with me? Sure! But it wouldn't last. And it won't happen, so it's purely academic, which he acknowledges. But Freegold is not!

And furthermore, all the power Gary wants to take away from the bureaucrats will be taken away ANYWAY when the dollar loses its global reserve privilege, and that privilege's sister, the paper gold market. Gone. Done. That's all it takes.


Can you see the difference in approach? Well here's how I kicked off Gold is Money Part 3:

Allow me to start by beating a dead horse. There is a vital difference between what may in fact be the ideal, perfect monetary system and what are the real monetary changes we are heading straight into today. My purpose for writing this blog is to share with you, and in return to receive your feedback on my own discovery and understanding of the latter. There are plenty of other sites that discuss the former.

If we can discover together where we are heading financially, economically and monetarily, and why we are heading there, then perhaps we can know, in advance, how the understanding of the global consciousness will evolve and unfold in the coming weeks, months and years. And, with this understanding, hopefully we can gain a certain peace of mind with regard to our own financial decisions, positions and future as we head into very stormy waters.

I know from my own experience that a little peace of mind is a priceless asset. It is one worth sharing, and one worth growing. Sharing and growing this asset together with you is my goal.


Next I discussed some of the confusion that arises from our common modern understanding of the money concept, including this paragraph which hints at the problems with using the same media in two different monetary roles, even if it is a pure gold coin standard:

In fact, as a medium of exchange, money is only one half of a full barter exchange. The other half is when you change your money into that item you desire. But when physical gold is the common medium of exchange, then it is possible that the concept of a "medium" (or middleman) is incorrectly applied, because if gold was what you were after (for its store of value function), then the exchange is completed in only one step! Direct barter!

Actually, that paragraph hints at a whole slew of problems that have plagued us over and over again for centuries ever since we started using the same media for all monetary functions. But let's just continue on and maybe this will start to make some sense.

Next I ran through the problems we encountered with a couple different types of gold standard in the past; the gold exchange standard we had after 1913, and the gold coin standard we had before 1913, which is the one yearned for by the likes of Ron Paul and Gary North. That's right, there are problems that arise even in a gold coin standard. I implore you to read the post, but especially the account (in blue) by Randy Strauss. Here's a tease just to get you to go read it:

And recall, these comments occurred while on a gold [coin] standard AND in total absence of a government-sponsored central bank [i.e. before the Fed] -- which was authorized (against Baker's preference) a year later.

As you come to understand how Money and Credit are interrelated, the more you will understand the separate Wealth of gold and why you need it now more than ever.


I went on to discuss how the money concept necessarily exists in the fourth dimension of time. How, if we only lived in a snapshot world of three dimensions, one medium would work fine for all of money's functions:

But here in the real world we must be concerned about how far we carry our money through the fourth dimension. Without this vital consideration, we stand to lose everything!

At this point in the post I discussed the separation of monetary functions through a few illustrations that I created:

Breaking the Triangle

In part 1 of this series I used a diagram I created called The Modern Money Triangle. The three corners of the triangle represented the three primary functions of our modern understanding of money.


But as we pass through the coming phase transition in which the parity between paper gold and physical gold will be broken, cracks will start to form in certain parts of the triangle.


The fractures you see in this diagram are time related. On a short timeline [length of time is the key variable: "t"] fiat currencies will perform our necessary monetary functions, medium of exchange and unit of account. But at some point on the time line, 'length of time', we will switch to a different medium, gold.

On a long timeline, gold will perform our necessary monetary functions perfectly, store of value and long term unit of account.
By the way, there is no upper limit on the 'time line axis' when it comes to gold. If plotted out it runs to infinity!

The outcome will be my new Freegold Quadrangle!


The "time line axis" represents the amount of time you are willing to hang onto the fiat currency you either earn or receive in payment. If the monetary authority is printing money, "t" will be shorter and shorter. In a hyperinflationary situation "t" will slide all the way to the left with a value close to zero.



As the new Freegold system of natural, pristine balance emerges, the fiat monetary authority will find its wisest move is to keep the money supply under control. And with a "wise" CB, gradually the "t" value will shift back to the right, little by little.


Clarify the View

This concept that the traditional monetary functions are now separating into non-fixed (i.e. floating) media has been both an epiphany for some and a stumbling block for others. My goal here is to clarify the view for those who cannot seem to get it. When comparing any two monies, circulation velocity (or the demand for money to the Austrians) correlates to, and is a measurement of, their respective store of value properties. In other words, the currency that circulates with greater velocity is in low demand, it's the "bad money" with a short store of value timeframe, while the slower currency is in high demand, it's the "good money" with a greater ability to store value through time.

This is a clear example of how the transactional and reserve functions of money are able to separate right before our eyes into two different media. Think about Zimbabweans quickly spending Z$s while hoarding US$s. Ludwig von Mises called it a "secondary media of exchange."

The term "secondary media of exchange" obviously implies the existence of a "primary media of exchange." But why only two? Well, the answer is simple: because we are dealing with two needs, two separate functions or roles in which we use "money." The two roles are transactional and reserve (store of value). Another clear example can be found on the Eurosystem's Consolidated Financial Statement. The primary medium of exchange is on the right-hand side, and the secondary medium of exchange is on the left. Look at how Line #1 has grown in proportion to the whole of the reserves (secondary media of exchange) from 30% to more than 65% in a decade. Now that's how you spot a focal point!

Here's the new "FOFOA's dilemma" once again (with an added hyperlink for the adventurous!):

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

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Another quick Sidebar:

For any real economists out there, here's how Freegold resolves Triffin's dilemma.

Triffin's dilemma highlights two flaws in the dollar and its use as the global reserve currency. Flaw #1 is the dollar being a national currency and also a supra-national global reserve currency. Flaw #2 is the dollar trying to be as good as gold in the store of value role via US Treasuries. What I mean in flaw #2 is that the dollar's credibility is hurt by a rising price of gold and, therefore, it must systemically manage that threat by backing the fractionally reserved bullion banking system which eases the natural supply constraint of gold.

The euro has eliminated both of these flaws in its fundamental architecture. It is not a national currency and it does not oppose a rising (in the present case) or a free floating (in the future case) price for non-fractional physical gold reserves. I have written extensively on this topic, and the bottom line is that gold is not yet free floating, even today, because its market is encumbered by many forms of gold IOUs that trade at par with the physical stuff through the support of the dollar system.

You can obviously resolve Triffin's dilemma by removing both flaws. But removing #1 alone is not enough, while #2 alone is enough.

Triffin's dilemma observes that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. But this is only the case if that currency does not embrace a "secondary media of exchange" that is allowed to float in value in a quantity not managed by the currency manager (i.e. physical only), and can be purchased and stored in lieu of retaining debt denominated in the primary medium.

Imagine, if you will, the euro supplanting the dollar's role as the globe's super-sovereign currency unit. This is (at this point) merely a conceptual exercise for all you anti-conceptual mentalities. Let's compare the two with regard to Triffin's dilemma.

How often do we hear euro critics repeat that the euro, a currency without a country, has no political union to back it and is therefore worthless? The US dollar has a country, but in its role as the world's currency it also functions just like the euro, without a global political union.

The fundamental difference between these two units of account (the dollar and the euro) is their relationship with gold.

If you have followed my blog at all, you know that the euro has Freegold, the wealth consolidator and "real money" with no country, no links and no political union to back it. So which unit of account (€ or $) is closest to gold? Which currency, of these two, is most likely to be preferred as the global reserve currency next to Freegold in the wealth reserve role?

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.
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A Practical and Probabilistic Comparison

Now that I'm almost done with the intro, and before we move on to the main body of this post which is the Austrian forefather's deconstruction of the money concept and how it fits perfectly with Freegold, let's take a moment to compare the gold standard concept to Freegold in terms of practicality and probability. We'll save 'honesty' until after we discuss the money concept.

What the hard money/gold standard crowd ultimately wants is a single unit to faithfully serve as both the monetary medium of exchange and long term store of value. A single unit is, in fact, what we have now as the dollar is the currency in widest use (network effect) and the US Treasury bond is the focal point global store of value. Both are denominated in dollars and are therefore a single unit through fixed parity. If the medium of exchange was to collapse, so would the store of value.

So the hard money camp would like to harden (make more difficult to obtain) that single unit by backing it with gold, making every single unit redeemable in gold, or at least allowing the free market to do away with any entity that fails to meet every redemption request. From a practical perspective this would obviously require major political and legal changes which is why this camp is full of activists with colorful picket signs. And this is why they have lowered their initial target to simply changing legal tender laws to allow their single hard unit to compete with the existing easy unit and, hopefully, theirs will win the popularity contest.

But in order to achieve such monumental changes, they really need a ground-swell of support from the people. You, dear reader, are probably much closer to their view than 95% of the rest of the population. So, from a probabilistic perspective, I'd like you to think about your own paycheck. How much of it goes right out the door to pay for food, utilities and your mortgage? 90%? And how much do you really care that the 90% of the money you earn and only hold for a couple of weeks sustains its purchasing power for the next 100 years (for the benefit of those people you gave it to)? I only ask this to get you to think about what is important to the majority of the people.

The hard money/gold standard crowd wants to make every one of those dollars you earn hard (difficult to get) so that they retain their long-term purchasing power. They want the banks to hold gold on reserve for every single dollar you receive, even if it goes right out the door. There won't be many pay raises in your future if these guys get their way.

Or would you simply be happy as long as the 10% of your paycheck that you decide to save stores its purchasing power for 10, 20 or 100 years? Yes, see, this is what really matters… to everyone! And this is why the medium of savings must be separate from (and float in value against) the transactional currency. I'm certainly not arguing the benefits of inflation, because there is a better way to control inflation than simply making every single unit hard (difficult to obtain).

The economy needs the lubrication provided by transactional currency for it to run smoothly. Obviously not all of it is saved and stored as wealth. Only a small portion of the flow of transactional currency is saved. And those that would hope to print in order to buy are only stealing from that small portion that is saved. If you "do the math" you'll find that, in the long run, this is true. And if you separate that saved portion by using a secondary medium that floats in value, then inflationary policy becomes self-defeating to the currency manager. This is how you have a true competing currency. Not two currencies competing for the medium of exchange crown. But a separate medium of savings competing against the medium of exchange for "pole position" on the 'Time=t' axis:


This is Freegold, and it is unfolding today. It requires no activism or political/legal changes at this point. It is, how do you say, baked into the cake already? And once again, these posts briefly explain how we aren't quite there yet, how Freegold is different from what he have today, even though it is "already in the pipeline."

The Money Concept

FOFOA: The measure of any money's store of value is a continuum of time. It is directly linked to demand and velocity. Even the worst money (say, Zimbabwe dollars during the hyperinflation) works as a very temporary store of value. Perhaps you read stories about workers in Zimbabwe getting paid twice a day and then running out to spend it before coming back to finish the shift. This is an example of the briefest time period in which currency stores value.

FOA: Was gold a medium of exchange? Yes, but to their own degree, so were the bowls. Was gold a store of value? Yes, but to a degree, so were dinner plates. Was gold divisible into equal lesser parts to define lesser barter units? Yes, but to a degree one could make and trade smaller drinking cups and lesser vessels of oil.

Here's the thing, 'store of value' and 'medium of exchange' are relative terms. Anything real stores value (a painting, a computer, a jewel), and lots of things are media of exchange in various settings (dollars, other currency, cigarettes in jail, etc). And for stores of value, there is a continuum as to how long things store value. What we are talking about is degree. And this gets to the heart of a semantic issue about money being media of exchange and a store of value.

Menger: [I]t appears to me to be just as certain that the functions of being a "measure of value" and a "store of value" must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.

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

Both of the above quotes get at the idea that, because money is a medium of exchange, it is also, to some degree, a store of value. Even Zimbabwe dollars were a brief store of value, but being a store of value isn't what money is all about. Being a store of value is not its central function—it is derivative of its being a medium of exchange. Being a medium of exchange is money’s essence—what makes money money. This means that, by definition, money’s ability to serve as a measure of value and store of value is secondary.

Now before I continue, I want to remind you of my definition of "Honest Money" from the second paragraph of this post. In that paragraph I wrote that my definition would eventually start to make sense, and right about now it should be starting:

"My definition is that honest money is simply money that does not purport to be something it is not."

Compare my definition to what the hard money/gold standard crowd says is "Honest Money":

"And modern practitioners will tell you that gold and silver are honest money."

Since we're dealing with the semantics of "money" here, we should keep in mind that the original Austrian definition of money was that it is primarily a medium of exchange. So in this light, are gold and silver the best monies? Let's check back with Carl Menger who is widely regarded at the founder of the Austrian School of economics:

Menger: [M]oney is the most appropriate medium for accumulating that portion of a person’s wealth by means of which he intends to acquire other goods (consumption goods or means of production).

[…]

But the notion that attributes to money as such the function of also transferring “values” from the present into the future must be designated as erroneous. Although metallic money, because of its durability and low cost of preservation, is doubtless suitable for this purpose also, it is nevertheless clear that other commodities are still better suited for it.


And while we're at it, how about a little Hayek?

Hayek: If I were responsible for the policy of any one of the great banks in this country, I would begin to offer to the public both loans and current accounts in a unit which I undertook to keep stable in value in terms of a defined index number. I have no doubt, and I believe that most economists agree with me on that particular point, that it is technically possible so to control the value of any token money which is used in competition with other token monies as to fulfill the promise to keep its value stable.

Obviously I am including the link before each quote for those of you that think I am taking these out of context. But hopefully you'll start to see a pattern emerging from the quotes.

As I mentioned above, in the same way that a medium of exchange is to one extent or another also a store of value, stores of value are also to one extent or another media of exchange. The question is one of degree, and this is how, through market forces, we end up with "two monies." Being the focal store of value does not make something the best medium of exchange, and vice versa.

This might be a good time to take another look at the ECB quarterly statement. There it is, two monies. One on the left, one on the right. Separate roles. And for you euro-critics, have another read of this because you might want to brush up on your currency theory. Having a hard fixed rate currency is just like sharing a standardized meter, liter or gram.

And speaking of the left side of the ECB statement, here's some more Mises:

Mises: Gold is the money of international trade and of the supernational economic community of mankind.

Schwa! Supernational economic community of mankind? That almost sounds like gold is the money of the Superorganism!

A Second Money?

But what use could we have with a second money?

Mises: For some of them it is easier to find without delay a buyer ready to pay the highest price which, under the state of the market, can possibly be attained. With others it is more difficult. A first-class bond is more marketable than a house in a city's main street, and an old fur coat is more marketable than an autograph of an eighteenth-century statesman. One no longer compares the marketability of the various vendible goods with the perfect marketability of money. One merely compares the degree of marketability of the various commodities. One may speak of the secondary marketability of the vendible goods.

He who owns a stock of goods of a high degree of secondary marketability is in a position to restrict his cash holding. He can expect that when one day it is necessary for him to increase his cash holding [p. 463] he will be in a position to sell these goods of a high degree of secondary marketability without delay at the highest price attainable at the market.

[…]

Consequently there emerges a specific demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specific demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the resultant of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render.


What Mises is talking about here is the focal point effect. As more people focus on a single secondary "money" for the purpose of storing value outside of the primary medium of exchange, it starts to develop a separate kind of demand, apart from its other uses. And just so we're clear that he's not talking about money substitutes like bank credit:

Mises: One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them--in a roundabout way--for paying or for increasing cash holdings.

Claims employed as secondary media of exchange have, because of this employment, a broader market and a higher price. The outcome of this is that they yield lower interest than claims of the same kind which are not fit to serve as secondary media of exchange. Government bonds and treasury bills which can be used as secondary media of exchange can be floated on conditions more favorable to the debtor than loans not suitable for this purpose. The debtors concerned are therefore eager to organize the market for their certificates of indebtedness in such a way as to make them attractive for those in search of secondary media of exchange. They are intent upon making it possible for every holder of such securities to sell them or to use them as collateral in borrowing under the most reasonable terms. In advertising their bond issues to the public they stress these opportunities as a special boon.


Here's an exercise only for the conceptual mentalities. Try applying that last paragraph to the concept of Freegold. I did, and it makes a whole lotta sense in the context of this blog!

Okay, so if we pay attention to the network effect of those that actually have intergenerational-sized wealth to preserve, and we look for the focal point that game theory predicts will be the winner within the Eurosystem's ConFinStat, we can pretty much know without a doubt what the new "secondary medium of exchange" winner will be. But what about the primary? Shouldn't it be silver or something? Or isn't there some big NWO power that's going to inflict upon us a sinister new SDR? Or perhaps, should we all buy Bitcoins and Facebook Credits to prepare for barter exchange during TEOTWAWKI?

In Austrian economics there are basically two halves to the explanation of money. One half is Carl Menger's explanation of the marginal utility of money that emerged long ago from a system of direct barter, and the other half is Ludwig von Mises' regression theorem that connects modern money to Menger's 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 (true honest money in my book) is consistent with both Menger's marginal utility argument and Mises' regression theorem, while the difficult regression back to a fixed gold standard is not.

Robert P. Murphy on Menger: ...Because of this, owners of relatively less saleable goods will exchange their products not only for those goods that they directly wish to consume, but also for goods that they do not directly value, so long as the goods received are more saleable than the goods given up. In short, astute traders will begin to engage in indirect exchange. For example, the owner of a telescope who desires fish does not need to wait until he finds a fisherman who wants to look at the stars. Instead, the owner of the telescope can sell it to any person who wants to stargaze, so long as the goods offered for it would be more likely to tempt fishermen than the telescope.

Over time, Menger argued, the most saleable goods were desired by more and more traders because of this advantage. But as more people accepted these goods in exchange, the more saleable they became. Eventually, certain goods outstripped all others in this respect, and became universally accepted in exchange by the sellers of all other goods. At this point, money had emerged on the market...


Taking the above in the context of the ongoing monetary evolution to Freegold, gold is more "saleable" as a store of wealth or in Mises' words, a "secondary media of exchange" in part because of its historical monetary function, which raises its salience:

FOFOA: There is nothing that makes "Grand Central Station" a location with a higher payoff (you could just as easily meet someone at a bar, or the public library reading room), but its tradition as a meeting place raises its salience, and therefore makes it a natural "focal point."

And also because it has the highest marginal utility at storing wealth (the gold tank can absorb an unlimited inflow), gold wins the "market process" as the store of value as Freegold evolves and the "money functions" separate into transactional medium and store of value:

FOFOA: Will that 26th gold coin purchase provide the same utility or diminished (less) utility than the first? Remember, the only utility of gold coins is that they retain their value for thousands of years. That's all they do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money."

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


Moldbug: However, because silver was fully demonetized in the 20th century and gold was not, the market capitalization of the gold stockpile is 60 times the capitalization of the silver stockpile. Thus, comparable volumes of gas are pressing in to the gold tank and the silver tank, but the silver tank is 60 times smaller. It is actually surprising that silver has not risen faster and harder.

But this present advantage is also silver's long-term Achilles heel. The silver tank, being so much smaller, cannot take this kind of pressure. It will almost certainly explode. I have personal advice for those playing the silver market: bring your steel balls.


Regression

And speaking of historical function and its salience as a focal point - as to the other half of the Austrian money theory, the Mises Regression theorem:

Robert P. Murphy on Mises: People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.

But haven't we just run into the same problem of an alleged circularity? Aren't we merely explaining the purchasing power of money by reference to the purchasing power of money?

No, Mises pointed out, because of the time element. People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday. We then push the problem back one step. People yesterday anticipated today's purchasing power, because they remembered that money could be exchanged for other goods and services two days ago. And so on.

So far, Mises's explanation still seems dubious; it appears to involve an infinite regress. But this is not the case, because of Menger's explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter.


So, basically, marginal utility explains the original emergence of money while 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. But part of the beauty of Freegold is the embrace of marked-to-market physical gold reserves, which will, if you understand the concept, provide a well-developed and stable price discovery for currency priced in physical gold which will allow ready exchange by anyone, anywhere, any time. Two monies, floating in stasis, freely exchangeable on demand.

So in this way, Freegold does not violate Mises' Regression theorem because the regression needed to maintain the transactional currency doesn't go back far at all. In fact, it's almost instantaneous. You will always accept the primary medium of exchange for your goods and services because the market for the secondary has been stabilized and made infinitely sustainable through a floating price in conjunction with the elimination of paper IOU encumbrances.

Regression tells us that we accept a currency because we think in terms of it, we remember in terms of it. Can you see some overlap between the above: "People value units of money because of their expected purchasing power;" and this from FOA?

FOA: Naturally, for gold to advance as the leading tradable good it had to have a numerical unit for us to associate tradable value with. We needed a unit function to store our mental money value in. In much the same way we use a simple paper dollar today to represent a remembered value only. Dollars have no value at all except for our associating remembered trading value with them. A barrel of oil is worth $22.00, not because the twenty two bills have value equal to that barrel of oil: rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 22 units. Money is an associated value in our heads. It's not a physical item.

The first numerical money was not paper. Nor was it gold or silver; it was a relation of tradable value to weight. A one ounce unit that we could associate the trading value to. It was in the middle ages that bankers first started thinking that gold itself was a "fixed" money unit. Just because its weight was fixed.

In reality, a one ounce weight of gold was remembered as tradable for thousands of different value items at the market place. The barter value of gold nor the gold itself was our money, it was the tradable value of a weight unit of gold that we could associate with that barter value. We do the very same thing today with our paper money; how many dollar prices can you remember when you think a minute?


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. Even Murray Rothbard was hip to this:

Rothbard: Money, however, is desired not for its own sake, but precisely because it already functions as money, so that everyone is confident that the money commodity will be readily accepted by any and all in exchange. People eagerly accept paper tickets marked "dollars" not for their aesthetic value, but because they are sure that they will be able to sell those tickets for the goods and services they desire. They can only be sure in that way when the particular name, "dollar," is already in use as money.

Can you see how this might be problematic for a "competing currency" in the Ron Paul sense? A currency that will be competing against "the dollar" for the transactional or "primary medium" role?

Rothbard: 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.


And with that, here is some more from FOA. Bear in mind, here, that FOA used the term "Mises" to represent the modern "hard money/gold standard crowd" or as I called them, modern practitioners:

FOA: My typical hard money shared long held belief, back then, was always:

----"Gold is the only official money of the world and will return to these roots one day"-------- and -----" some worldwide financial dislocation will drive all governments back to this position"-----!!!!

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?

A lot of the Mises crowd tried to point out that ---- "hey, this is all very good but if you were on a gold system this economic game would be all the more better" ----! Ha Ha, no one cared,,,,,, why risk what was already in process. 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. Looking at it all,,,,, we robbed the Japan lifestyle standards the most. All to buy us an almost free standard [of living], and they loved it.

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.

No,,,,,,, my guys are dead on the money with respect to the political dynamic that's playing out. The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can.

When you look at who they are reaching for; every one of these blocks wants gold moving higher to shelter their dollar trading losses. None of them expect to unload dollar reserves because our end time trade deficit won't permit it. They can't just send the dollars to each other, buying their own goods; that would never exhaust the external dollar float. Hell, they now have their own money to do trade with, the Euro.


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...


Thinking it Through

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. Which brings us back to their only other idea, which is to somehow make the dollar redeemable in physical gold at a fixed weight and in any quantity the dollar-holders demand.

If this sounds a little bit familiar, it should. Yes, we've tried that before. Of course the hard money crowd would like to change it up a bit this time, although they can't quite agree on the right combination of changes. Here are a few of their suggestions:

1.) Denationalize both the dollar and the gold so it can be fixed by the free market.
2.) Outlaw fractional reserve banking.
3.) Renationalize the dollar (end the Fed) and redefine it as a fixed weight of US gold.

Obviously there are major hurdles to each of these, as well as serious impracticalities and contradictions. Monetary systems tend to evolve naturally, in their own version of punctuated equilibrium. And the rare changes that actually take hold throughout history, whether judged morally good or bad in hindsight, whether ultimately credited to politicians or the free market, have always been aligned with this evolutionary process.

And today, the dollar's past relationship to gold is problematic for all of their ideas, yet not for Freegold. Here is Murray Rothbard again:

Rothbard: Before proceeding to investigate what the new definition or weight of the dollar should be, let us consider some objections to the very idea of the government setting a new definition. One criticism holds it to be fundamentally statist and a violation of the free market for the government, rather than the market, to be responsible for fixing a new definition of the dollar in terms of gold. The problem, however, is that we are now tackling the problem in midstream, after the government has taken the dollar off gold, virtually nationalized the stock of gold, and issued dollars for decades as arbitrary and fiat money.

I also wrote about some of the "midstream" problems for the dollar in Confiscation Anatomy:

FOFOA: The US gold hoard is now off the table. Think of a poker cheat who pockets his winnings yet still wants to play. When he loses he writes paper IOU's to the other players. Can he ever pull his money back out of his pocket without having it taken away? Think of an individual who declares his own insolvency and defaults on his obligations to pay, only to resurface later with a windfall inheritance. What problems will he face?

[…]

The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!


To skirt the obvious problems in dealing with these issues head-on, some of the hard money camp has subtly retreated even further, now asking for a mere "commodity standard." Here is Ron Paul again:

News Anchor: And just one more thing which is that when you talk about the right course, if I am not mistaken, you want to go back to the gold standard? Is that the right way to run monetary policy, in your opinion?

Ron Paul: No, but I’d like to go forward to a commodity standard. There were a lot of flaws in the old gold standard because there was bimetallism and a fixed price between gold and silver.

[…]

I really like the idea of allowing the market to determine what backs the currency, make sure there are no-fraud laws, and really look into the matter whether or not we should have fractional reserve banking.


Reminds me of the old saying, "what a tangled web we weave…" You see, it's kind of like playing Whack-a-Mole when you resist the nature of the beast. Unfortunately for the US, it's gold, not "commodities" that is the money of the Superorganism. Mises again:

Mises: No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which national governments try to isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market.

Did you catch that? In his magnum opus, published in 1949, Ludwig von Mises described Reference Point: Gold, which is the underlying nature of a global marketplace that reveals where our monetary evolution is actually heading! Here are a few of my posts on the subject:

Reference Point Revolution!
Reference Point: Gold - Update #1
Reference Point: Gold - Update #2

Ron Paul is absolutely correct about at least one thing. Fractional reserve banking is the problem, and it will soon be history. But I'm not talking about fiat fractional banking, I'm referring to fractional reserve Bullion Banking. This is the root of all our monetary problems! It is even the root of the problems that arise in the fiat currency banking system. I realize what a bold statement this is, but I have gone into great depth on this blog exploring it from many different angles. Here are a few recent posts on this subject for those that are interested:

The View: A Classic Bank Run
Who is Draining GLD?
Reply to Bron

So what is honest money? And what does it mean "to return to honest money?"

Honest money is simply money that does not pretend to be something it is not. And the only way you get there is with "two monies." One that is a primary medium of exchange but does not pretend to also be the primary store of value. In doing so, it will actually become a pretty good short term store of value as it finds stability through stasis with a floating counterweight.

And a second one that is the focal point primary store of value, but does not pretend it can also be a primary medium of exchange at the same time. (There is no need to lend or borrow the secondary medium of exchange!) In doing so, it will become the greatest "secondary media of exchange" that ever existed! It will be a sight to behold!

And yes, we are returning to honest money today! The signs are everywhere, the most prominent being the rising price of gold against a falling dollar. Those who are buying gold, like China, Russia, Europe, India, Asia and the Middle East, are preparing for the return to honest money. They are preparing because they realize there is a huge advantage in preparing for something that is coming versus just watching it arrive from the sidelines. Yet, for some reason, we don't hear them demanding a new fixed dollar-gold standard from the US. Hmm. Fool me once, shame on you. Fool me twice, shame on me!

As you browse the web you will find dozens or even hundreds of interpretations of what the rising price of gold means. You now have mine to add to the pile. It means we are in the process of returning to honest money. But there are those that would like to take advantage of this to fix (read: manage) the price of gold to the US dollar once again. Does this sound honest to you?

There is a good reason why my future gold price projections are roughly one order of magnitude greater than those who want the US to manage the price of gold and to fix that price to the dollar… once again. It's also why those giants that exist outside of the dollar-centric world of the hard money activists are buying gold, and only gold, in preparation for the transition. Here are a few of my posts that will give you a clue to the "order of magnitude" difference:

It's the Debt, Stupid
How Can We Possibly Calculate the Future Value of Gold?
Gold: The Ultimate Wealth Consolidator
Relativity: What is Physical Gold REALLY Worth?
The Value of Gold

I would recommend reading them in that order.

So let's see. I think we have a winner. Let me check my scorecard:


And the best part is the probability, because there's no activism required. All you can do is prepare your own savings to be safely shuttled through the transition. So put down that picket sign, take off the t-shirt, undo the CAPSLOCK and go buy yourself some physical gold. Then, just like the Giants, you will be prepared for the return to honest money.

And finally, a big, dramatic tip of the hat to JR for his invaluable contribution to this post!

Sincerely,
FOFOA





185 comments:

Jeff said...

Thanks for TMBG, FOFOA. The official band of freegold? :)

Yukon Cornelius said...

Holy hair blown back brain melting post. This was like getting one big huge compilation album of a band that you just love. Honestly, wow. Thanks for putting the work into this post. Very appreciated. I highly recommend reading it to this:

http://www.youtube.com/watch?v=ZNGe7iK1O-4

Mantis said...

Indeed, FOFOA. The fixed gold standard of the past still casts a long shadow into the present. Although a gold standard in name, it was in many aspects as aberrant and synthetic as our present monetary system.

victorthecleaner said...

Thanks, FOFOA, this was fantastic. If you wish to win over some old fashioned goldbugs to freely floating gold, just point them to this article.

Victor
PS: Michael H, I posted some thoughts on your questions at the end of the previous thread.

Robert LeRoy Parker said...

Mish finally released his hyperinflation piece. He more or less calls Fofoa ridiculous. BLOG WARS!

Mish Link

sirch said...

Wow. You were right, FOFOA, the view up here is clear and beautiful.

Thank you for showing us the way.

Wejn said...

Thank you for an excellent article, FOFOA. ;)

Robert Mix said...

Late at night and "medio borracho" R A Mix will have to tackle this column tomorrow, perhaps the "Moby Dick" of gold articles EVER published tomorrow. Infckunig incredible,it will take me DAYS too digest this!

BRAVO, FOFOA, I sense a clear sense of direction coming your way re leaders who may OR MAY not give a Shi'ite about the people... The TPTB apparently do not.

Recent T.H.B. Nwly enlisted Space Cadet member/enlistee Robert (DCRB) has completed basic training. And awaits his Superiors' suggestion as to which batallion to join:

-- the Space Battallion (fun looking!)

-- or perhaps the Lunatic Fringe Battalion (which looks zany and fun as well)

-- other fun places to be assigned or suggested?

***

FOFOA friends are invited to send me an email to my dochenrollingbearing at gmail account to get a link to join my new blog! AFTER two weeks of behaving well (and then you receive) a place on my coveted "People OK w/Ethnic Jokes List", humor not hate. Some PG-13+jokes... Also some nice material from my women corespondents who send me NICE stuff. Nothing NASTY or inflammatory, just ask our congenial host if you have doubts. You can ALWAYS come off my List telling me that you do not want my stupid jokes clogging your email inboxes...

mortymer said...

Once a student, forever a student:

UK official reserves

http://www.bankofengland.co.uk/markets/forex/reserves/index.htm

-> This pages gives a brief overview contains attached files for details, some good stuff info.

Monetary systems, educate yourself!

costata said...

Hi FOFOA,

One of your very best, if not the best IMHO. I hope the Austrian economists take the opportunity to at least consider the perspective you present here.

All,

If anyone wants to continue the discussion about silver I will be monitoring that thread for some time. As those 'longer responses' are completed I will post a notice on the active thread but I won't be posting the content on this thread or future threads about other topics.

Thanks again to all those who took the time to respond and discuss.

Motley Fool said...

comments

MatrixSentry said...

You know you have "clicked" when you sit down to a FOFOA posting and enjoy it like you would a favorite author's newest book. Excellent work FOFOA.

Mish's hyperinflation post was a huge disappointment and flop IMO. One thing is very clear regarding Mish, his ego is monumental. Mish cannot move away from his position even if he saw the flaw in it.

The gist of his argument appears to be that the banks and the giants of the world would never permit it. Like they have a choice? It's built in to their system and is a natural consequence.

DP said...

Wowsers! Another tour de force -- I'm constantly impressed that you're able to keep putting the bar higher and higher. You seem to have pulled together a lot of different threads and really rammed them home together, so surely at least a few more should be starting to climb the foothills trying to catch up with you for the sprint to the summit. "Now that I'm almost done with the intro, and before we move on to the main body of this post" was a very enjoyable touch, for me. This pom doesn't quite know how gary could think you must be an Aussie, when you have such a capacity for subtlety. ;> (BTW I am personally very happy for you to keep those Ashes, costata; it'll save any worries about them ever getting damp for a start... :) )

D'ya think gold might go on to be a "one world currency" for the "new world order" Superorganism one day?

Thanks for all the fish,

DP :-)

PS: @RLP: That could in no way ever be a fair fight.

PPS: Glad for some respite from silver as the headline topic!

Edwardo said...

I haven't read the article to completion, but I thought the news at the link was pertinent.

http://www.zerohedge.com/article/european-gold-confiscation-sceme-unfolds-european-parliament-approves-use-gold-collateral

Michael H said...

And here I thought that FOFOA was relaxing in the Caribbean while costata minded the store. You've been working! Haven't read the piece yet but looking forward to it.

OT, the latest from Bruce Krasting at ZH:

http://www.zerohedge.com/article/we-want-our-secrets-kept-secret-fhfa-director

Contains interesting speculations about the chess game that is the dollar financial system.

Essentially, Krasting says that QE1 targeted Fannie and Freddie in order to appease the Russians and Chinese, who were nervous about the lack of a USG guarantee on Fan/Fre bonds.

Or, as Krasting colorfully puts it,

"The likes of China and Russia had (Hank) Paulson by the balls. And they squeezed."

Ash said...

For those who missed it on the last thread, this is Part II in a series about my theoretical perceptions on Freegold and the future role of physical gold in financial systems in general.

This part deals with the concept of "value" in a financial capitalist system, and may be of interest to anyone who wants to get a different take than the discussion of value presented in the current FOFOFA article.

The Future of Physical Gold"

MF,

I noticed you said you were working on a reply to my previous comment to you. That's fine, but I suspect we are just going to end up ranting back and forth about issues tangential to the accuracy/inaccuracy of Marx's idea re: capitalism and of the ideas underlying Freegold as well. So perhaps we should try to re-focus the discussion?

PS - I really enjoyed this article because it highlighted something that I have noticed as well, but something that is usually very under-stated in economic discussions - that many of the brilliant economic thinkers of our past have had some of their specific thoughts bastardized by the mainstream camp purporting to represent them. That is especially true of Keynes, IMO, but also Marx to a large degree, and I'm sure Menger and Mises are not far behind (their quotes implying the benefits of a "two-money" system are very interesting).

Oh, and can't forget the neo-classical camp, who has thoroughly misrepresented the ideas of some classical economists (Smith, Ricardo, etc.) to the point of no return.

Jeff Herron said...

FOFOA, I have been introduced to your blog through the recent Hyperinflation/Deflation posts by Ackerman and Lira. I have read most of your back posts over the last few weeks.

Today's post prompts me to leave a comment because I have taken primarily an Austrian/Libertarian "what money should be" approach until now. The powerful idea of Freegold is setting both my mind and my money free. And today's post reinforces my high opinion of the Austrian highlights like Menger, Mises, and Hayek, and also helps me to see how Freegold is a natural extension of the Austrian framework. FOFOA, you and FOA, Another, Aristotle, et al, are the modern-day economic thinkers par excellence. I am glad to have found your blog, and I will be making a donation to you today to express my gratitude.

One question before I sign off: I have begun to convert my savings from increasingly worthless US Dollars into increasingly worthy physical gold, but I am concerned about when gold will no longer be subject to the penalties that it is under today in the US. Do you have any thoughts on this?

To explain a bit further, I am essentially regarding physical gold now as the only vehicle by which to shuttle the purchasing power of my savings into an uncertain future. So, I am in essence holding my retirement and other long-term savings in physical gold. But when the time comes to begin converting gold back to the medium of exchange (presumably US Dollars), I am concerned I will experience a loss due to capital gains fees, taxes, broker fees, etc.

I know that it is possible in Europe and China for the average citizen to freely exchange local currency for physical gold, which alleviates my concerns above -- if I were a European or a Chinese national. Sadly, such is not the case.

When will the US remove its punitive treatment of converting US Dollars back-and-forth into physical gold?

I appreciate any insight you might have into this question.

Quasimojo said...

FOFOA .... While you will likely dismiss any encouragement urging you to formalize the tenets of Freegold in published form as recommending an unnecessary form

of activism, I'd like to nevertheless suggest that a published work, by your hand, might greatly expedite the evolution you so eloquently foresee. Keep it as simple

as feasible, available to the greatest mass of readers possible, and the proverbial acorn might become a towering oak. The world is yearning for understanding and

solutions; confusion abounds even among the (ostensibly) sophisticated. While the intricacies of Freegold may be considered abstruse, the basic premise is simple

and its profound advantages can be conveyed to the receptive. So, if you haven't already begun the task, may I urge you to please give serious thought to how

valuable and significant a published work on Freegold might be? (And will other readers of this blog entertaining similar faith in the potential importance of an

FOFOA-authored book on Freegold, please echo this encouragement?)

Casper said...

Test

radix46 said...

The most important piece of information from this post? If you want to live a long time, become an Austrian economist.

radix46 said...

I have a slight problem with the marginal utility concept. Perhaps I have misunderstood it...

If I have 1000 ounces of gold (drooool), then I really would not be concerned about the 1001st. It certainly would not be of as great a value to me as the 1st or 2nd ounce I obtained. If I have 1 ounce, getting an extra one is a considerable change in value and I would be very eager to get that second one.

However, if I had 1000 ounces, I might very well just spend the extra $55k (post freegold) on some luxuries or even on an income-producing asset, as I would consider my wealth to be fairly safe.

Whilst it (the 1001st) may technically have the same value, in terms of what it can buy, as the first ounce, it wouldn't have the same value for me. In fact, this effect would kick in for me way before the 1001st ounce. I'm not sure where, exactly, as I've never had the fortune of being in that position, but undoubtedly it would.

Would this, then, affect the stability of the post freegold gold price?

I think... maybe. Although, I am also thinking that I might be looking at this from a very specific and minority position, ie that of a person who held physical gold through the transition.

These people may sell a portion of their gold after revaluation, but I suppose there would still be considerable bids coming in from those that hadn't (who would be more numerous) and wanted a stable store of value.

I'm a little confused at how these concepts relate and affect each other.

Ash said...

Jthenewer,

"I know you've claimed that some things require lots of complicated language to explain, but surely the 'core' of a rebuttal of the Freegold thesis could be done in reasonably simple way?"

Maybe you could tell me a more simple way? I see the core of Freegold as being its theoretical foundations of dialectics and economic value embraced by the Austrian school. So I structured Parts I and II as rebuttals to those specific foundations, but I'll admit part I was much less specific and clear. Maybe part II is unclear as well, but I can't make it much better. The ideas of Marx are inherently "philosophical", so there is no way around that. I think you will like Part III better, though, because it focuses on more "real-world" evidence that helps validate the theoretical foundations from Parts I and II.

"It was my impression in reading your article that you batted aside core Freegold arguments without reasons that were clear to me - particularly, gold's NON-commodity status and the 'job' of gold envisioned by people who think that Freegold will occur at some point."

The whole point is that gold is very unlikely to ever get to its ideal role envisioned by Freegold, based on the evolution of financial capitalism to this point. I do believe that gold primarily acts as a traded commodity right now, subject to Marx's dialectics of value (use vs.exchange), and that this is unlikely to change as long as the financial capitalist system remains in place.

"Also I think your representation of Freegold as having debt-backed currencies is a little misleading, as the presence of debt is not a pre-requisite for Freegold's occurrence"

Well, the presence of debt is necessary for the global economy to continue growing, hence Freegold's incorporation of physical gold into the global financial system as a wealth reserve. I believe we would all agree on that. Since Freegold envisions currencies acting as the sole mediums of exchange, and I assume it would not be some type of "sovereign money" system, that would mean the currencies are still debt-based as they are now.

"Also your discussion of the concept of money differs from how the concept is used by FOFOA - just so you know. Perhaps giving some more thought to the Freegold perspective on how gold assumes its position would give you a different angle on things?...

Can you tell me again why the view of gold as the ultimate reference point, and hence a 'cure' for the debt-riddled status quo, is flawed?"

I understand how FOFOA discusses the concept of money, and I think it is flawed to the extent that he believes money can act solely as a traded store of value in our global financial system (which I believe stems from his acceptance of the marginal utility theory of value, and of course Austrian theory in general). That is referenced in-depth in the article where I talk about the distinction between the commodity (C-M-C) and monetary (M-C-M+) circuits of capital in the system, both of which are absolutely necessary, but have distinct purposes and are objectively valued.

Nothing can be the "ultimate reference point" for our global financial system and stop it from imploding, including gold. THat's the point I've been getting at, and it is once again based on my theoretical (Marxian) perspectives of financial capitalism. As I stated at the beginning and end of the article, the inherent problem is insufficient effective demand, and having a reference point does nothing to solve that problem.

radix46 said...

comments

costata said...

All,

IMHO these posts accurately describe the state of markets today:

http://londonbanker.blogspot.com/2011/05/concentration-manipulation-and-margin.html

http://goldchat.blogspot.com/2011/05/we-are-flies-in-bullion-bank-web.html

/SleepingVillage/ said...

Good stuff, Sir, thanks so much for again taking the time to share your thoughts with us. My only wish is that the "people of influence and position" read your thoughts as well as us everyday knowledge seekers.

I hope to always mine for gold and knowledge:)

Born with the gift of a golden voice

MnMark said...

Does anyone have an opinion about whether during and/or after the transition to Freegold the US government will stop taxing capital gains on selling gold? Because if I have to pay a 20 or 30% capital gains tax on any gain I have in terms of the fiat medium-of-exchange money when I sell my gold, I am giving up a huge chunk of the store of value. Which would seem to reduce gold's usefulness as a store of value.

FreeGoldAdvocate said...

I sent a link to this article (and your blog) to Ron Paul's email address. I hope he read it. He does not seem too far from FreeGold. He advocates gold and silver as untaxed competing currencies. He appears to understand that fractional reserve bullion banking is at the heart of our problems.

Jeff said...

Re: taxes

ANOTHER: Gw, I would say, all forms of physical gold is good to own. Even the rare ones offer the "art form", yes? Even in war, the art work is looted first, then the jewels, and always food. I prepare for not the war of men, but the war of currencies! This conflict will bring forth a new concept for many: "western governments will encourage people to hold physical gold"! When the Euro has defeated the Dollar, citizens will be asked to use gold as a savings, for holding the Euro will be frowned on. Gold will not bring your "capital gains tax" as the mines will be taxed to compensate.

Date: Sat Mar 07 1998 23:37
ANOTHER (THOUGHTS!) ID#60253:

Mr. Mozel,
The USA placed a special "windfall profits" tax on domestic oil during the last major rise in prices. I do think the oil stocks would have shown a greater value had this tax not been in place. Because gold will soon become a currency, mines will be taxed in a much greater way. Also, domestic mines will be asked to sell directly to the treasury at the "preceived commodity value" value of gold, plus an operating margin. As no private company will be allowed do your treasury job, "produce money". Gold in the hands of the public will be thought of as a good thing, as citizens are asked to "pull own weight" as the government is much under.

Martin Millnert said...

FOFOA,

I, as Edwardo, would like to know your comments on what sincerely seems to be a very relevant event: http://gata.org/node/9960

ZH-commentator "Urban Redneck" wrote on Edwardo's URL in a response to commentator rs1's attempt to value Greece's gold reserves in terms of Euros using todays gold spot price: "Divide US debt by US tons of gold".

What's the Freegold angle on this event in the EU region?

As for your post, it measures ~60-70 PgDn in my not so small browser window; I skimmed pieces right now, but will have to defer it to serve as weekend reading. :)


In a related matter, I've seen an increasing hype of "Prosperity without Growth" in the past days, to the point that I just watched a 30-minute documentary about it in order to better understand what the hype is about.

It seems to me that many of the underlying problems they see (the "economy" has "grown" this-and-this much since 1900), fits pretty well with the central banking money printing scheme we've seen during the precisely same time window. (I do not attribute it as being neither of (un)desired/wanted/good/bad )

So, FOFOA, I was wondering if you have considered the concepts of "Prosperity without Growth" (this title really does bother me, because I'm not sure what the true way to measure "growth" is, but I'm a bit more OK with it once I realize they're actually somewhat discussing fiat inflation...), because at least I smell a freegold solution to the problems they've declared/identified; of which some of them essentially being the loss of long-term to really-long-term stable information in the markets.

Conceivably, it could potentially be another (partial) ally of Freegold. One that one may find unexpected support in, if framed rightly?


Thanks!

Regards,
Martin

Biju said...

CLAP CLAP CLAP - Thank you FOFOA.

I just made a donation for your effort.

Biju said...

Also just a FYI : I have been converting my Gold perth/suisse bars to Canadian Maple Leafs hoping legal tenders and they may avoid taxation in the future.

jthenewer said...

FOFOA, thanks for the post.


Standing in line for the comments :)
J The Newer

Indenture said...

Someone should submit 'FOFOA's Dilemma:' for some sort of award.

radix: "If I have If I have 1000 ounces of gold (drooool), then I really would not be concerned about the 1001st. It certainly would not be of as great a value to me as the 1st or 2nd ounce I obtained. If I have 1 ounce, getting an extra one is a considerable change in value and I would be very eager to get that second one.1000 ounces of gold (drooool), then I really would not be concerned about the 1001st. It certainly would not be of as great a value to me as the 1st or 2nd ounce I obtained. If I have 1 ounce, getting an extra one is a considerable change in value and I would be very eager to get that second one."
But if I start out with one gram and move on from that point the increase isn't as great. So instead of buying one ounce the first time just buy one gram. Or half a gram. Or 1/4 gram. Or...

MnMark: FreeGold = No Capital Gains Tax when you sell gold.

Aaron said...

FOFOA said...

I went on to discuss how the money concept necessarily exists in the fourth dimension of time. How, if we only lived in a snapshot world of three dimensions, one medium would work fine for all of money's functions:

But here in the real world we must be concerned about how far we carry our money through the fourth dimension. Without this vital consideration, we stand to lose everything!

3 dimensions -- 1 medium
4 dimensions -- 2 mediums

Something new to share with the physics department. Thanks FOFOA. I wonder if the economists will get it.

Ash said...

Aaron,

As I'm sure you know, the 3 spatial dimensions are inextricably linked with the fourth time dimension in the universal fabric of space-time, as per Albert's insights.

An object cannot move through space without also moving through time, and vice versa. In fact, the rate of movement through space inversely corresponds to the rate through time, relative to observers moving at different rates.

Not sure what any of that has to do with anything here really... just some food for thought.

radix46 said...

Indenture,

You wrote: "But if I start out with one gram and move on from that point the increase isn't as great. So instead of buying one ounce the first time just buy one gram. Or half a gram. Or 1/4 gram. Or..."

OK, that's fair enough, but it's just a matter of degree. The principle still exists. Once you have an amount that you consider to be 'enough', relative to others and to the price of other things that you want to buy, then the next unit will have less value for you than the ones you already have.

If I've got what I consider to be enough, however much that is, then I perhaps I would value spending my next $X on something other than gold, perhaps a speculation, or a holiday, or better food or whatever....

Motley Fool said...

Hiya Ash

Haven't written a word yet. Will do it this weekend somewhere. I was intent on broadening my reply somewhat.

In that vein, I have seen you mention a couple of times that you think there are flaws in marginal utility theory and austrian economics. I know of some flaws in the latter, but I suspect you may be focused on different things.

Would you please state what flaws it is that you see?

I would like to have that info for my reply.

The Fool

Motley Fool said...

Hi radix46

It seems you have some misconception as to what the theory is and what it means.

I did some posts long ago that is among other things on that topic, maybe it is of some use to you. :)

A short history of money

Gold is money, paper is not

Please bear in mind this was written long before I discovered Freegold. It should still be relevant though.

Peace

The Fool

Motley Fool said...

Hi Robert Leroy Parker

I saw a hilarious post on ZH a while back. It went like this :

"Hyperinflation is ridiculous."

- Mish

"Mish is ridiculous."

- Hyperinflation.

;)

TF

Motley Fool said...

Hi FOFOA

The post is absolutely outstanding.

I could not find anything to disagree with in my first reading. That likely means there isn't anything, but that happens so rarely to me, I will read it again to make sure.

Did I mention it took me 40 bloody minutes to read. Jeez, man. xD

Anyhow.

Bravo!

The Fool

MatrixSentry said...

FOFOA,

Donation incoming. Your site represents value to me. Here's some back at you.

Mike said...

Biju

Not sure why canadian maples would avoid taxes but gold bars wouldn't.

Can you explain or do you have a link where i can read about this?

so all the mini giants with 100oz-400oz bars are going to pay taxes in freegold as well?

Michael H said...

Martin Millnert,

I think Chris Martenson's take on prosperity and growth may be relevant to your question:
(or perhaps you are already familiar with Martenson's work)

http://www.chrismartenson.com/crashcourse/chapter-5-growth-vs-prosperity

Essentially, his view is that growth and prosperity are opposites. Society produces to fulfill its needs, and also produces a surplus. There is a choice of what to do with this surplus: invest it in growth, or invest it in 'prosperity', which I take to mean 'standard of living above subsistence'.

Viewed this way, it becomes obvious that surplus invested in growth increases the future resource needs. If growth is the focus, eventually growth will eat all surplus, leaving none for prosperity.

I think the growth in the economy and the 'money printing schemes' are correlated but not causally related. I think both are caused by the discovery and increased use of fossil fuels.

The current monetary system *requires* growth, whereas I don't think freegold does.

Michael H said...

On Mish's Hyperinflation piece:

If I were to rebut Mish's hyperinflation article, I would aim at these points:

"It makes perfect sense for countries that trade with each other to do so in their respective currencies. Even though oil is priced in dollars, oil trades in Euros right now. Oil trades in Yen now. Currencies are fungible. So if a few minor countries want to trade in Yuan now, it will not matter one iota in the grand scheme of things."

"It does not matter one iota what oil is priced in ... Oil already trades in Euros and Yen just as gold does. One does not need dollars to buy oil any more than one needs dollars to buy gold. Currencies are fungible. I remain amazed at the number of people who trip over this simple construct."

I think what Mish is missing is that, while currencies may be fungible at an individual level, when one gets to the size of countries, they are not so fungible. The trading of currencies in the size required to buy oil does indeed affect their relative values.

There is a *big* difference between oil being 'quoted in dollars' and 'traded in dollars'. For the latter, one must actually go out into the marketplace and find dollars in order to buy oil. Mish either does not realize the implications or is ignoring them.

Mish also says:
"I keep stating, and it keeps falling on deaf ears, that as long as the US runs a trade deficit, it is a mathematical certainty that some country is accumulating US dollars or US dollar denominated assets."

The US is currently running a trade deficit, but many of those dollars are winding up, not with foreign CBs, but at the Fed via QE2.

"Bernanke is trying like mad to get banks to lend and consumers to borrow."

Bernanke's goals are debatable. If he was really trying to get banks to lend, why is he paying interest on excess reserves?

Mish's bullet points on why the Fed would not 'cause hyperinflation if they could':

- Hyperinflation by definition would destroy the currency and thus the banks
MH: The Zim dollar is still around. I assume there are still banks in Zimbabwe.

- Hyperinflation would destroy the wealthy and all their corporate bond holding
MH: Any 'wealthy' person who is 100% invested in corporate bonds deserves what they get.

- Hyperinflation would destroy the Fed
MH: Zim central bank still operating, with the same CB president, no less.

- Hyperinflation would destroy the wealthy political class
MH: "destroy" is a relative term. Bloody revoluion, now *that* would destroy the wealthy political class -- literally, as in 'end their lives'. Hyperinflation might reduce their wealth, but the wealthy who play their cards right would still stay on top.

"It is pretty silly to think the dollar will go to zero when all it would take to stop hyperinflation would be convertibility at some high rate."

Interesting thought ... though I think the convertibility should be at a 'high, floating rate'.

"Excuse me for asking but what lifestyle is Bernanke in a race to maintain? Janet Yellen? Anyone on the Fed?"

Does Mish really believe that Bernanke is the man behind the curtain, in charge of the fate of the US? This is the same Mish who constantly harps about the powerlessness of the Fed.

"The US is not the only country with massive structural problems."

But the US is the only country with the world reserve currency.

Michael H said...

Ash,

I'm looking forward to part III of your series. I enjoyed parts I and II.

I especially liked the distinction of 'use value' vs. 'exchange value'.

I know it must seem like you've answered this before (so feel free to copy and paste or paste a hyperlink to a comment), but -- you refer to freegold theory as "fatally flawed". What is the fatal flaw?

Michael H said...

radix46,

"Whilst it (the 1001st) may technically have the same value, in terms of what it can buy, as the first ounce ..."

I think this is what FOFOA is referring to when he says the marginal utility of the 1001st ounce is the same as the 1st.

"it wouldn't have the same value for me. In fact, this effect would kick in for me way before the 1001st ounce."

Replace 'dollars' (or other currency) for 'ounce' and you see that it is the same as we have now with currency-denominated savings. With the difference that everyone knows that currencies lose value over time, so that adds further incentive to reduce one's cash balances.

Will this affect the stability of the post-freegold gold price? Does this dynamic affect the stability of the current currency purchasing power?

Michael H said...

Ash,

I should have read further down the comments. I suppose the answer to my question of the fatal flaw in freegold is

"As I stated at the beginning and end of the article, the inherent problem is insufficient effective demand, and having a reference point does nothing to solve that problem. "

To which I say: 'insufficient effective demand' sounds a lot like the effects of 'malinvestment'. It is a problem of the real economy, caused by the financial system.

I see freegold as a way for the industrial system to (at least partially) extricate itself from the clutches of the financial system. I think what you are trying to say is "you can't get there from here", i.e. correcting the malinvestment will destroy the world economy and so freegold, which requires a functioning world economy, is impossible.

Michael H said...

Martin Millnert, Edwardo,

As far as accepting 'gold' as collateral -- This seems to me to be a last-ditch effort to save the dollar-financial system. Bullion banking provides dollar liquidity, not gold liquidity.

One detail to look for would be what is meant by 'gold'. Even the term 'physical gold' is not as cut-and-dried as one would expect.

enough said...

FIGHT FIGHT !!!

it's on.... Mish vs FOFOA in a battle Royale !!

get your tickets early..........

last quarter of piece, Mish attempts a dropkick. Time for FOFOA to come with a body slam !!

http://www.marketoracle.co.uk/Article28325.html

CandyMonkey said...

Thanks FOFOA.

Freegold is so simple. So clean. I think that is where most get tripped up. There is an underlying assumption that money and monetary policy have to be complicated. It only gets complicated when money is not honest because lies have to be created to cover for that reality. With Freegold, it is the opposite.

Now, when does Freegold happen? That is the $50,000 question!

The CandyMonkey is out!

jthenewer said...

Radix, that 1001st ounce of gold can be exchanged for just as wonderful an object/asset/plaything as the 1st ounce. That is, the utility of the ounces is just the same. I think the point you're making is more that if you were wealthy you might run out of things to buy - that's different from the marginal utility of gold falling off, which it DOESN'T do - in comparison with true commodities.

J The Newer

Polly Metallic said...

I enjoyed this treatise very much, and continue to find the premise of Freegold a logical outgrowth of our current US$/economic death throes.

In the last couple weeks I’ve read many of your articles, and have also read Another's original writings. Back in 1999/2000 I read on USA Gold the various FOA posts, but I never read the posts from Another in the Kitco era. It was great to find, what was to me, new material from Another.

It will take time, but I would like to explore how events in the last 10 years may have subtly changed Another/FOA’s predictions. While the scenarios they expected did not play out in the expected timeline, I don’t see anything that has occurred which is an impediment to the realization of Freegold. Changes that unfolded include the end of most forward selling, buying back mining companies’ hedged gold, the extended time period of gold’s (carefully conrolled) price ascent (and I wonder who most benefitted from the additional time), the growth of a additional physical supply via all the “cash for gold” outlets, etc.

I have a lot to think about and explore. I really appreciate this site for making me revisit the Freegold concept. When events did not play out as expected ten years ago, I had more or less put the whole concept on the back burner and forgotten about it.

CandyMonkey said...

@indenture

Actually, it is not the marginal utility of the 1001 ounce of gold that you would be concerned with, but rather the preservation of value of the fiat you would be exchanging for that final ounce. If you had no need to use that fiat to purchase goods or services, the question becomes, do I keep my excess wealth in fiat or gold to maintain purchasing power? Since you do not want to purchase goods or services, your marginal utility on goods and services has been maxed out. Fifty Porsches is silly to own as only about one or two really provide utility. But 1001 ounces of gold has infinite utility as you can exchange them for anything at any time and would not lose purchasing power holding them.

Biju said...

@Mike

If/when a fregold takes place, as ANOTHER says private citizens will not be taxed unlike the miners, but

The reason I started to move from bars to to Maple's

- Maples look better than perth/suisse bars
- they have legal tender backing, I would have liked Buffalo but it is costlier and Eagles are 22K.
- There is a possibility that even before a freegold environment, Govt's(like UTAH....others) may not tax legal tender coins for inflation tax.
- Also the buy/sell price of Maple's are same as others(see www.tulving.com).

So I thought better to convert paying a $40/coin rate.

Aquilus said...

FOFOA

Thank you for the latest tour de force. Like Motley Fool, I find it very hard to object to any of the ideas presented – and not for lack of trying. Bravo sir!

Ash

I don’t want to impose with too many comments and tangents here, so if need be I will continue the responses at your site.

I agree with Michael H’s comment regarding your latest post Ash, and I have some further comments on “you can’t get there from here” as Michael puts it.

First, the article is unfortunately very short on examples and very long on flowery prose – the opposite of what I was expecting from you this time based on the expectations you have set. Let us hope that part 3 will deliver the meat and potatoes.

Second, as far as I can tell, your thesis of “insufficient effective demand” does not explain the reason why it is so – it just states it. Or maybe I missed it among the long worded phrases in which case I await part 3 to deliver it in plain words. To me this thesis of “insufficient effective demand” is what I said before I see in your writing – a linearity of thought and a lack of fate in the individual’s capacity. Maybe some will argue it’s inherent to Marx’s theory, but I’m not ready to go there in your case.

I fail to see how you demonstrate anywhere yet that after a hyperinflationary event (and the deflation and mini-depression that immediately always follows) followed by a reference point in gold, there is still anywhere a driver for mal-investment left in the world. At that point trying to play today’s financial games with that currency under that setup would be laughable…

Or maybe you still expect the long drawn out period of deflation in USD first to destroy the world economy first? But I don’t see any good arguments presented for that anywhere, whereas FOFOA shattered that again and again in my view.

On a very personal note, reading the Marxist language, the pompous dialectic theory, brought me back the socialist “economic theory” that I had to endure for years. It was very similar to these articles: rich in ideas, high rhetoric and idealism and fell flat on its face when faced with the reality of the individual’s behavior and needs. That being said, I enjoy reading a different point of view, and I hope that at the end of your expose there is a theory that’s consistent.

I will post any continuation / responses to this on your blog directly until part 3 of your article unless they relate directly to the topics this blog is dedicated to.

Derek said...

FOFOA,

Here's a video recently posted to ZH which shows a barter network in Argentina with time-sensitive (expires) scrip. It very well illustrates the different functions conflated into the modern concept of money and how long term wealth storage need not be part of the equation.

Argetina: Surviving Without Money

Warm regards,

derek

Ash said...

Alright, well, first off, I spent my entire day sailing on a lake, just relaxing and reflecting with some good friends... I recommend people do that if they have a chance... it's an amazing way to just clear the mind once in awhile.

Now, back to the real world of technical economic theories...

Michael H,

I think you are far down the "right path" in terms of understanding the Marxian perspective of capitalism. Insufficient aggregate demand in the economic system, or the "realization problem", is an inherent feature of capitalist relations of production. Speculative finance and its resulting malinvestment has certainly made the process much worse, but that's not to say speculative finance is the root cause of drastic wealth inequality. It is just a natural extension of industrial production and productive finance, both of which could not maintain their current rates of profit and realization without the evolution of speculative finance (or what I would call the Debt-Dollar Discipline.)

Part III will focus on more specific details that reflect how the capitalist system has evolved to inherently create insufficient systemic demand for capitalist products/services, or "sown the seeds of its own destruction", as Marx would say.

Aquilus,

I wanted to make clear in Part II that the problem is insufficient aggregate demand, before delving into the theoretical details of why capitalism endogenously leads us to such a state. That's why Part II focused on Marx's theories of value creation in a capitalist economy, and how his theories are completely distinct from the subjective "marginal utility theory of value" embraced by Austrian economists, such as Menger.

At the end of Part II, I say that we can now return to the problem of insufficient aggregate demand in the capitalist system, as a sum of the commodity and monetary circuits. So I will be discussing that more in-depth in Part III, but I'm happy to answer specific questions regarding that foundation until part III is out.

"On a very personal note, reading the Marxist language, the pompous dialectic theory, brought me back the socialist “economic theory” that I had to endure for years. It was very similar to these articles: rich in ideas, high rhetoric and idealism and fell flat on its face when faced with the reality of the individual’s behavior and needs. That being said, I enjoy reading a different point of view, and I hope that at the end of your expose there is a theory that’s consistent."

I hope you are going into these readings with a somewhat open mind (but suspect you are not), because no one ever understands Marx starting from a clearly anti-Marxist perspective. Doesn't really make sense that they would, right?

If you believe his views are "pompous", high in "rhetoric and idealism" and fall flat on their face "when faced with the reality of the individual's behavior and needs", then perhaps you can restrain from the "flowery prose" and provide some specific examples to support your statements. Personally, I believe the Marxian perspective does the opposite of all those things, while the Austrian school revels in such "pompous idealism". Not much of a surprise, though, right?

Redhill said...

Thank you FOFOA.

Subscribing comments.

Mike said...

Biju,
the reasons you gave me offer no evidence that maples would be tax free over bars/wafers. the reasons you gave me sound more personal.

with that said, i do prefer gold from the country you live in or as close to it.
ie if you live in canada then maples, rcm, scotia would be ideal.

same if you live in the USA, then eagles and buffalo's etc..would also be ideal as i think you would get the most of it and have the least amount of risk when trying to sell.

as far as i know, no gold will be taxed that is owned by citizens so buying maples over say rcm bars is more preference then anything.

Blondie said...

Biju,

Gold is what it is.

As long as it is gold, the shape it is minted in is completely irrelevant.

Any zone taxing gold will be penalized by the movement of capital (gold) away from that zone, and as such it will not be taxed anywhere unless it is taxed everywhere. Considering that gold is currently specifically excluded from taxation in many zones, moves to tax it everywhere seem counterintuitive to me.

sean said...

In this post, FOFOA wrote “Try applying that last paragraph to the concept of Freegold” regarding the discussion by Mises about government bonds and treasury bills as secondary media of exchange [you can find it by searching for the quoted phrase].
I’m not sure – FOFOA, are you raising the question of what happens to government bonds and treasury bills under Freegold? I think perhaps under Freegold they are longer the most desirable secondary media of exchange because that role has been taken by gold. Their interest rates must therefore increase to appeal more to the saver, thus making them more onerous for the debtor. This has the beneficial effect of keeping government spending under tighter control. Does this make sense, or were you getting at something else?

Great post btw. Austrian economics. Get you some!

ebikeguru said...

I certainly think a FOFOA FREEGOLD book would be a winner. I would buy many copies and send them all over! Not to mention kindle and amazon sales.

FOFOA, I just published that how to play golf book I sent you on kindle and amazon. I sold 30 last month, which was my first month!

It costs $14 to submit a pdf for publishing. min 24 pages (haha) In that 14 bucks, you whip up a cover, they send you a proof hard copy and then you approve it for sale. simple as that.

If you cutnpast this article as it is into a pdf as the main treatise, cutnpaste the linked articles into appendices, do a quick table of contents, go to createspace.com, submit it as a pdf, design a front and back cover ( dragndrop with a template of theirs for free), write FREEGOLD on the front, submit it. They even give you an ISBN number. print on demand on amazon (worldwide), and on kindle (worldwide). Kindle sales give you 75 percent of the sale as they just bosh an electronic copy to buyer. Hence my $148 check for first months sales!!

Seriously FOFOA, it would be a doddle to do. Once on amazon, you can put links to it from the blog and garner sales from visitors here too.

P.S I just boshed you the $14.00

:)

Happy to do this for you anyway FOFOA if you give me the nod, as I think this really is an amazing read that I would love to loan out or have on my coffee table to lend to non-trailwalkers and friends alike.

Cheers!



Regards, Fred Quimby

Biju said...

@Mike
yes it just my preference that
- Gold maples have the lowest premium among the legal tender coins in USA.
- the spread between legal tender and small coins(not bars) are the same

Hence I made those conversion.

@Blondie
I guess you know that Gold is taxed differently right now. in USA, we have to pay tax on currency price appreciation, when we sell Gold right now. India adds a surcharge of approx $4/100gms when a person brings gold bullion to India. Also I am just speculating that some Govt may start abolishing taxation before others on certain legal tender coins before others, which can cause those coin values to go higher.

Also currently we do not suffer by buying a Maple over a pamp suisse cards - so what is the downside? Moreover I think the Maples are beautiful, it would be more, if they could replace the Queen portrait with a Bear or something.

During this time before freegold, if at all I need to convert some of my coins for any emergencies, I get a better liquidity selling a legal tender coin than a bar. I would have preferred Buffalo's(24K) but those have a high premium.

Edwardo said...

For everyone's consideration:

http://www.spiegel.de/international/business/0,1518,764299,00.html

DP said...

I have a great theme tune for someone's Second Best Music Blog On The Web, but I don't know who it should be. If you know someone this would be useful for, please would you send it along to them. It would just be too big of a shame for it to go to waste.

Cheers all!

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

Edwardo said...

"If you believe his (Marx's) views are "pompous", high in "rhetoric and idealism" and fall flat on their face "when faced with the reality of the individual's behavior and needs"

-Marx's theories may be many things subjectively, but, objectively, they are profoundly, and unquestionably anti-Darwinian. Capitalism, equally, runs afoul of Darwinism, but, for, as one might imagine, very different reasons. But I digress.

In essence, Marx's theories rest on the necessity of the primacy of the collective to a degree that is, literally, fantastic when viewed through the prism of human evolutionary psycho-biology.

Truly, Marx was a Christian theologian, "To each according to his needs...." is a Biblical injunction, who saw fit to apply un Christian like coercion in order to correct what he perceived to be the core ills endemic in human social arrangements.

"then perhaps you can restrain from the "flowery prose" and provide some specific examples to support your statements. Personally, I believe the Marxian perspective does the opposite of all those things, while the Austrian school revels in such "pompous idealism". Not much of a surprise, though, right?"

-All isms and master discourses engage in pomposity. It goes with the territory. No one who travels down such paths is exempt.

mr pinnion said...

Hi all

I watched a fascinating video on Max Keisers site about bitcoin.
Does anyone think it could evolve into something to rival Freegold?

Regards
Ozzy

star-gazer said...

Thank you for this posting. I started reading Hayek about 15 years ago (Road to Serfdom, etc.) which eventually led me to Mises (Human Action). I did not fully grasp his ideas but had the feeling they were correct. I started reading (silently) your postings a little over two years ago. I also started buying gold (eagles) shortly thereafter and will continue to do so. (I have also bought some silver (coins), which I think/hope will be enough to get me through the transition; my silver is expendable, my gold is not). Bottom line: I now understand Freegold and Mises (et al) far better than I did before. Onward to our destiny! Again, thank you. I will now make a fiat currency donation and then return to silent mode.

Robert said...

I have a question about the geopolitical implications of freegold. If I understand correctly, the flow of gold will virtually stop when gold is de facto remonetized as a reserve monetary asset and stops trading as a commodity on the paper exchanges. If that's the case, then we are back to where we were in the 1970s when the Saudis wanted gold instead of fiat. Assuming the Saudis will want gold for oil in a freegold world, where is that gold going to come from? The US Treasury won't give up what it has left. Without the dollar as the reserve currency there will be no way to keep the flow of gold going to the Saudis through the back door. Does that mean we go to war for the oil? Have I missed something?

Wendy said...

FOFOA,

I know this is off topic, but I went to the creepy map today and there are people from about 150 contries visiting this blog and 35 different contries had viewed as of noon today.

I would enjoy an open forum that asked people from around the world the effects they are feeling as a result of their local economy, and what steps they and their neighbors are taking to save a little bit...

I think it will be interesting to all

Wendy said...

test

Wendy said...

AHA

Blondie said...

Robert,

Oil will be available for any currency in which the expenses can be paid, and for which the portion of the profit margin to be saved in reserve (if any) is exchangeable for gold.

The situation is the same whether a zone is a net oil producer or net oil consumer: net surplus zones will accrue gold, while net deficit zones will drain of it.

Any zone can live beyond its means only for as long as it has reserves to make up the deficit.

Oil will be more highly valued in such an environment.

I know this is not how most people look at it, but in my opinion the age of war is rapidly drawing to a close. We will likely experience some measure of conflict in the shorter term, as the stresses of the consolidation are felt, but war will soon be seen to be as aberrant as our present monetary system.

Just as there are gloomy and complex ways in which to view the future, so too are there brighter and simpler ones. A growing appreciation of the thoughts expressed by FOFOA (and his forebears) has been instrumental in my views evolving from the former to the latter.

Ash said...

Edwardo,

"In essence, Marx's theories rest on the necessity of the primacy of the collective to a degree that is, literally, fantastic when viewed through the prism of human evolutionary psycho-biology."

OK, but would you say that our current global capitalist society does not depend on the collective to a degree that is "literally fantastic". It's as clear as day that financial capitalism relies just as much on central planning to remain viable as a Communist system would. Both of them would (or will) fail, because of diminishing returns to complexity in our global empire. (I highly recommend Joseph Tainter's The Collapse of Complex Societies for further info about empires, collapse and complexity, if you haven't read it already).

Anyway, none of this has anything to do with the original argument... which was whether Marx's theories about capitalism were correct or had any useful insights to provide. I have yet to hear one legitimate criticism of material dialectics, the commodity dialectic (use value vs. exchange value that creates surplus value), or the "realization problem" as wealth is increasingly concentrated in the M-C-M+ circuit over time, and financial ponzi schemes are self-limiting and ultimately make the problem worse.

So how about we quit with the counter-productive arguments about who is more of a pompous idealist than who, and why Communism is evil... and get back to heart of the matter.

Michael H said...

Robert,

(Are you the same Robert that has posted here before? The tone of this post sounds different)

"the flow of gold will virtually stop"

Although the by-weight flow of gold will be drastically reduced, gold will be repriced upwards substantially. This will have two effects:
1 -- coax additional gold out from hiding, adding to the flow
2 -- Increase the value of the gold that does flow, likely to exceed the value assigned to the larger amount of gold that is flowing now.

A third effect, as a bonus to oil states, is that the reserves of gold that they have accumulated will now be much more highly valued by the rest of the world.

mr pinnion said...

Blondie

You say there are gloomy ways to look at the future and brighter ways to look at the future.
I say there are logical ways to look at the future based on past events.Hope you see the funny side of the link below.

http://www.youtube.com/watch?v=peE0l2UaDYU&feature=player_embedded

Regards
Ozzy

Tyrone said...

Can FreeGold stop it?

UN sees risk of crisis of confidence in U.S. dollar
UNITED NATIONS – The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.

In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.

The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.

Edwardo said...

Art wrote:

"I have yet to hear one legitimate criticism of material dialectics"

-I have deliberately avoided this debate, and I have no intention of entering it. My days of arguing about Marxist theory are over. However, I shouldn't think it would be too difficult to find such "legitimate" criticisms since the very basis of Marxism, namely the idea that all of human history is, in essence, the history of class struggle is, itself, reductive, i.e. flawed.

This is not to say that many of Marx's observations regarding the ills of capitalism were not brilliant. If Karl Marx never said anything else about capitalism but "All that is solid melts into air, he would still, for me, merit attention.

"So how about we quit with the counter-productive arguments about who is more of a pompous idealist than who..."

-Perhaps that comment was meant for someone else, otherwise it seems gratuitous, since I haven't engaged in any such arguments.

mortymer said...

Global liquidity: a view from Basel
Jaime Caruana
General Manager, Bank for International Settlements
International Capital Markets Association Annual General Meeting and Annual Conference
Paris, 26 May 2011

http://bis.org/speeches/sp110526.htm?ql=1

"...In my remarks this afternoon, I shall make five points, which will address different but related aspects of the debate about global liquidity:

# First, your role as credit originators makes you a key source of global liquidity.
# Second, as a case in point, I will highlight the contrast between shrinking dollar credit to private borrowers in the United States and expanding dollar credit to borrowers elsewhere, all with a single policy rate determined by the monetary authorities.
# Third, international credit tends to amplify domestic credit booms, posing first-order policy challenges.
# Fourth, during the run-up to the global financial crisis banks’ maturity mismatches made financing within and between currencies very easy, but made banks vulnerable to rollover risk.
# Fifth, macroprudential policy and Basel III provide key mechanisms to stabilise your provision of liquidity...."

rblong2us said...

at the end of Mish's article on 'how to dig yourself in deeper', he comes up with these words -

"The question now is whether or not we will see deflation again, and if so how quickly.

Inflation vs. Deflation

The US is certainly in a period of inflation now by my model. Home prices are making new lows and credit is in a funk, but most conditions appear inflationary at the moment."


So it would appear that he is not quite so confident in a deflationary outcome.

Looks like FOFOA has tipped the balance on this discussion.
Certainly was the final nudge that convinced me.

FOFOA is able to identify the bigger picture and this is why his work stands out.

Thank you FOFOA and all you commenters for real knowledge.

rbl

thedeadfauvi said...

http://www.voltairenet.org/article170083.html

This idea was debated at the G8 summit at L’Aquila (Italy) on 8 July 2009. Pushing the pin further, Russia submitted that the new world currency should be minted rather than being virtual. Dmitry Medvedev, who had a few sample of coins minted, slapped them on the table. One side displays the faces of the eight Heads of State, whereas the flip side bears the motto "Unity in Diversity"

Is that one step back for RPG?

Ash said...

Edwardo,

"Perhaps that comment was meant for someone else, otherwise it seems gratuitous, since I haven't engaged in any such arguments."

It was directed at everyone talking about the traits/flaws of historical economists on this thread, including myself. I wouldn't count you out as someone who participated, though...

Marx's theories rest on the necessity of the primacy of the collective to a degree that is, literally, fantastic when viewed through the prism of human evolutionary psycho-biology.

Translation: Marx was an anti-Darwinian idealist.

Now, I could have gone on to argue about Darwin's theory of evolution and why it is by no means an "objective" argument against political structures based on collective ownership and social cooperation, but that would be way besides the point... so I didn't.

I do think it's rather gratuitous that you responded to my comment as if I was Art, whether intentionally or accidentally! (nothing personal, Art)

"...namely the idea that all of human history is, in essence, the history of class struggle is, itself, reductive, i.e. flawed."

Actually, he said that the history of all human societies has been the history of class struggle (my paraphrase)... not "all of human history". With that revised statement, maybe you could further explain how it is "reductive" and flawed.

Most of Marx's "brilliant" insights about capitalism rest on his foundation of "historical materialism", so it is far from unimportant.

Honestly, I'm not trying to draw you into an argument so I can "prove" to you that I am right and you are not. I am legitimately interested in hearing other points of view about socioeconomic/philosophical theory and either exposing their flaws, or if I can't, contemplating them further. That's why I've spent time going back and forth with the hardcore Freegold advocates here... because I certainly have no illusions of being able to convince them of my fundamental position, and I am confident they don't either.

costata said...

thedeadfauvi,

I don't think that gesture by Medvedev was a step backward for Freegold-RPG. He made a strong impression at the meeting by showing those gold coins. I think the point he was making was that gold has to be a key part of the solution. The coins were "stage props".

That's my 0.02 FWIW

thedeadfauvi said...

Costata,

thanks for your attention.
It is not just the quote I submitted, which is quite clear in itself, it's about the whole article from voltairenet, which explains more or less clearly the situation addressing the DSK arrest, the behind the scenes.

Voltairenet is very investigative explaining some world power structures, alliances, without deploying the so much hated conspiracies, which - depending of one’s own notion about “conspiracy” however exist and have always existed.Maybe you might find some spare time to look at it.
Even if RPG is the natural evolution of the monetary system, is implementation is multifactorial and so dependent on these structures.

And by the way, FG will never be the rosy landscape some people (Blondie)hurry to envisage. It will bring some advantage only for those in the know, nothing new.

Robert said...

Blondie, Michael H,
I appreciate the replies, but I think you are both taking my question too literally. The situation you both describe seems precisely what was politically unacceptable in 1979. Is it any more politically acceptable today? Under a freegold scenario it seems that gold flow would be cut way back, gold would be valued much higher than it is today, and the price of oil (in gold) would be sky high. The developed and developing world is going to resist that. And of course the 800 pound gorilla, China, is going to resist that. All this resistance is going to be in the form of continued support for the ever-weakening dollar, if for no other reason that to keep oil and gold flowing. Can you really see China pulling the plug on the dollar if the effect is to dry up oil and gold flows denominated in cheap dollars?

thedeadfauvi said...

The reality in Greece:

http://coveringdelta.wordpress.com/

Not only debt v. saving
but
organised theft v. sovereign

Edwardo said...

"Actually, he said that the history of all human societies has been the history of class struggle (my paraphrase)... not "all of human history". With that revised statement, maybe you could further explain how it is "reductive" and flawed."

-It's not reductive AND flawed. It's flawed by virtue of the fact that it's reductive. After all, to be reductive means to either leave out or under emphasize important factors to such an extent that one's analysis or theory is undermined.

Marx's foundational premise of "class struggle" as THE defining feature for all of human society either leaves out, or elides many aspects of the human condition that have profoundly shaped human civilization.

Greg said...

"The idea with competing currencies, since the political will towards ending the Fed had pretty much dried up in the 80s, was to make it legal for gold and silver to trade as currency. With gold and silver contract settlement supported by the courts, "obviously" (presumably) they would win out over fiat in the currency competition of the free market."


If the courts are enforcing the competition then its not free is it?

Which just goes to show that its not "money" which needs to be honest ........ but people! If the honesty is only as good as the legal contract backing it, now we have to know the honesty of those making the contract........

Money is never honest or dishonest, people are.

If we subsidized renewable energies at the same level we subsidized coal,oil and natural gas, THEY would probably win the energy competition too. Who wouldnt rather have their entire energy generation source on their roof or in their own yard.

debtfreecitizen said...

How do valuate gold miners after the split to paper and physical gold has occurred?

Ash said...

Edwardo,

"It's not reductive AND flawed. It's flawed by virtue of the fact that it's reductive."

I know we're getting real nit-picky here... but your second sentence contradicts your first sentence. Anyway, I knew that you were saying "it's reductive, therefore it's flawed."

I believe you are completely misinterpreting his premise, though. It is possible for something (i.e. class conflict) to be the defining feature of societal evolution, but for other important factors to feed off of and into that feature as well. The key thing to remember is that those factors are not independent from each other (i.e. the political factors are not independent of the socioeconomic factors, and the latter are more fundamental drivers than the former).

As an analogy, think about the defining features of biological evolution. Those would have to be mutation and natural selection, but there are many other biological factors influencing evolution that stem from those foundational processes.

Steveo said...

I posted up a petition seeking to re-instate increased radiation testing, please sign it, takes less than 60 seconds.

http://oahutrading.blogspot.com/

Edwardo said...

Ash wrote:

I know we're getting real nit-picky here... but your second sentence contradicts your first sentence. Anyway, I knew that you were saying "it's reductive, therefore it's flawed."

-Um, no, Ash, it doesn't. And if you knew what I was saying than you might have written something that made your understanding plain.

"I believe you are completely misinterpreting his premise, though."

-Perhaps, however, it is at least as likely, if not more likely, that Mr. Marx should have done a better job stating exactly what his premise consisted of or folks like you wouldn't still-approximately one hundred and fifty years on- be in the position of offering after the fact correctives. That's a kind explanation of why there are so many alleged "misinterpretations."

"...The key thing to remember is that those factors are not independent from each other (i.e. the political factors are not independent of the socioeconomic factors, and the latter are more fundamental drivers than the former)."

-Yes, "systems" generally have many interdependent strands some of which are dominant, others not. However, as I'm sure you know, that doesn't make the case for Marx's view of human history, not even theoretically.

dojufitz said...

Has anyone sent this blog to the head of the IMF? Do these guys know there are people trying to work out a solution to the current financial malaise who are not working for the govt? Holy jesus - these pen pushers don't seem to come up with any ideas at all! Whene is someone going to have the balls to say enough is enough.

Ash said...

Alright Edwardo... it shouldn't be too difficult for you to understand that if something is flawed by virtue of it being reductive, then it can be described as being flawed AND reductive. Those are both adjectives that would be able to independently describe Marx's premise...

By virtue of the fact that you couldn't grasp that simple logic, and you clearly have not taken the time to actually read Marx's work before acting like you understand his view of historical materialism from one popular phrase he wrote...

I'm going to stop wasting my time.

mortymer said...

King is dead. Hail to the King!
or
When the Match sparks the light...

http://en.wikipedia.org/wiki/Ivar_Kreuger

[Mrt: financial inventions, off-balance sheet entities, derivatives, loans to governments and other financial engineering]

mortymer said...

@Ash, Edwardo about Marx...

The thing is that the discussion is rather flat and for a deeper understanding one really needs to study the matter in depth. I have for you some reading about the subject so it would be nice to know what do you think about it... maybe after that the talk can move forward?

"As we shall see later, the shift from one to the other was associated with a separation of control from ownership in economic life. The shift was also associated with what we might call a change from a two-class society to a middle-class society. Under industrial capitalism and the early part of financial capitalism, society began to develop into a polarized twoclass society in which an entrenched bourgeoisie stood opposed to a mass proletariat. It was on the basis of this development that Karl Marx, about 1850, formed his ideas of an inevitable class struggle in which the group of owners would become fewer and fewer and richer and richer while the mass of workers became poorer and poorer but more and more numerous, until finally the mass would rise up and take ownership and control from the privileged minority..."

http://ia600202.us.archive.org/6/items/TragedyAndHope/TH.pdf

[@Ash, Edwardo: just search "Marx" to find more, page46 onward. I do not claim it is correct, it just offers some very interesting points and insight to consider. Its a bit longer but its needed to understand what was happening in that time]

mortymer said...

Tragedy and Hope
A History of the World in Our Time
By
Carroll Quigley
Volumes 1-8; New York: The Macmillan Company; 1966

http://ia600202.us.archive.org/6/items/TragedyAndHope/TH.pdf

"...Great Dates in World History
Credit had been known to the Italians and Netherlanders long before it became one of the instruments of English world supremacy. Nevertheless, the founding of the Bank of England by William Paterson and his friends in 1694 is one of the great dates in world history. For generations men had sought to avoid the one drawback of gold, its heaviness, by using pieces of paper to represent specific pieces of gold. Today we call such pieces of paper gold certificates. Such a certificate entitles its bearer to exchange it for its piece of gold on demand, but in view of the convenience of paper, only a small fraction of certificate holders ever did make such demands. It early became clear that gold need be held on hand only to the amount needed to cover the fraction of certificates likely to be presented for payment; accordingly, the rest of the gold could be used for business purposes, or, what amounts to the same thing, a volume of certificates could be issued greater than the volume of gold reserved for payment of demands against them. Such an excess volume of paper claims against reserves we now call bank notes...."

[Mrt: I hope this tiny bit can give you courage to go check this more than 1000p paper]

mortymer said...

...seems based on comments Freegold is not anymore "in", then maybe we should appreciate Freebeer.
Already in a version 4.0!

http://en.wikipedia.org/wiki/Free_Beer
http://freebeer.org/blog/

costata said...

Hi All,

I have just uploaded another one of the series of 'longer responses' to the feedback from the silver open forums. It should be viewable in the comments at open forum part 2 shortly.

Cheers

Blondie said...

Mortymer,

Regarding your Carrol Quigley quote on the creation of The Bank in 1694 and it's employment of credit:

"... a volume of certificates could be issued greater than the volume of gold reserved for payment of demands against them. Such an excess volume of paper claims against reserves we now call bank notes...."

The following is pertinent:

"... at some point, every credit extension must return to be based, in however minuscule a fashion, on some deposit of gold in some bank somewhere in the world."

Inflation is the term for this process. Post 1694 the British and then the American Empires were bankrolled with inflation, as enabled by the banking system based upon the BOE.

As we are aware, The Ponzi is always continued via the blowing of more bubbles, and this has been continuously practiced for 314 years, until 2008.

"First, wiping out the inhabitants of continents & re-populating them subject to charters, contracts, loans & investments (all tremendously inflationary). Secondly, leveraging the utilization of vast virgin resources via the slave trade. Then, for the grand finale, the whole enchilada was capped off by the kingpin, fossil fuels (first coal, then oil)."

Robert,

What was politically untenable in 1979 is indeed just as unpalatable today, but things are different. What worked in 1979 is not possible now. Peak credit occurred in 2008.

This is the end of the 317 year old system; rather than a pothole, this is the end of the road, Wile E. Coyote style.

There has already been, and continues to be, massive resistance to this conclusion in order to "keep the show on the road". The half-life of these efforts is diminishing steadily.

Politicians and bankers are not omnipotent, as they (and we) are now discovering.

The point at which every extension of credit returns to its source, some minuscule quantity of physical gold, is nigh. A grand deflation not against the reserve currency, but against the reserve asset.

Freegold is the result of this collective systemic response.



Mr Pinnion,

I enjoyed your video. It made a very good point.

The question then becomes in regard to pessimism/optimism "is the tide incoming or outgoing in one's values", does it not?

If the things one values are on the increase (peace/equilibrium in all manner of forms), then the glass is half full, whereas if they are on the decrease the glass must be half empty.

I posit that in the shorter term these values may indeed be in shorter supply, but in the medium-long term will be in abundance.

mortymer said...

@Blondie, a very fine reading this Carrol Quigly, tons of details a new stuff for me... I was surprised how much one can research with no internet (1966).

On similar note to your comment:

http://www.321gold.com/editorials/moriarty/moriarty053011.html

"The Ticking Time Bomb

Bob Moriarty
Archives
May 30, 2011

When I was young and in college we used to ask ourselves rhetorical questions just to show we could think. A favorite was, “What happens when an irresistible force meets an immovable object?” And the answer was, “Immeasurable energy.”

We are about to learn if that thesis is true or not. The irresistible force is the $600 trillion in derivatives. The immovable object is the $60 trillion world economy. Basically a $60 trillion economy cannot support a $600 trillion bucket of used lottery tickets that everyone wants to pretend still have some value. They don’t.

The only real question is just how much actual money is left and I suspect the answer is “near zero.” That’s the ticking time bomb.

I’ve always believed that the growth in derivatives from a low of about $60 trillion in 1997 to its high point of about $800 trillion in 2008 was the foundation stone for credit running totally out of control worldwide.

Brooksley Born famously attempted to regulate the Wild West environment of derivatives in 1997 only to be slapped down in a classic Washington DC turf war led by Alan Greenspan, Larry Summers and Robert Rubin. We are going to rue the day she lost that battle..."

Casper said...

Hi Mortimer

nice find... I'm getting through some parts that are directly tied to monetary/banking/economic issues although I'm aware that you can't judge/explain world events solely on that. I don't think I'm going to read the whole 1.000 pages but a few hundred can be managable.

Casper

mortymer said...

"Fostering Africa's growth in the New Reality - From Vision to Action" Address by Rundheersing Bheenick, Governor, Bank of Mauritius at the Opening Plenary of the SWIFT Africa Regional Conference, Mauritius, 30 May 2011 (Audio File)

http://bom.intnet.mu/Default.asp?id=40462

Michael H said...

Robert,

"... gold flow would be cut way back, gold would be valued much higher than it is today, and the price of oil (in gold) would be sky high."

If gold flow is reduced and gold is valued higher, then the price of oil *in gold* would be much, much lower. That low gold-oil price is at the center of the freegold-gold-revaluation thesis.

"The situation you both describe seems precisely what was politically unacceptable in 1979. Is it any more politically acceptable today?"

Yes, it is more politically acceptable today. In the 1970's, for starters, the dollar was the only currency available for world trade. Collapse of the dollar would have curtailed world trade, and so both the US and the rest of the world aligned to support the dollar's continued use.

As ANOTHER/FOA pointed out, the birth of the Euro meant that the R.O.W. had one less reason to support the dollar.

Of course it is still politically unacceptable to the US, but the US is only one country, and eventually it won't get what it wants.

"The developed and developing world is going to resist that. And of course the 800 pound gorilla, China, is going to resist that."

I think the R.O.W. will welcome the opportunity to finally crawl out from under the dollar yoke.

"All this resistance is going to be in the form of continued support for the ever-weakening dollar, if for no other reason that to keep oil and gold flowing. Can you really see China pulling the plug on the dollar if the effect is to dry up oil and gold flows denominated in cheap dollars?"

Currently, you are correct: as long as the dollar buys cheap oil and cheap gold, the R.O.W. will support it. But no further.

Edwardo said...

"...then it can be described as being flawed AND reductive."

-That's redundant, which is why one needn't, one shouldn't, bother using both words in the manner that you insist on. By your less than pristine logic you would appear to run the risk of routinely describing people in hospital as both sick and ill, malnourished people as both hungry and famished, etc. etc.


"By virtue of the fact that you couldn't grasp that simple logic, and you clearly have not taken the time to actually read Marx's work"
before acting like you understand his view of historical materialism from one popular phrase he wrote..."

-That paltry and pathetic ploy will get you nowhere.

"I'm going to stop wasting my time."

-Excellent! While your at it, Ashhole, take it one step further and stop wasting any one else's time too.

Ash said...

Mortymer,

You may be interested in Part III of my gold series, as it will focus in detail on the results of Marx's "realization problem" in a financial capitalist system. The argument also goes hand in hand with Quigley's thesis in Tragedy and Hope (which has nothing to do with some kind of unified pro-Communist conspiracy to destroy capitalism, as many have claimed).

Note that Quigley essentially follows Marx's theory of material dialectics (or "historical materialism") when discussing the evolution of human society through history. He also recognizes that Marx failed to anticipate the extent to which the internal crises of industrial capitalism would be postponed or transformed by fossil fuels and finance, which is something I mentioned in Part I of my series.

However, in a similar vein, Quigley did not really anticipate the extent to which financial capitalism, under the framework of speculative finance, would make a resurgence in the 1970s, after he wrote the book. It was the evolution from Foucault's "disciplinary society" under industrial/financial capitalism to Deleuze's so-called "control society" under corporate financial capitalism.

Anyway, I will post a link to Part III in FOFOA's comment section when it is up.

pipe said...

FOFOA-I liked your diagrams, and I'm o.k. with your break points on the time lines.

There is still a lot of work to be done, however. This link, http://www.321gold.com/editorials/moriarty/moriarty053011.html, is a current editorial by Bob Moriarty at 321gold. I often disagree with him, but he really nails it here. Basically, all the bond holders and OTC Derivative holders are bag holders, holding on to phantom wealth.

We're nearing the end of a grand super cycle. Shoehorning this phantom wealth into gold won't do any good. Bonds that are not tied to a reliable income stream are a phantom store of wealth. An example of bonds being true (wealth) storage objects would be bonds used to finance a toll bridge. But most bonds are just call options on future tax receipts.

As this phantom wealth is recognized for what it is (and isn't), governments in debtor nations will be forced to contract, as will the world economy and international trade. During the long adjustment period there will be a lot of competing currencies for the various roles of money, and they will vary from country to country.

As silver is re-monetized in many countries, it will be too expensive for industrial use and industry will find replacement metals. Monetary silver stock piles will be gradually rebuilt, and countries that don't get on the silver program will eventually be shut out of international trade.

holdinmyown said...

"Its meaningless to speculate about the ultimate price of gold. It is impossible to know how many zeros will be added valued in today's money" (my paraphrase of Egon von Greyerz in the following interview with James Turk)

http://goldswitzerland.com/index.php/james-turk-interviews-egon-von-greyerz/

Blondie said...

Jesse, in the same vein as my last comment:

"It is said that a shark must keep growing and moving to remain alive, and can never be at rest. It must continually devour all that it can to survive.

This is the nature of a Ponzi scheme as well, since it is founded on nothing more than a growing believe, and misplaced trust. It can ultimately tolerate no dissent, and needs continue to add converts to it, whether it be by persuasion or force.

And therefore we have the not incidental connection between a global fiat currency such as the American Dollar or the British Pound and a far reaching military-political empire. When the empire stops expanding, the currency begins its slow but inexorable decline."

JR said...

Pipe says:

Shoehorning this phantom wealth into gold won't do any good. Bonds that are not tied to a reliable income stream are a phantom store of wealth.

FOFOA not talking about shoehorning phantom wealth in
How Can We Possibly Calculate the Future Value of Gold? :

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

Edwardo said...

This is a tad OT, but I think it's interesting to say the least.

Lee Adler asks:

"Is it a coincidence that on the eve of the final month of QE2 the CME announced margin cuts on stock
index futures at the market close? Is it a coincidence that the market began to move a half hour before
that? No it’s not."

Ponder it, margin cuts. Recall that silver futures recently were subjected to a series of margin increases designed to halt silver's rise. I posit we now have the inverse of that condition in stock index futures. I smell the whiff of desperation.

Robert Mix said...

To be clear to your other commentators, my name now comes up as Robert Mix, my real name. I used to be "Just Another Robert" (JAR, so I am happy that is now clear. Perhaps FOFOA made the change or perhaps it Google itself (see end of my comment).

I skimmed again the long, long article. It is going to take another read for me to fully grasp all the material you have presented FOFOA.

---

But I have a pair of questions that might have some impact of Freegold. Maybe I have missed something (most probably), but I believe that ANY intellectual position should be open to debate, question or challenge.

"It is likely that there are fewer paper claims on gold OUTSIDE the USA than within the USA. My question would be how does that affect Freegold? Yes, I have seen other independent commentators say similar things that FOFOA does about the 100 x "paper gold" vs. real physical gold. But, that would be here within the USA, correct? If, say in India, there are few "paper gold" claims, would that weaken FOFOA's position that gold will have the BIG quantum-like jump in the price of gold?

I have seen this other question (perhaps at Zero Hedge) too: How would India's large physical holdings be affected by a Freegold price of $55,000 / oz? India would then instantly be very wealthy if so. And I cannot believe that if the USA price vaults to a very high price, that the rest of the world would have the same price. Or else all the foreign gold would come here. Perhaps this question has been answered already, and I have missed it."

I would be interested in response to my above questions, thanks!

---

It might be due to the fact that I now have a blog that changed my name here, I also blog with Blogger.

I am not an expert in ANYTHING really. I do closely follow gold and some other subjects, but cannot claim to be an expert.

(For example, the quality of the comments here is very good, over my head even in some cases, and it took me DAYS to finally finish "Honest Money")

But, I do invite anyone to my blog. Instead of sending me an email (like I earlier did above), I now just show the link. I made zerohedge.com people do this because I was concerned about the secretive nature of the place and the large number of trolls and malefactors. I see little of that here.

Please feel free to stop by my blog, where I cover gold and a variety of other topics in a much less challenging manner than FOFOA covers his.

Everyone. Please consider this comment to be a compliment to you all (even when I asked those two questions about how gold and paper OUTSIDE the USA factor in to Freegold).

Robert Mix
robertmixblog.blogspot.com

JR said...

Hi Robert Mix,

re: India and Freegold, check out this to start:

http://fofoa.blogspot.com/2011/04/reference-point-gold-update-2.html?showComment=1302478649512#c6219658602927266758

costata said...

Hi Robert Mix,

I think you need to keep in mind that currencies will float against each other as well under a Freegold-RPG regime. The rupee could appreciate significantly against the US$ after a collapse in the value of the dollar.

If the average middle class Indian family is suddenly much wealthier it could also help to make the transition smoother eg. by boosting international trade during a period when US imports are reduced.

It's a big challenge trying to analyse the economic impact on other countries of the forces at work on the US$ and the US economy.

mortymer said...

Randal Strauss Farewell?

http://www.usagold.com/cpmforum/

"RS View: Adieu, my friends and fellow travelers! Over these past dozen years I hope I’ve succeeded in helping you to embrace a new thought or two, not least of them being this most basic premise: Any given national currency can indeed serve well enough for standard banking practices in our fast-paced modern lives (think here in terms of financing/borrowing requirements, checking accounts, and various cash/credit/debit transactions). Don’t sweat the small stuff — it’s here today and gone tomorrow. However, and this is vital, when your needs turn instead toward consolidating those various nondimensional incomes and/or bank accounts into true wealth suitable for mid- to long- term savings, for reliability and soundness nothing beats financially-unencumbered unfractionalized/nonderivatized physical gold. Get you some. — Randal"

mortymer said...

Mortymer presents European commission & LBMA :o) A very very nice catch today...

R192
March 2007
Public consultation - Update for units of measurement directive
Subject : Consultation on the Units of Measurement Directive (80/181/EEC)

http://ec.europa.eu/enterprise/sectors/legal-metrology-and-prepack/files/r192_en.pdf

"...Potential Impact of a Change to Metric Units on the London Market As mentioned, the US gold and silver markets also use the troy ounce, the main markets being exchange based (COMEX in New York and the CBOT in Chicago). Although they do operate a physical market, this tends to be domestic. Therefore, if business were to be diverted from London it is probably more likely to migrate to Switzerland rather than the U.S.A. The Swiss market, although much smaller than the London market, is a physical market. Previously when the London market was closed temporarily in 1968 following the collapse of the Gold Pool, a lot of business was diverted to Switzerland and it took many years to win that business back. Over the years, the Zurich market has suffered from a combination of bank mergers and transfers of key functions to the London market but there are currently clear signs that the Swiss market is eager to compete with London again. Moreover, the London market until recently had two Good Delivery gold refiners but these have now closed whereas Switzerland has five active gold refiners. Consequently if the London Market were to suffer disruption and / or became less competitive, there is a real possibility that the business would flow to Switzerland to the detriment of the UK’s (and the EU’s) financial market earnings..."

[Mrt: metrics or ounces? London or Zurich?]

mortymer said...

The application of the Mutual Recognition Regulation to articles
of precious metals; Brussels 1.2.2010

http://ec.europa.eu/enterprise/policies/single-market-goods/files/mutual-recognition/precious-metals/precious-metals_en.pdf

DP said...

@FOFOA, at what point does Ash admit that his ideas are in no way a refutation of yours (the sole topic of discussion at your blog) and that he is just hijacking this forum to try and squeeze a little extra traffic to his doll's house where he is welcome to talk about whatever he wants to talk about?

Just sayin'.

radix46 said...

Mortymer is definitely a candidate for MVP.

dojufitz said...

When is it all going to happen.....zzzzzzzzzz year 9091? I've asked about the time frame before and got a 'Time doesn't matter' response.......

i think i'll go back to sleep.........ZZZZZZZZzzzzzzzzzzzzz

Michael H said...

pipe says,

"There is still a lot of work to be done ..."

You better get to work then. Let us know when you are done.

mike said...

Just watched this short movie and thought of this post...

http://www.youtube.com/watch?v=PDKeQ4IACJ4&feature=player_embedded

[@15:40] what's the difference between this [barter credit] and this [official money] ? They're both paper and ink. But both of them have very different characteristics. This is money of formal use. It's monopolized by the state. This one is a social currency, it's made by the people and it's decentralized. Money can be used to cancel out debt, social currency is used for exchanging. Money is linked to a property known as interest which in some way reproduces itself. Whereas this currency not only has no interest, but it's value expires after a certain time... so it doesn't accumulate.

Honest Money ?

~Mike h

Robert LeRoy Parker said...

I'm curious if anyone has or has knowledge of someone else attempting a freedom of information act request in regards to the Fed's gold swaps?

I'm sure it would be stonewalled, but it might be worth a shot.

Robert LeRoy Parker said...

Well, nevermind. This answers that question.

Gold Swaps Protected Under Exemption 5

What a crock of shit.

Texan said...

Gold only thing green on my screen today. And Apple of course (poor Nokia).

Very, very impressive.

Ash said...

Part III of my series on gold, which focuses on Marx's "realization problem" and its implications for the global financial system, which IMO cannot be saved through any process of monetary recapitalization:

The Future of Physical Gold (Part III - The Final Realization)

Biju said...

Ash : I did a quick reading of the end part of your essay.

I don't agree that the super wealthy will be re-capitalized. Most super-wealthy own real assets - not Gold.

My thoughts.

(1) It is the CB's/Indians/Arabs, who will be re-capitalized. If they want they can re-capitalize the bank also by revaluing gold higher and backing the bank reserves with Treasurey/CB Gold.
Govt can also re-capitalize people by having a mechanism to distribute Gold to people via mint.

(2) All the Govt debts can right away be paid in high priced Gold, and trade can continue and balance of trade settled in small amounts o Gold. I don't see a HI in this scenario, if Govt reprices Gold higher, instead of waiting for dollar<->Gold markets to fall via paper defaults or external palyers to repudiate dollar debts. In the later case it can lead to HI, so just before China/others repudiate reprice Gold higher and avoid pain.

Biju said...

Ash :

Also come to think of it - why should middle class folks be re-capitalized with Gold. They alaready have net woth of Zero(when their debts cancel their assets).

- So as FOFOA said(I think), let the GOvt open the Gold window before HI and sell/buy Dollars for Gold with a high initial price and let it float and see if debt holders will come for the Gold or stay in Treasury debts.

- Regarding your question as how Middle class with create demand , just like today by working and paying of debts and their excess currencies converted to Gold. But if HI happens before freegold, then all debts and savings are wipted out and after pain, everyone starts clean again.

costata said...

mortymer,

That piece about the physical trade moving to Zurich is a brilliant find. Outstanding detective work.

Perhaps we should also be reminded that the Rothschild's stunned a lot of people when they pulled out of the London gold market (around 2004 if memory serves me). I wonder if they severed all of their links with the gold market at that time LOL.

Has everyone noticed how strong the Swiss Franc has been lately? The Euro has been rather firm as well? Is some big money on the move?

Ash said...

Biju,

First, I don't believe you are accurately assessing the process of Freegold at all, as described by its advocates here.

Besides that, I was not really asking a "question" about how the middle class will create demand... I was making an argument that the middle class of developed economies and "emerging markets" will barely exist by the end of this decade and will therefore be unable to provide sufficient aggregate demand, based on the structural instabilities of the financial capitalist system that have evolved over centuries.

To understand why/how I come to that conclusion, you should really start from the beginning of the article instead of skipping to the end, since the latter is where I am merely applying the already established argument about the "realization problem" to the specifics of Freegold.

Aaron said...

@Ash

Given I’m a noob to Marxism, perhaps you can help me out here.

A quote from Part III from your series on gold

“Perhaps this process is an accurate description, at least to some significant extent, but that means the debtors are necessarily defined as anyone who does not have a majority of his/her savings in physical gold.”

"Necessarily defined?" I don't get it. You have to own gold to not be a debtor?

"Let us take two commodities, e.g. corn and iron. The proportion in which they are exchangeable, whatever those proportions may be, can always be represented by an equation in which a given quantity of corn is equated to some quantity of iron: e.g. 1 quarter corn = x cwt. iron. What does this equation tell us? It tells us that in two different things - in 1 quarter of corn and x cwt. of iron, there exists in equal quantities something common to both. The two things must therefore be equal to a third, which in itself is neither the one nor the other..."(Capital)

Marx argued that what they all have in common is the fact that they are all products of human labour. It is human labour that has created them and it is the amount of human labour that goes into them that determines value. He writes:

"The value of one commodity is to the value of any other, as the labour time necessary for the production of one is to the other."(Capital)

I understand the value of labor -- hell, I’m a no-till gardener and organic beekeeper -- but Reference Point Human Labor? There’s a lot of variability in there. I can grasp how RPG will work, but how will RPHL work? Gold is fungible and divisible -- humans are not fungible and divisible and as such human labor is not fungible and divisible.

If I’m not mistaken you believe fixed capital (cost of machines, rent, heat) plus variable capital (wages paid to laborers for labor capital including labor time) should equal the final price of the good produced when valued (priced) in currency. I realize I’m getting into ideology here, but if after paying my operating costs I distribute my gross profit as wages, where is my savings?

--Aaron

Diamond Jack said...

It's the end of the world as we know it.

And I've got gold.


Greensmoothiegirll.com

Better than moonshine.

Ash said...

Aaron,


""Necessarily defined?" I don't get it. You have to own gold to not be a debtor?"

If you hold most of your "savings" (excess wealth after consumption) in fiat currencies or derivative assets, are you not technically a part of the debtor system according to Freegold? Personally, I would hesitate to use that term, because I do not believe we should think of the system in terms of debtors and savers (I prefer the capitalist/worker dialectic used by Marx as discussed in Part I), but if you are going to make that class distinction, I think it should be clear how many people really belong to each "class".

Re: Marx's Labor Theory of Value

I tried to make clear in Part II that I agree with Dr. Keen that Marx's LTV is very flawed, in so far as it views labor as the only source of surplus value in production. In fact, Marx himself seemed to initially follow a logical process that would necessarily lead one to conclude all commodities possessed that inequality between their exchange value and their use value in the production process. However, as his writings progressed, he seemed to stray from that logical conclusion and give labor an entirely unique role from other commodities.

The point of Part III, however, is to focus on a separate problem for capitalists that Marx recognized (besides the tendency of the rate of surplus value to fall over time, which stems from the LTV), which is the problem of realizing surplus value in consumer/investment markets over time, as increasing amounts of wealth are concentrated and centralized in fewer people and locations.

The global reference point perspective is something you are getting from your view that Freegold can ultimately stabilize the global financial capitalist system. I am arguing that it cannot and the trend towards increasing economic complexity and centralization will not last... therefore, global reference points for exchange will likewise not exist when the debt-dollar system breaks down.

In that sense, I am not at all arguing about what should happen in human economic systems and certainly not what prices/wages should be, only what has had to happen (at least for all practical purposes) under the capitalist system of production.

Biju said...

I could be wrong as Ash indicated, but can anyone please correct me in my understanding of freegold as I explained above ?

Casper said...

Hi Biju,

I think that any revaluation by a CB is going to stress heavily some part of a system so not to expect serious tremors and rumblings is a bit shortsighted.

Who knows what exactly comes when.... so they play defense (not to protect the system to protect the change/transition) .. wait and see.

Ash,

as a student of LTV, are you familiar with Rosa Luxemburg and her thoughts on monetization of "surplus" value? What are your thoughts on money entering into a system to fill the demand gap, in an environment of the gold standard?

Casper

Aaron said...

@Ash

"If you hold most of your "savings" (excess wealth after consumption) in fiat currencies or derivative assets, are you not technically a part of the debtor system according to Freegold?"

In your first comment you didn't mention "debtor system". In your first comment you stated, "debtors are necessarily defined as anyone who does not have a majority of his/her savings in physical gold" so using your first comment, no this isn't correct. If someone holds his/her savings in the US dollar or any other currency, those savings are exposed to devaluation as a result of the debtors, but that doesn't make the person with the savings a debtor anymore than someone who chooses to save their "wealth" in pine cones -- or gold.

"therefore, global reference points for exchange will likewise not exist.

You got me there. If you don't see a global reference point in the future and as such you believe international trade is going to come to a complete and permanent halt after the dollar loses world reserve currency status, then I probably will not be able to understand your perspective.

--Aaron

SimpleTrader said...

FOFOA, I appreciate the effort you put into your post, and the concepts you try to convey are indeed very important. However, I wish you had a good editor who would help with structuring the article in a more readable form and cut down the words to about a fifth of what you write without losing the meaning. It would spread the word re Freegold more widely too. I have read all your posts over the past few years, and although there are dozens of 'hints' of Freegold is, or examples of what Freegold isn't, and many references to Freegold, I have yet to come across a concise, complete definition of Freegold.

Robert LeRoy Parker said...

I think Ron Paul is reading FOFOA.

Monetary Policy Hearing Clip

George said...

All this sounds reasonable except the "friction" caused by capital gains taxes. Are you assuming that taxes on gold appreciation will be eliminated? If not, the conversion between spending and saving will represent too large a loss for this to work.

sean said...

RLP,
are you aware of GATA's small success in obtaining some info regarding Fed gold swaps via FOI?

What they managed to obtain were minutes of a secret meeting of the G-10 Gold and Foreign Exchange Committee in April 1997, showed Western central bankers conspiring to coordinate their gold market policies:

sean said...

George,
yes, freegold expects taxes on gold to be eliminated for exactly that reason, though mines will be taxed. This is discussed more here.

Ash said...

Aaron,

From The Debtors and the Savers

Now, what happens during ALL periods in history, whether "the hard money camp" is in charge or "the easy money camp" are running things... is a transfer of wealth. This is important! Because when the easy money guys are in power the transfer of wealth happens slowly and gradually, and wealth flows from the Savers to the Debtors. But when "easy money" collapses - and it ALWAYS collapses - there is a very RAPID transfer of wealth in the other direction, from the Debtors back to the Savers.

And this is where you need to take some action today. Because we have been living in a "easy money regime" for so long now, the delineation of the two camps is somewhat obscured. There are many many people who consider themselves Savers who are still sitting in the wrong camp, and will be on the WRONG side of the coming
- extremely rapid - transfer of wealth.

Today you need to be proactive if you want to get on the receiving end of this "blow back" transfer of wealth. You need to actively choose which camp you are in. And to do that, you need to recognize the two camps, or classes. Remember, this is a "class struggle".

The coming "blow back" hyper-rapid transfer of wealth is not something that necessarily requires moral judgments of good and evil. It is simply a fact of life today. Pick which side you want to be on in THIS particular transfer of wealth. By selling your debt-financed paper savings and buying physical gold today you are making the conscious CHOICE to join the camp of the true Savers.

Many people that consider themselves "savers" are precariously positioned right now. These people need to take active measures to get on the receiving end of this transfer of wealth to survive. Many, many, many average citizens amazingly still have this option, yet they don't even realize it. They need to get up and move over into the same camp as the Rothschilds and the Russian Oligarchs, and prepare to own the future. It's not a matter of good versus evil at this point, it is a matter of survival!


I hope that's enough to clear up the reason I made that statement in the article...

As I said before, I think the class delineation is wrong, almost completely backwards in some ways, and it is also a very subjective way of viewing economic evolution through class struggle, which of course stems from the Austrian foundation.

Ash said...

Aaron,

"You got me there. If you don't see a global reference point in the future and as such you believe international trade is going to come to a complete and permanent halt after the dollar loses world reserve currency status, then I probably will not be able to understand your perspective."

How did people conduct international trade before the dollar became the reserve currency after WWII? How about before the discovery of fossil fuels? Are you saying that there must be a "global reference point" for any trade across political borders?

Also, do you really think the arbitrary political borders that delineate current nations are going to be relatively the same in 50 years as what they are now? If so, then yeah we are on completely different pages.

Ash said...

Casper,

I have heard of her before in terms of dialectics, but no I'm not really familiar with her specific views re: a gold standard and monetization (realization) of surplus value.

BTW, if by "student of LTV" you mean that I agree with it, then I would have to reiterate that I do not.

julian said...

Hello All,

FOFOA, as usual, you move mountains.


SimpleTrader said:

I have read all your posts over the past few years, and although there are dozens of 'hints' of Freegold is, or examples of what Freegold isn't, and many references to Freegold, I have yet to come across a concise, complete definition of Freegold.

I think it's safe to say there isn't one.


RLP,

nice Ron Paul clip.

To paraphrase the moustachied FedReserve agent, "We don't own any gold, we only have gold certificates that aren't worth anything, they're just accounting tactics."

Why did Ron Paul then go on to ask them to sell their gold? And why would he think they could be revalued at today's (paper) price? Is it because that's the paper price, and they're paper?

The agent said they didn't have any gold. Does Ron Paul think those certificates are redeemable? Are they? FedReserve agent didn't make it seem so.



Returning to FOFOA's honest money,

the two monies track, I already understood. I realized soon on into my hike that there was an inherently vital separation of monetary functions as exchange medium and savings medium.

What FOFOA's honest money taught me, or helped me see, is the fallacy of using a single medium for both needs, at least in an economy of sufficient complexity. To use the savings medium to enable exchange functions, or for the exchange medium to serve savings functions, is inherently doomed. As dictated by nature, and backed up by some lofty Philosophers of Economy.


Cheers,


Julian

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

The link Sean posted from GATA about the minutes from the international CB meeting about gold is proof that the USG has at least considered the implications of revaluing the gold:



"U.S. delegate Fisher, the minutes say, "explained that U.S. gold belongs to the Treasury. However, the Treasury had issued gold certificates to the Reserve Banks, and so gold (by these means) also appears on the Federal Reserve balance sheet. If there were to be a revaluation of gold, the certificates would also be revalued upwards; however [to prevent the Fed's balance sheet from expanding] this would lead to sales of government securities. So the net benefit to Treasury would need to be carefully calculated, since sales of government securities would expand the public portfolio of government securities and hence also expand the Treasury's debt-servicing burden."



So in 1997 they were worried about an expanding balance sheet? 



There is some interesting stuff in the minutes from that meeting, including an explanation from each G10 representative of who owns the gold in their country - the state or the CB.

Also in the minutes is this:

"Smeeton (United Kingdom) noted that the gold market is not as depressed as the price would suggest. Gold itself is not in a bear market. Physical demand is high. Mining activity is also quite high. The Bank of England recently released, for the first time, statistics that it has collected for many years, on trading volume in the London market. In May 1996, the market traded the equivalent of $3 billion of gold daily. Swap deals accounted for 75 percent of the volume. London also serves as a settlement point for gold. Last year London settled 950 tonnes of gold daily -- or roughly $10 billion -- giving some scope for the
volume of trading outside of London as well. He noted that gold had traditionally been a secretive market and some dealers had even resisted releasing this information, but most thought release was helpful in demonstrating the market's resilience even though the price has been sluggish.

Smeeton, however, was bearish on the near-term prospects for the price of gold . Central banks were running low inflation policies that made gold less attractive to investors. A second worry surrounded the EMU process, and the expectation that European central banks would sell gold to help meet Maastrict debt targets. The recent Dutch sale had only aggravated this worry. The ongoing rumors of selling by the Dutch and Belgian central banks, and the change in attitude toward gold by the Swiss National Bank, had created an environment where hedge funds and others found it attractive to play gold from the short side.

Gold leasing was also a prominent piece of the market, whose growth central banks were very much a part of. The central banks, in turn, had been responding to pressures that they turn a non-earning asset into one that generates at least some positive return. Smeeton estimated that roughly one year's worth of production had already been sold forward. Central banks mostly lent gold at maturities of 3-6 months, but some central banks sought to enhance returns by lending at longer tenors. Smeeton noted that central banks had some responsibility for the gold leasing market since it was their activity which made that market possible to begin with. He added that gold does have a role as a war chest and in the international monetary system.

Edwardo said...

The Ron Paul video was a typical Ron Paul performance wherein The Congressman from Texas fails to really pin down those in front of him, and then pontificates to a degree that dissipates the force of the inquiry.

RP needs to ask simple but well placed questions and then allow those being questioned, in this case, Fed stooges, to step in it in a way that is apparent to those in attendance.

sirch said...

I'm trying to get a sense of where USA will stack up in a Freegold system. There probably aren't concrete answers to these questions, but I'd still like to hear opinions.

I understand the Fed's power to manage the dollar is more "valuable" than even gold - but are they not concerned that they are going to miss out on Freegold or are they oblivious to the true value of gold?

Fiat will still be used in a Freegold system, but since gold will be understood to be superior as a long term store of value, doesn't that mean that no one will want/need US (or any other currency) debt as a reserve asset? Does that mean central banks will no longer be as powerful in a freegold world?

Will gold be the only thing held as national / CB reserves? Or will fiat debt still have some reserve function because of it's ability to provide a yield? Or will fiat currency have a more or less stable supply / value because of the counterbalance of gold.

So the Fed does not own the gold - the USG does. But does the Fed or the USG still participate in gold sales / leasing? Unlike some other Western countries, some actions of the USG seems to show that it wants to hold on to its gold.

FOFOA pointed out that the official reported US gold reserves of 8,333.5 tonnes is the same amount that was sold to the Treasury in the 30s. But we redeemed dollars for gold until '71, so do you think we have more, less or the same amount of gold now?

Does the USG understand gold's future and is it therefore accumulating or at least holding on to all of its gold? Such a wise move is not typical of the USG.

And finally: could the USG actually benefit from Freegold?

radix46 said...

Ron Paul always sounds ineffectual and pathetic. He rambles and never rams home any point. He sounds like a ranting crazy whiny old man.

If only he could get some coaching in public speaking or just get an averagely articulate question writer, he may have some impact.

That is why Bernanke always looks so smug when he is answering questions from Paul. He's not worried in the slightest.

mortymer said...

Franc Poincaré

http://en.wikipedia.org/wiki/Franc_Poincar%C3%A9

(http://fr.wikipedia.org/wiki/Franc_fran%C3%A7ais)

"The Franc Poincaré is a unit of account that was used in the international regulation of liability. It is defined as 65.5 milligrams of gold of millesimal fineness .900. Formerly it was identical to the French franc, although it has not been so since the 1920s.

Practice on its conversion to national currencies varies from state to state; in most states the conversion factor is based not on the market price of gold, but on an official price (a remnant of the gold standard, frequently far below its market price today). The Franc Poincaré has been replaced for most purposes by Special Drawing Rights..."

mortymer said...

@Costata, indeed my friend, indeed, I was stunned when I read it for the first time.

Let me offer you one thought today:

"Money has been introduced by convention as a kind of substitute for a need or demand, and,...
its value is derived not from nature but from law and can be altered or abolished at will"

ARISTOTLE, NICHOMACHEAN ETHICS
Book 5, ch. 5 (F. H. Peters trans., 156, 15th ed. 1893)

mortymer said...

The international role of the euro: a status report
Elias Papaioannou and Richard Portes; 2008

http://ec.europa.eu/economy_finance/publications/publication12409_en.pdf

"...the major factor behind the dollar’s dominance in international trade arises from the use of the dollar in reference-priced and organized-exchange traded goods. For example, most commodities, including oil, are settled in international markets in dollars. Indeed McKinnon (1980) and Krugman (1980) have argued that when a currency has established itself in a particular market, then a small price-taking firm always finds it optimal to follow, because if it were to chose another invoicing currency this would yield more volatile sales. The key insight is that once a currency has acquired a dominant role due to historically low costs, then it will continue to enjoy this status, even if alternative currencies offer similar (or even smaller) costs. Recent theoretical work by Bacchetta and van Wincoop (2005) and Goldberg and Tille (2006) stresses the effects of the structure of demand and production on invoicing (see also McKinnon (1979) and Swoboda (1968) for early contributions). These models yield a herding effect, implying that the exporter has an incentive to follow its competitors and use the same currency, because this limits output volatility. The main empirical prediction of this theoretical work is that reference-based pricing is more likely in homogeneous goods, such as oil, gold, and basic commodities. The intuition is simple. If a firm produces and sells differentiated goods, then it faces (the usual) downward-sloping demand curve and thus can choose to index sales in the currency of the exporter. When the good is homogeneous, the producer is typically a price taker and thus will use the currency that the good is settled in to minimize loss of sales and profits arising from exchange-rate fluctuations. Goldberg and Tille (2006)..."

[Mrt@Radix: MVP, whats that good for? In R.Feynman´s words "...what is is worth for?" I do not like honors, I am happy to be appreciated for the work I have done and for the people who help, discuss and are part of learning]

mortymer said...

ad. http://www.youtube.com/watch?v=f61KMw5zVhg

Blondie said...

@Mortymer,

"The gold franc was the unit of account for the Bank for International Settlements from 1930 until April 1, 2003. It was replaced with the Special Drawing Right."

Blondie said...

re MVP:

Ferdinand A. Lange was the founder of the German precision watchmaking industry. When he was later offered a peerage for this accomplishment, Lange politely declined saying that “a worthy man ennobles himself”.

mortymer said...

@Blondie: http://fofoa.blogspot.com/2011/05/costatas-silver-open-forum-part-2.html?showComment=1306316996678#c8035252660130753163
+additions to that discussion from few comments posts before that.

=> An attempt of Ordinary Slow Withdrawal from Dollar Reserve system?

What worries me is a rumors (?) of new requirements for Real estate down_payments for new loans. Have not had time to research that - supposedly the European Commission proposal, implementation already next year (?).

DP said...

On Moderation ...

FreeGoldAdvocate said...

I want to believe – but I must critically analyze the arguments, not just accept them.

I have been studying these FOFOA posts for several years now, looking for that “light switch”. I even thought I found it once here:

One of the unique characteristics of gold that sets it apart from commodities is that its primary use - store of value - has no weight or mass requirements. In commodities, where industry is the primary user, weight is critical. If you are a builder who needs a ton of copper, then your need for this specific weight is more important than, and independent from, the price of copper. If copper rises in price, then darn-it, you must pay more. If copper falls in price, hurray, you just saved yourself some money.

But if your need is to store $100,000 worth of present value in gold, it doesn’t matter how much gold you get. All that matters is that whatever weight you get reliably and efficiently stores your value. One ounce could do just as good of a job as 100 ounces. In fact, one ounce would do a BETTER job than 100 ounces! The less gold it takes to store your value, the better it does its job. This particular “gold dynamic” sets it apart from all commodities.

Yet, just like Apple stock is worth $250 per share only if the market believes it is; the same condition applies for gold’s extraordinary power to store value far above the cost of production and independent of its mass. It works until it doesn’t.

I agree with FOFOA that the root of our monetary problems is “fractional reserve bullion banking”. I agree that if this practice can be eliminated then we can enjoy the benefits of freegold. This sounds like taking the position that the world would be a better place if crime can be eliminated. Both assertions are true, however making the assertion does not in itself eliminate fractional reserve bullion banking, or crime. We have all observed that passing laws outlawing crime has not eliminated crime. Likewise I am not sure outlawing fractional reserve bullion banking will eliminate it.

Another possibility is with consumer education. We can educate savers about the advantages of preserving their wealth by buying and holding physical gold. Again, just like we can educate citizens that crime does not pay. While helpful, education will not eliminate crime or fractional reserve banking. If anyone with currency can buy physical gold, could not some of these holders decide to engage in the profitable (even if criminal) business of fractionalizing it? After all there is a sucker (paper gold buyer) born every minute. How do you propose to eliminate these buyers and sellers? Powerful legislation may be able to marginalize the fractional bullion market and drive it underground so that it does not overtly affect the freegold market price. However, I think miners in need of financing will continue to forward sell their gold to a futures market at a discount. They would be selling a levered paper promise of future gold.

JR said...

mortymer,

Neat find on Aristotle's lack of a clue about money, now we know where MMT's true roots lie :)

Anyway, its reassuring to know that even the best of us can have that kinda silliness floating in there head. We can't all be everything and it makes clear why there's only one Aristotle whose thoughts have any direct pertinence to the economic issues at hand.

Cheers, J.R.

P.S. - the lawyers are no good, leave Mr. Lenihan to his own devices. Statutory interpretation of the legal scheme "governing" the $IMFS doesn't offer much for where we are going. Nostalgia is nice but "Everyone knows where we have been. Let's see where we are going!"

JR said...

Hi FreeGoldAdvocate,

some ideas from above:

"This is Freegold, and it is unfolding today. It requires no activism or political/legal changes at this point. It is, how do you say, baked into the cake already? And once again, these posts briefly explain how we aren't quite there yet, how Freegold is different from what he have today, even though it is "already in the pipeline."...

And the best part is the probability, because there's no activism required. All you can do is prepare your own savings to be safely shuttled through the transition. So put down that picket sign, take off the t-shirt, undo the CAPSLOCK and go buy yourself some physical gold. Then, just like the Giants, you will be prepared for the return to honest money."

***********

From Freegold Foundations:

"The Free in Freegold

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

This is the free in Freegold."

***********

comment to the post How is that different from Freegold?

"For a monetary system to work, anyone, anywhere, must be able to exchange the currency for gold at a floating rate. This is FREEGOLD. It is all of the natural consequences that will flow from the ending of fractional reserve bullion banking, an unsustainable modern carryover from the official gold standard of yesteryear."

and from the main post:

"...the gamblers' casino chips, ambiguous claims on some illusory pile of gold somewhere back in the cage, will no longer exist. This is probably the most important difference between Freegold and what we have today. After the failure of paper gold liabilities to continue trading at par with physical during the dramatic revaluation, every discrete piece of the 160,000 tonnes of above-ground gold will be **unambiguously** owned!

Furthermore, in every gold exchange, there will be an **unambiguous** seller and an **unambiguous** buyer. This does not necessarily mean that all gold exchanges will be face to face and entail the physical movement of gold. But it does mean the end of ambiguous pools of unspecified gold and its unallocated owners. I realize that this part is difficult for many to visualize today given that it is how a good deal of the gold market presently operates. But I believe that if you give it enough thought, you will ultimately come with me to this conclusion. Otherwise, as Another said, time will reveal all things."

Cheers, J.R.

Steveo said...

The classic 78% retracement of the previous rise. How simplisticly
devious. Good chance 'Ol bucky is ready for a run up. The weak
hands, waiting for the Euro to fall during massive bad news probably
threw in the towel on USD as "doomed". The question, is ---more
doomier than thou? All currencies are doomed in fact, at least paper
ones. All of them. At some point the leaderships that control
monetary supply will bring the value of each currency in the world, to
zero. That is the way it works, in history, every time.



This isn't much of a "double bottom" or what I keep trying to remind
myself of...markets are tricky, they like to fake out those who jump on,
and retrace back to shake them off. Then when are "burnt" they are
afraid to jump on again....so only the biggest boyz get to join in on
the largest move. Biggest or smartest. I nickname this tendency the
DRTV Dog Returneth To Vomit. The graphic image jumps into my brain,
works for simple, simple mnemonic tricks.



I am leaving ES alone, as ES is more likely to be directly gamed. Esp.
by the current administration who call the P/E ratio the "profit to
earnings" ratio.

Also, in other posts, got relevant charts on Nikkei (just broke major trendline to the downside), and our old Friend Cable (Great British Pound) which probably made it's last "throwoff"

http://oahutrading.blogspot.com/

mortymer said...

JR: http://anotherfreegoldblog.blogspot.com/2011/06/02-bank-of-england-reading.html

JR said...

Hi mortymer,

Another fellow that like Aristotle also had a name that started with the letter "A," but who unlike Aristotle was educated in economics, observed:

Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

Smiles!

mortymer said...

The most beautiful paintings I have seen are done by innocent souls of children who do not "know" how art should look like. They just do it. During one´s education one learns the technique of masters and then returns to the honesty of self.

Edwardo said...

Hello DP,

While I think it highly likely that you have already prepared a worthwhile riposte to your most recent interlocutor, I would strongly advise against engaging further in any discourse with he who resorts to such lame bon mots as "captain obvious."

Equally, attempting fruitful discourse with one who links such phrases as "technical theory and common sense" together- which, quite frankly, strikes me as akin to conjoining "hard work" with "care free frolic"- is also a real waste of time.

Finally, well, almost certainly not finally, I would be remiss if I didn't point out that, where the conversant in question is concerned, there is a substantial element of delusion at play...


"I do appreciate that FOFOA has allowed me to continue posting links and comments here... and I hope that will last"

...such that the recognition of being allowed to post doesn't seem to include the awareness that such a privilege might, might, mind you, be predicated, at the very least, on the exclusion of a certain snottiness towards folks like you who make regular contributions to the subject matter -Freegold- that is the province of this blog.

Bearing all this in mind, it is no wonder that you have, as I once did, albeit mistakenly, referred to Ashhole as Art. The two A (b)listers are, after all, despite certain differences in style, both trolls. Now you know what I'm going to say next, don't you?

DON'T FEED THE TROLL!

DP said...

@Edwardo, not to mention the delusion regarding an understanding of Freegold ;)

dojufitz said...

Hi FOFOA,

just wondering what the price of Gold was when you started this blog and what its current price is?

FOFOA said...

Hello dojufitz,

Thank you for asking a great question! My first post to this blog was on Saturday, 8/23/08. The most recent London gold fix at that time was the PM fixing on Friday 8/22, which was $824.00 and €555.78.

Today's PM fixing was $1,549 and €1,059.36.

Link

Sincerely,
FOFOA

Blondie said...

FOFOA, Dojufitz,

I'll not need to go to far out on a limb here to speculate that any particular oz of physical gold in FOFOA's possession at that time (if any) is still exactly what it was then (ie. one oz physical gold), whereas at both points in time at which the price was "discovered" the exchange of "gold" in the overwhelming majority of these price discovery trades was not of physical gold at all, but rather various contracts agreeing to supply physical gold or currency equivalent, if enforced or held to maturity, and that the purpose of both producing and holding the overwhelming majority of these contracts (whether long or short) was never to enforce or hold to maturity but to speculate on or manipulate their price (or both).

Hence the "price" of actual physical gold, unencumbered by such financialization, is at this time unknown.

mortymer said...

Nice look_back Fofoa,

Anyway, as everybody knows already I am checking links, especially if they are of official institutions. Have you noticed here anything unusual?:

LBMA Publications Press Release Archives

http://www.lbma.org.uk/pageshttp://www.lbma.org.uk/pages/?page_id=107&title=publications_press_release_archives

...that during the 1999 - 2008 there were 44 refiners "Addition to the LBMA Good Delivery List for" gold and/or silver?

Note: on one from those doc, a random check, I found this:
"...LBMA’s quantitative criteria of minimum production level (10 tonnes p.a. of gold) and tangible net worth (at least £10 million equivalent). It has also
passed the LBMA’s exhaustive testing procedures, under which its gold bars were examined
and assayed by independent referees, and its own assaying capability has been tested...")

mortymer said...

Guixi Smelter of Jiangxi Copper Company Limited added to the LBMA’s Good Delivery List for Gold; 30th August 2005

http://www.lbma.org.uk/assets/jiangxi_gd_au_pr_20050830.pdf

The London Good Delivery List of Acceptable Refiners of gold and silver is maintained by the LBMA, by whom it is copyrighted. It lists those refineries whose gold and silver bars have been found to meet the required standard for acceptability in the London bullion market when originally tested. The List currently includes 50 gold and 61 silver refiners.

mortymer said...

Here is the growth in a nice tab:

Wednesday 21 April 2004
PRESS NOTICE
LBMA MEMBERSHIP REACHES 100 IN TOTAL

http://www.lbma.org.uk/assets/lbma_membership100_2004.pdf

mortymer said...

Here is the introduction of a scheme for the proactive monitoring of refiners on its Good Delivery List:

LBMA Announces Proactive Monitoring and the Appointment of new Good Delivery Referees; 2004

http://www.lbma.org.uk/assets/lbma_pam2004.pdf

mortymer said...

Here is important info about:

LBMA Good Delivery List for Gold and Silver Treatment of Bars from Deep Storage; 9th June 2006

http://www.lbma.org.uk/assets/lbma_deepstoragebars2006.pdf

"...The LBMA has noted that in the past year, an increasing number of gold and silver bars have been re-appearing in the market after having been held for many years in vaults (whether in London or elsewhere). Most of these bars will still be acceptable in the London bullion market, even if they are not fully compliant with the LBMA’s current Good Delivery Rules, which have been modified in a number of ways since the establishment of the LBMA in 1987. However, some of these “deep storage” bars may no longer be regarded as acceptable, either because of physical defects or poor marking. This can apply both to bars from currently active Good Delivery List refiners and also to those from refiners which are now on the Former List (and which may well no longer be in business). In particular, the LBMA has confirmed that bars which are not stamped with the original refiner’s assay mark and fineness (with these being shown instead on an accompanying certificate) will no longer be acceptable as Good Delivery..."

mortymer said...

Good Delivery Status of Bars in Deep Storage; 3 October 2007

http://www.lbma.org.uk/assets/lbma_gd_goldbars_status2007.pdf

"In view of recent press comments, the LBMA wishes to clarify the situation concerning the Good Delivery status of bars reappearing in the market after being held for a considerable number of years in deep storage at central bank vaults, including that of the Bank of England. The LBMA would like to make it clear that this issue does not concern the quality of the gold. It relates solely to the physical appearance of the bars. During the past decade, a significant quantity of central bank gold has been sold, primarily through the loco London market. The net amount sold by the official sector has, according to GFMS, been mostly between 400 and 500 tonnes each year..."

mortymer said...

Closing this dip in LBMA by:

Home > Good Delivery > Gold List;
Wednesday 16th March, 2011

http://www.lbma.org.uk/pages/index.cfm?page_id=29#currentau

"The following is a list of refiners of gold whose large bars were found to meet the required standard when originally tested..."

[Pls note that on the same page on the rioght side there is more info about: Specifications; Good Delivery Rules; Proactive Monitoring; GDL Additions; FAQs; Certified Reference Materials; Non-GD Bars; Vaults]

Enjoy reading/studying!

mortymer said...

OK :o) and one last, heheh:

GDL Additions

Following is a list of press releases in PDF format of refiners added to the LBMA’s Good Delivery List for gold and/or silver, with effect from the dates shown.

http://www.lbma.org.uk/pages/index.cfm?page_id=32&title=gdl_additions

radix46 said...
This comment has been removed by the author.
DP said...

(wheeze!) Juliet ... Bwravo ...

george rucker urology said...

http://www.gold-eagle.com/editorials_05/silberinfo061805.html

Was he another

DP said...

This doesn't feel like a view that might be expressed by Another?

silberinfo:
If a friend asks you how high his share shall be in physical Silver compared to Gold, what would you recommend him for the long term?

F. Lips:
Difficult to answer. It depends on the individual financial situation of the person. Meanwhile, silver offers bigger capital profit chances than gold.

Holly said...

Hello everyone. I am new here, so some help would be appreciated.

I am having a hard time understanding the second money under freegold. Why and how would it come into existence? How would the regression theorem come into play for this 2nd money? I can see how it came into being in the current financial system stemming from gold, but once the fiat totally is broken down, how could another take its place and how would it be valued?

Thanks for the help!

Michael H said...

Holly,

Welcome to the comments section. You will probably get more responses if you make comments and ask your questions in the latest FOFOA post, even if it is relevant to a previous post. Just let people know which post is relevant to your questions.

As for this question:

FOFOA referrs to a 'primary medium of exchange (MoE)' and a 'secondary MoE'. The primary MoE is the national currency we have now, i.e. US dolalrs in the USA and Zim dolalrs in Zimbabwe.

When the primary MoE begins to lose value rapidly, people look for an alternative MoE that holds its value better. This is the secondary MoE, and the choice of a particular secondary MoE is a market choice based on the circumstances of the population.

Currently, the USD serves this function in many countries around the world. Should hyperinflation hit the USD, though, then people in the USA will need to find a secondary MoE.

Another key is that fiat will not totally break down. It is too integral a part of the world economy for that to happen. The USD may hyperinflate, but transactions in paper and digital currency will continue.

Luke said...

Thanks Michael, I will do that.

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