http://economicedge.blogspot.com/2010/01/fallacy-of-gold-backed-money_02.html
The parkway in my area is beautiful. Great hiking all along it. Come back sometime.
Turns out my friend sold his gold mine, so he didn’t have current figures from his own operation. But he did have some interesting comments I hadn’t thought of.
He said his best guess for all-in incremental production cost industry-wide was probably $800 - $1000 - right about where Jeff reported. But he also commented that mining operations generally have several different deposit quality levels in different parts of their properties. He said that privately held miners generally work the lowest grade that is economic to produce, because that saves their best grades for a depressed market situation where you need some higher-grade deoposits to keep the operation going with positive cashflow.
Obviously, the economics could be different in a publically held operation, where management may be incented to work their highest grades first always, to show the highest profits and boost share prices.
Seems like a good diligence topic for operating producers - what different deposit grades do they own in the ground, and which ones are they currently producing? The long-term value guys should be saving their best deposits for a rainy day when they are needed to keep operations in the black. I’d be surprised to find all of them doing that, however.
Erik
Yes, it’s anecdotal… but I trust this guy, regardless of those who would distrust anything published on Kingworld news. If you have not read Egon von Greyertz, please read this;
http://goldswitzerland.com/deus-ex-machina-egonvongreyerz/
Anyway, without further ado, here is my comment, cut and pasted from Egon;
“We are stressing to investors to take their gold out of the banking system, not only because there are runs on banks that will continue, but the risk of being in the banking system is major. So you should take the additional step of not just owning physical gold, but also owning it outside of the banking system.
We (just) had an example of a client moving a substantial amount (of gold) from a Swiss bank to our vaults, and we found out the bank didn’t have the gold. This was supposed to be allocated gold, but the bank didn’t have it. We didn’t understand why there was a delay (in our vaults receiving the gold), but eventually we found out why there was a delay (the bank didn’t have the gold). It’s absolutely amazing, but not surprising.
This confirms what I’ve always thought. Not only should you not have gold in banks or even unallocated gold, but even allocated gold. It seems that some banks don’t even possess that. So the risk of having gold in the banking system is major.”
It's all bull folks... regardless of what has been said in this thread, I trust that the Gold in PHYS is there.. because Sprott is not a banker. For shares he owns, he can sell me out for the premium if he wants.. but I trust the Gold is there. Banks.. not so much. Bullion banking is a ponzi scheme that will crash in the end, allocated or not. Kyle Bass came to the same conclusion. Got physical Gold?
This thread has been filled with the arcane details of man-made rules for banking, contract law, etc. Personally, I really just don't care about that.. because in the end it's all so simple.. none of that matters at all. Our paper money system is fatally flawed.. it's so easy to see that a child can understand it. For example, the entire derivatives market has been laid upon a debt-based money system without funding.. .i.e. regardless of how the derivatives supposedly net out.. there is not enough money is existence to begin making the payouts once the collapse starts. It's not just counterparty risk.. the money does not exist, period. If you can visualize this... a debt based money system with a giant derivatives laden boat anchor just waiting to be thrown overboard.. then you understand that there is no reforming the system. It must blow up. Only real assets will be left on the other side.
Jim,
what you are citing doesn’t really make sense.
If you own allocated gold, you have a list with the serial numbers, production years, and refiners of the individual gold bars you own. From what Greyez says, I doubt that the client owned allocated gold.
What I am ready to believe though is that many banks sell their customers gold-related products with very nice marketing-speak and fancy brochures, that these products are not allocated gold, and that the customers are led to believe and want to believe that they own gold when in fact they merely own a claim against a bank.
Victor
[quote=Erik T.]…
I agree with most of that, but it’s also important to remember (and few seem to) that the suspension of FASB 157 (mark-to-market accounting) was the proximal trigger for the reversal of equity markets in March 2009. What was happening was classic debt deflation - nobody wanted MBS - subprime or otherwise - and the balance sheets of the institutions that already held the stuff were collapsing. The crisis was averted - to my utter amazement - by simply changing the accounting rules to allow banks to pretend those assets are worth more than they really are. That was not a "temporary, emergency measure" - it’s a permanent change that remains with us today. Nobody actually knows whether the banking system is solvent or not, because the government has decided the answer to that question is too scary, so we’re "better off" not knowing the answer! This really isn’t an exaggeration. This has to end badly, but to my own astonishment, everyone seems happy to pretend there is no problem. If I have learned anything from this, it is that it takes longer than I thought for people to wake up and understand the big picture.
…
Personally, I avoid the phrase liquidity trap because its meaning has changed over the years, and different people using it in different ways leads to confusion and miscommunication. When Keynes originally coined the term, he was talking about the scenario where a liquidity injection fails to reduce interest rates as central bankers presumably intended. But ZIRP in Japan in the '90s brought new meaning to the term - suddenly people used "liquidity trap" to describe the "trap" central banks fall into when interest rates reach the zero bound, and it therefore becomes impossible to reduce them by injecting liquidity to the system.
I’m not criticizing you on this bbacq - just suggesting that you be ready for different people to read different meanings into your words when you talk about liquidity traps. I also make a point of never using the word "inflation" without qualifying exactly what I mean. Some people think inflation means rising consumer prices. Others think it means rising money supply. Others think it means rising aggregate money and credit (perhaps the most useful definition). But if you use the term in isolation, you’re almost guaranteed to confuse people who are stuck on a different meaning than yours.
…
I beg your pardon, but please speak for yourself. I most certainly was talking about these things going back to 2006, and so was Chris Martenson going back even farther. Perhaps what you mean is that these rather obvious risks have now begun to reach the consciousness of the masses. That I would agree with.
…
I have a slightly different perspective. Back in 2008, my belief (shared by quite a few people at the time) was that it would be obvious to markets that printing money and diluting the value of the currency couldn’t possibly work in the long run. I reasoned that the Fed was out of useful bullets once we hit the zero bound in interest rates, because I thought QE - outright money printing - would be recognized for the desperate measure it truly is, and that markets would revolt because of a loss of faith in the system.
I couldn’t possibly have been more wrong. What happened is that (as David Tepper is often credited with first saying publically), freshly printed money has to go somewhere, and where it went was to bid up risk asset prices. More money = higher prices, and no discernable increase in concern about the stability of the system! Since 2009 it’s been just that simple, and so far the long-term perils of money printing are a popular topic only among people like us, who are considered "fringe extremists". So far, these concerns are ignored almost completely by the mainstream.
The RORO trade emerged as everyone figured out that Fed money printing has a LOT more influence on asset prices than conventional fundamentals. When people think more QE is imminent, they start buying. Asset prices all go up together in reaction to anticipation of more freshly printed fiat (risk on). That includes upward moves in prices of assets that have traditionally had a negative correlation, such as equities and gold. Eventually that gets overdone or there is reason to think the Fed will back off on QE, and everyone wants out as deflation begins to rear its ugly head again (risk off), as is happening right now.
The whole reason this is working is that it HAS been working. So far, anyway. Everyone has adjusted to a "new normal" perception where few dare to short the market or even be flat, because "everyone knows" they can count on Benny and the Inkjets to print more fiat to save the market if it starts to crash. In reality, Ben can only print so long as inflation doesn’t become a big problem, but few seem to grasp that. Those who do are quick to dismiss the concern, thinking that because the CPI has been moderate, "there is no inflation". To my utter astonishment, they completely ignore commodity prices. All of this sets up the really big risk event that I see coming in the next couple of years.
I think the really big event comes when further QE fails to lift asset prices, surprising most market participants, or when further printing becomes impossible because oil prices have been elevated to the point of causing a gas price political crisis. In other words, it’s when the Bernanke Put (which everyone took for granted) doesn’t materialize that all hell breaks loose. The reasoned thinking of people like Ron Paul who can see what’s coming isn’t even remotely interesting to the Washington policy machine. But $7 gasoline prices will change everything, almost overnight, as Washington goes into reactive crisis response mode - the only thing it knows.
I contend that the whole 2009-Present experience has been a fantasy mirage, resulting directly from the widespread (and so far correct) belief that no matter what happens, the Fed will save the markets from crashing. The day that the market wakes up and recognizes that Ben can’t save the markets any more, we’ll see a crash that will make 2008 look like fender bender. Watch for signals that sitting congresspeople are at risk of being thrown out (becoming un-re-electable) "unless something is done" about gas prices. Intelligent, forward looking analysis and insight (a la Ron Paul) is completely irrelevant. Congresspeople waking up and recognizing that their career in politics will END with the next election unless they take away Ben’s printing press will change everything, instantly.
I used to think that myself, but my view has evolved. The key is the part about the (broader, mainstream) market "understanding" this stuff. I don’t think they do. People who have been interested in PMs for years have the idea in their heads that we "just have to" go back to a gold-backed currency because it’s what’s always happened throughout history. But if you actually go back and study that history, you’ll find that major wars are often needed before people recognize what you are taking for granted as obvious. Just watch the mainstream cable channels - Bloomberg and CNBC really are a good proxy for the general level of comprehension in the market. Most people continue to view gold and silver as "barbaric relics", and the guys who most people foolishly perceive to be the smartest investors in the world just went on record as saying that civilized people don’t buy gold! This is very telling, and it’s a message goldbugs sadly seem to miss.
There are PLENTY of other options to a gold-backed currency, including a global fiat currency. Stop and consider the scenario where the world recognizes the failings of national fiat currencies, and there is a general consensus we need something else. The options being debated are global fiat administered by a global CB (perhaps an outgrowth of today’s Fed), or a return to the gold standard. Forget your own opinion, and think in terms of what would likely happen on the stage of public opinion. All the people with the most power and influence in the world will see this as a choice of more power for the elite (global fiat), or a profound loss of power for them (gold standard). So it would come down to a public debate between the most powerful people in the world - Nobel Prize winners like Paul Krugman and the folks who OWN the media - vs. some Austrian economists nobody ever heard of. The latter group might actually know better, but who would win the contest for public opinion?
In summary, history shows that you always go back to a PM-backed currency, but when you study that history closely you realize we’re a long way from that point. It usually takes complete wipe-outs (hyperinflations) of fiat currencies and/or major wars to get the world to wise up. All the goldbugs who repeatedly insist that we’re headed back to gold-backed currency would do well to research what it’s taken in the past to get a society to recognize that neeed. I’m sad to say it, but we haven’t felt nearly enough pain yet.
All the best,
Erik
[/quote]
Erik,
These analyses are very astute; very insightful. I won’t pretend to speak for others, but it’s very comforting to me to know that economic neophytes can find reliable, knowledgable and most of all, trustworthy , information in these troubling times. For this I am grateful to you and all the others who participated in this thread (and other threads as well.)
It’s because of quality posts like this (and many others) that I’m convinced that CM.com has got the deepest bench on the net.
[quote=victorthecleaner]Jim,
what you are citing doesn’t really make sense.
If you own allocated gold, you have a list with the serial numbers, production years, and refiners of the individual gold bars you own. From what Greyez says, I doubt that the client owned allocated gold.
What I am ready to believe though is that many banks sell their customers gold-related products with very nice marketing-speak and fancy brochures, that these products are not allocated gold, and that the customers are led to believe and want to believe that they own gold when in fact they merely own a claim against a bank.
Victor
[/quote]
Victor,
Isn’t it possible that the client did have a list with serial numbers etc. and the bank sold their gold nonetheless? That would account for the outrage and incredulity noted. In today’s world, it would be just one more outrageous ripoff that gets swept under the rug.
@Earthwise
Thanks so much for the very kind words. Made my day! 
@Victor
I agree that this story is hard to believe, and my first thought was the same as yours - perhaps the client in question had an unallocated account and just wasn’t astute enough to realize what had been sold to them. If I remember correctly, the Lenny/Harvey Organ vs. Scotia Mocatta debacle a couple of years ago was a similar affair.
But that said, post MF Global I’ve changed my views. Yes, we agree that allocated buillion is titled to the investor, not the bank, and CAN NOT be sold to a third party BY LAW. But there was plenty of nasty stuff than CANNOT HAPPEN BY LAW that happened anyway in MF Global, including (I’m told) some customers who had allocated metal (COMEX Warehouse receipts) that were sold by the trustee and pooled to pay off the other non-secured claimants.
My point is, the reason most people concern themselves with allocated bullion in the first place is to hedge the tail risk of an all-out financial system collapse. In that scenario, my guess is that governments would step in and change the rules. Consider a case where there is a global bank run, and all the banks are bust. The pitifully under-reserved FDIC system goes bankrupt in 20 minutes, and the US Gov’t now has to figure out what to do. I could easily see them declaring that all assets in the bank vaults get pooled "for the common good" and used to make sure the masses can somehow continue to feed their children.
I am fully aware that what I have just described is "impossible" as a matter of property law, since the banks don’t even own the allocated metal in their vaults, and there is no precedent of law authorizing the government to reallocate private property to the banking system. Consider that it’s also "impossible" for American Citizens to be subjected to indefinite detention or extra-judicial assasination. But despite these things being prohibited by the Constitution, both are now openly acknolwedged policy. Indefinite detention seems to have been struck down by a federal judge, but in time of crisis I think the US Gov’t will do whatever it wants.
My point is, in the extreme circumstance that allocated accounts are designed to hedge for, I think all bets could be off and the rule of law could easily be suspended.
Problem is, I don’t know if any viable alternative. Private vaulting like the KWN guy appears to be selling solves nothing - if the government decides to change the rules, they know safe deposit boxes and private valut facilities are the first thing they should lock down. Offshore doesn’t appear to offer much solution, either. We’ve already seen the whole country of Switzerland compromise its most strongly held values and long-standing banking traditions, caving under duress to the U.S. Gov’t. I think it safe to assume that other jurisdictions can be pushed around just as easily when push comes to shove.
Erik
[quote=earthwise]
Isn’t it possible that the client did have a list with serial numbers etc. and the bank sold their gold nonetheless? That would account for the outrage and incredulity noted. In today’s world, it would be just one more outrageous ripoff that gets swept under the rug.[/quote]
No, I don’t think so. In this case, the client would have said so. This would be embezzlement and would just end up in court, being well publicized. The bank would probably have to close down their custodial unit as a consequence. If I park my car in the supermarket’s parking lot, and when I come back, the clerk tells me they had sold my car, but they could easily buy another one for me, I’d see them further.
The difference between allocated and unallocated is that with allocated, the customer owns the gold. With unallocated, the customer only has a claim against the bank.
I think Erik T made a comment early on in this thread that someone wanted allocated, but the banker (=salesperson) was only able to sell financial products and had to call his boss to figure out what the term ‘allocated’ meant. I think this anecdote gives you the right picture.
Victor
Erik T,MF Global was strictly speaking not allocated either. About a year (?) earlier the COMEX had introduced new ‘electronic warehouse receipts’ which, when you bothered to read the small print, weren’t actual warehouse receipts. They just stated which bars you would be allocated by your broker if you would later request this, but they didn’t confer title to the bars.
Again, everyone was duped into trusting the system by some changes to the fine print. This, I think, is how it usually happens. And this is why they eventually cannot complain in court. Because they read it and they signed it. Bad luck.
By the way, I am not sure confiscation should be your greatest worry (I would avoid ETFs though because according to their usual fine print, they can decide to wind down at a time at which I do not want this). The next major issue will be that the US dollar will one day no longer be accepted in international trade. Then everyone will need a liquid gold market. So even if some governments pass confiscation laws (you never know), I think this will be short lived.
Victor
Victor,
Thanks for the clarification on MF Global. No surprise that the "story" circulating on the blogs was slightly out of sync with reality. But I still think that in all-out pandemonium, the government will do whatever it wants.
On a related note… Does anyone here know of any EVIDENCE showing that the Justice Dept. announced an investigation into JP Morgan’s PM dealings?
Yes, I’m well aware that GATA and the rest of the gold bugs have made a big deal about this "investigation", but I have thus far not been able to confirm that it is real. Evidence that JP Morgan is the subject of an official investigation would be much appreciated if anyone has it. (Note: "GATA says so" doesn’t constitute evidence!)
Erik
deleted
@Erik: "Thanks for the laugh, bbacq." At least we make each other chuckle, and that is a good thing! But you are mistaken if your takeaway is that I am not interesting in enlightening discussion. I am simply not interested in appeal to authority as a mode of argument, especially when the authority appealed to is oneself, or the highly-discredited mainstream media. "I wasn’t commenting on your point; I was making my own point." I realize that, Erik. It is a common strategy. A more productive approach in idea-tennis is not simply to serve and never return or volley, but to actually try to return the opponent’s serve. Idea-tennis consisting of nothing but aces is boring and unproductive. I tried to address points you made, I apologize for digging at you (though you seem to enjoy sparring, as do I) but I am dead serious in getting as close to truth as we can know out to a large audience. I will reiterate a point I made earlier: "The way you argue - broadbrushing swathes of society, appealing to the authority of coercive bozos - makes me think you have an agenda."
I will reiterate to you that the greatest utility of a site and thread like this is to help enlighten the public on just how messed up our current monetary/financial/governmental system is, and why, and what the alternatives are, and why those alternatives are superior. Then people might be able to better plan their lives to deal with the uncertainty forced on them by this evil system, and to change it to something more in their interest.
@Tycer: You are correct in calling me on ad-hominism. Mea culpa and apologies to all. It can be difficult to divorce oneself from the rhetoric-to-date. This thread was founded in ad-hominem: "charlatan" etc…
bbacq: There is no "they" in "market" to understand things in the way I am using the term, Erik. The market itself thinks, the market remembers, the market computes prices. My neurons don't think, my brain does.
Tycer: I still do not understand your meaning, please explain.
It's an incredibly important thing. It underlies everything, everywhere. Not many yet understand it, and we'll never understand it fully, because it would be like a neuron "understanding" how the brain works. The brain operates at a complexity level one step up from neurons. The brain might, if it studies and thinks long enough, "understand" the neuron, but the converse is impossible. We will never know what the market knows. We will never understand in anything but a very general way how it accomplishes its magic.Tycer, the best way to start to get your had into this idea (I have long referred to it as "systemic rationality", others use other terms) in the field of economics and finance is to read the short monograph: "I, Pencil", by Leonard Read. I raised this idea in response to a comment by ErikT that he didn’t have confidence that individuals (neurons) in the market (brain) understood the finer points of our discussion. My point is that that is not necessary. Those that don’t understand will learn rapidly as the system changes state. In complexity-speak, or chaos-speak, if you like, we are in the process of moving to a different strange attractor in financial state-space. I could go on and on, but I recommend James Gleick’s "Chaos", and anything by Nassim Nicholas Taleb, who understands the math and applies the lessons to economics and finance in a somewhat accessible way. Mandelbrot knew this stuff a long time ago, but is less accessible. There are summaries on the web. I strongly recommend podcasts by Russ Roberts at this site, where he interviews Taleb and many others. It is an absolutely great site to listen to, and you can make your own decisions about what they say.
One lesson from Thomas Kuhn’s "Structure of Scientific Revolutions" is that just before society recognizes a new truth (eg helio-centricity after geocentricity, Einsteinian relativity after Newtonian mechanics, quantum theory after classical physics, and, I postulate, gold-currency after fiat) the side advocating the (lesser-correct) historical/conventional model is fully entrenched and most convinced of its position, even to the extent of ridiculing, ostracizing, and punishing advocates of the new (truer) world view. But, because truth always finds a way, eventually the ideas closer to truth are generally and broadly adopted by society. The market as a whole has always eventually rejected fiat currency and central banking because they do not promote truth in value. It will happen again. I so wish we would stop testing these failed theories, they have never worked, and can’t.
[bbacq]: There was a time in history when most people didn't sit in Plato's cave watching Munger's, Gates', and Buffet's shadows dance, and instead went outside to see reality, and they didn't retreat back in fear.
Tycer: "Please enlighten me as to when that was."
To use your own word, I think the period of history known as "the enlightenment" was an era of exceptional reason, and the use of independent thought, and this enlightenment resulted in what is probably the best kick at the self-government can, the constitution of the United States of America. The US expansion into the west was another time when people didn't fear truth, and confonted uncertainty head-on (apologies to indiginous North Americans - Canadian natives fared at least a bit better that those to the south). I think that the latter part of the reign of Kublai-Khan is another such time. There is very little independent thinking these days. We have been trained in group-think. I hope all reading this have read "Animal Farm" and "1984"...Tycer: "I hope it can be. However it seems to me that with all our whiz-bang gizmos and such the human animal has not evolved in a positive manner is 5000 years or so. History may not repeat itself, but we sure seem to interact with each other the same."
Tycer, does not our interaction here and now, in clear view of anyone who cares to seek it out, constitute for you the perfect counter-example to your own proposition? The human animal need not evolve for our behaviours to change, and behaviours have indeed changed dramatically in 5000 years. We have never had the ability to interact as we now do. We have never had the power to self-organize across geography, race, culture, societal status, the works. The printing press, a relatively simple and evolutionary improvement on an existing technology, writing, caused massive disruption and huge power shifts away from the then all-powerful Catholic Church. The internet has just got started! Do you really argue that the internet, the web, the blogosphere, the webs of social networks - all of this - are not revolutionary, and will have little societal effect? It is not a credible position. Individuals are growing increasingly empowered, through nothing but knowledge of something much more closely approximating truth than what they are spoon-fed by "authorities".Tycer: What is your definition of market-tests?.
In the context used, a run on a bank. If a promissory-note issuing agency (such as a bank issuing gold-backed currency notes) starts to smell bad, and there are freely-available alternatives in the market, wealth will flow away from the skunky bank. Individuals and other legal entities with savings will, feeling the risk of continuing to save in the [failing, fraudulent, imprudent, over-extended, opaque, whatever-reason] bank, will withdraw their deposits and move them to an institution in which they have more trust. If the bank cannot survive under these conditions, ie is unable to call enough debt quickly enough to staunch the outflow of assets, it fails the market-test, is insolvent, and enters bankruptcy, defaulting at least partially to at least some proportion of its creditors. The entire sovereign state of Greece has failed a market-test recently, and is paying nickels on the dollar on its debt notes. A market-test and default in all eyes except those of some centralist bankers who had a vested interest in "managing" the Greek default, and who used MFGlobal (and their creditors) as sacrificial victims. The entire Euro-zone is currently experiencing a market-test, which it will fail.Specie-backed currencies, as you pointed out, have been manipulated in most if not all cases. It would be great if the current money masters would willingly give up their power to be replaced by your private competing minters in a non coercive system. My thought there is that currently, those that hold the most gold are the ones making the rules and will fight tooth and nail to keep it. My personal opinion is that their power is so great and their morals so low that modern society would not survive the war that brings that change. Even if enough people were ever to awaken and band together before communication was severed to attempt that change the others in the cave of Prussian education would surely kill them. At least we would finally find out if Yamashita's gold is fact or fiction.Thanks, Tycer, I'll go have a look at Nathan Martin. There are lots of specie-backed examples, but the US wild west is an interesting one, I think. I think it is the freeest money currency system we have ever experimented with.Nathan Martin’s opinions on gold backed currency make sense to me. Perhaps the longest running currency was completely fiat based and worked until specie-backed currency was forced on the populace. I’m referring to Tally Sticks. A benevolent master of all might be the most peaceable end even if we do get the short end of the sticks.
Tycer, I encourage you to be optimistic. The communications genie is out of the bottle.
It is not necessary that "the current money masters would willingly give up their power":
They have no power that we do not willingly grant them.
All we need is enough 12-year olds explaining the obvious, and they have no power whatsoever. The only "power" they have is deceit, and now that we can all talk openly about this stuff, consult the guide of history, understand what math and science have to say about it, it is just a matter of time, and, I think it will be internet-time, not Roman-time in which the paradigm shift occurs. It is for this reason that I advocate ErikT to stop trying to predict how things will behave within this foolish system, and instead focus on enlightening people on the ways in which it is broken, and how it can be fixed, to everyone’s great benefit.
We no longer need to go to war to get enlightened.
A religious person would tell you, Tycer, that we already have a benevolent master and his name is God, or Allah, or Deva, or Brahman, say. I have a slightly different view, but they map closely onto each other, I think. Tycer the problem with humans as benevolent dictators is that we are both mortal (we die) and fallible. What you propose is not sustainable, and tally-sticks were implemented by coercive central government/banking cartels that just happened to be the most powerful in the area at the time. It would not be a step forward. More fiat is not the answer, because there are dramatically superior alternatives.
The only answer is to devolve the authority for the big and difficult decisions and problems to something bigger than any of us, ie all of us, acting in freedom without coercion. This is a very important concept, and we fail to grasp it at our peril.
Tycer you mention gold, and its concentrated ownership in the hands of those "who make the rules". Two points. First, I am disappointed constantly in the perception of powerlessness amongst the electorate in our western democracies. In Canada recently, we defeated some insane internet-surveillance legislation through nothing but people speaking their minds publicly. The advocate of the bill Vic Toews has been thoroughly discredited, his career is probably over. My son now tweets his every move to Vic, just in case Vic wants to know where he is and what he is doing, and he is not the only one ridiculing these guys who just don’t get it.
Once it is the subject of broad, open ridicule, the end of a coercive authority is near.
The internet (the market, Gaia, God, whatever you want to call the collective will and wisdom of the people of this planet) is going to bite back very hard at attempts at "control".
Second, it may not matter who has the gold. True, historically gold has been king, and silver queen, if you will. I am sure the market had lots of good reasons for making this decision, and we could discuss and try and understand them. But it is not necessary that gold be the specie backing all future currencies. In fact, there may be very good reasons, many of them discussed on this very thread, that gold is no longer as suited as silver or some other specie.
Just as they destroyed the value of the currency that was meant to be convertible to gold, the US dollar, they have now largely destroyed the money-value of gold. Just look at all the wasted effort on this blog trying to understand "the price of gold" and where it might go, how much gold might actually exist, what the leverage ratios might be, etc.
We must have a decent idea of scarcity and ownership concentation/distribution of a specie for it to have value as money. I think there may now be enough confusion about gold that its money-value is in decline (though still rising relative to fiat), because it is no longer so easy to have faith in gold’s value, because of all the "how much is there? Where is it?". I am not so sure the same is true of silver. Previous above-ground silver stocks are largely depleted, and I do not believe (anyone have data?) that silver ownership is as concentrated nor as sullied through leasing and leverage as gold. I’d love to see data, because this is important. But it is not impossible that we see silver-backed currency, as some currently propose for Mexico.
Tycer, thanks for the chance to chat and your warm welcome, and I’ll check out that link.
@JimH: I find your posts refreshing. Eric Sprott deserves our praise. He keeps his gold just down the street from me here in Ottawa, and conducts surprise-audits on the Canadian Mint, in whose vaults he keeps it. I trust Eric much, much more than I trust our governments, who may, in the end, nationalize his efforts at bringing truth-in-value back to the markets. We must all speak out before that happens, or suffer the consequence of our indolence and indifference. Keep posting, you are closer to the truth than many…
@Earthwise: How lovely for you and ErikT that you are engaged in mutual admiration! Do you have something constructive to add to the discussion other than offering up that it is better to trust others than one’s own mind, and speciifcally, to trust ErikT? I don’t understand the "deepest bench" comment. Is there a "home team" here or something? If so, the newbie (me) would like to know!
@ Everyone Else: Please look at the problems more deeply than does Earthwise, and learn how easily are corrupted ideas like "price" and "value" and "money-supply" etc in a monetary system based on nothing but promises to ourselves that are taxed by others for their own benefit. Read everything very, very carefully, and let no-one be the arbiter of your perception of truth other than yourself.
End central banking before central banking ends us. Don’t trust me, just look into the facts.
best regards,
bbacq
I hope you accept my apology above in the spirit offered.
You wrote:
My point is, in the extreme circumstance that allocated accounts are designed to hedge for, I think all bets could be off and the rule of law could easily be suspended.I think it is useful that this discussion has progressed to recognizing that the rule of law has broken down. MFGlobal and other financial atrocities should make it clear to everyone that something like nationalization of private assets is not that far away unless we act to stop it, by ridiculing and removing from positions of authority those who do not serve the public interest.Problem is, I don’t know if any viable alternative. Private vaulting like the KWN guy appears to be selling solves nothing - if the government decides to change the rules, they know safe deposit boxes and private valut facilities are the first thing they should lock down.
But I must suggest that the obvious viable alternative is to invest in ABCD: Anything Bernanke Can’t Destroy. I didn’t come up with the acronym, but it is remarkably apt.
I’ll offer up again to discuss whether conventional deflation and consequent asset-price reductions (as measured in fiat) is even possible when it so obvious to so many that such a scenario under the current situation of derivatives-to-the-moon will also likely bring down the currencies themselves, in which these prices are quoted. Victor-the-cleaner and I were able, elsewhere, to at least reach the point at which we largely understood which points were in dispute. It can be exhausting unless one stays quite focussed, but it is useful for the public audience.
best regards,
bbacq
I’d like to direct a question at the brain trust on this thread in the hopes that I may finally get an answer to a question that has bothered me for quite some time.
Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?
To continue, the thesis around endogenous money creation fundamentally disagrees with the widely held belief on how money (debt) is created, and represents that this is a demand driven system that simply responds to debtor requests for loans, and backfills these requests (after the fact) with capital reserves, fiat or otherwise. Further, Minsky’s instability hypothesis suggests that a dominant failure mode in such a credit based economy is speculative and Ponzi based lending, all of which we can readily observe.
And from here we of course have the system of credit default swaps, estimated by some to be in the vicinity of $600+ trillion, which are really more akin to insurance policies than monetary instruments, overhanging the substantially credit based economy.
So, how, exactly does a gold standard provide any relief to this system, what would change specific to these subjects if we had a gold standard, and how would it change?
In responding I don’t mean to lay claim to being of the braintrust here.
Keen isn't talking about gold standards in that article, he is talking of "free banking" issuing fiat currency. You'd have to quote specific text to allow better understanding of your intent. I don't like being forced to accept our current fiat scheme, and uncapitalized "free banking" doesn't sound like a very good idea either.
Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?
To continue, the thesis around endogenous money creation fundamentally disagrees with the widely held belief on how money (debt) is created, and represents that this is a demand driven system that simply responds to debtor requests for loans, and backfills these requests (after the fact) with capital reserves, fiat or otherwise. Further, Minsky’s instability hypothesis suggests that a dominant failure mode in such a credit based economy is speculative and Ponzi based lending, all of which we can readily observe.Yes. Endogenous money creation (and destruction) by the market seems to be the dominant mode for creating additional money beyond fractional-backed specie in those models as well as for fiat currencies. Yes, some sort of disincentive to excess is required for the system to remain stable. We have observed excess and failure where we have created legislation that removes disincentive to fraud and imprudence in lending and money creation. With legislation that ensures consequence to imprudence under the rule of law, money supply and demand are met in a similar fashion as for any other good.
And from here we of course have the system of credit default swaps, estimated by some to be in the vicinity of $600+ trillion, which are really more akin to insurance policies than monetary instruments, overhanging the substantially credit based economy.Yes. It is a Ponzi scheme of unprecedented scope and scale, the first global Ponzi scheme, in fact. Hurray for globalization, eh? And all the insurers are insuring themselves in a giant distributed feedback loop. And the system is inherently unstable and uncontrollable. Scary, kids.
So, how, exactly does a gold standard provide any relief to this system, what would change specific to these subjects if we had a gold standard, and how would it change?Well, a gold standard would replace this system. This system wouldn't exist. A system that could work reasonably well, and much better than our current system is one in which: - any country wishing seriously to engage in global trade moves to a specie-backed currency, specie of their choice. - ideally, every country implements decentralized private banking as below, but if central, so be it, they will just lose in global trade and thus punish their own citizens. I feel for them. - international trade, ultimately, is settled in specie, at the currency-possessors discretion. Of course, banks may choose to retain their trading partners' currencies instead of specie at their discretion. But all notes are callable and convertible into specie, else inernational trade law has been violated. - the countries that are smart will not use central+fractional banking, which will continue to impoverish their populations, but instead move to competing highly-regulated, highly-transparent banks that are empowered to take deposits, make loans, and issue the national currency, under their own name. While all notes are nominally freely exchangable for specie, any bank that tries to make too many loans or print too many bills, beyond that required by their share of the endogenous money-creation demand will suffer note depreciation relative to its rivals, and either be driven out of business by a run, or assemble their feces and re-instill confidence in their prudent management of their creditors' deposits. The multi-currency software out there might not even need to change at all. - sufficient competition must be ensured, ie lots of issuers, and limits on absolute balance-sheet size, regional dominance, or overall money-creation position limits might be required. I would certainly start with them. Too big to fail is too big to exist, and it should be stopped before it gets that bad. - I think it would probably be a good thing if banking regulation precluded limited liability in the sector, ie that bank directors and shareholders be held fully liable for the banks' balance sheets. Banking should be boring, so that the (productive) rest of us can forget about it again and get on with our lives. The system as proposed does away with the objections you mention. Disincentive to imprudent lending and excesive note creation exists intra-country for those who choose this path, and their economies will thrive, all else equal, and provide a market-based disincentive to those countries that choose either not to play, and continue with fiat (which will devalue relative to the other currencies), or to play, but using a central bank, which will then prolong the excessive government borrowing, taxation-through-inflation, etc, and they too will devalue. I agree the current system is an absolute Ponzi scheme, and we all need to move the discussion to the simple replacements that exist, are not hard to implement, and will be a lot better in the long run. I can't see the situation resolving any other way than a return to specie-backing in order to restore faith in international trade and currency markets (or war). It might take a long time, and we have to endure a lot of pain, or we can rip off the bandaid and expose the wound to the fresh air to heal. The first countries to make this move will have a huge head start. Ooops? Did I hear a starting pistol come echoing around the globe from the far east just now?
Hi bbacq,
Apology accepted, but for the record, I never thought one was necessary. Your passion for the subject matter at hand did, in fact, briefly start to lead you down the path of ad hominemism. I’ve done the same thing myself on several occasions. As the pot, I won’t take issue with the kettle on that score.
The reason I think we are "talking past each other" is that we have different interests (objectives?) that bring each of us to participate in these forums. You seem to be very aware of the shortcomings of fiat currency and the risks they pose to society. I couldn’t possibly agree more. Believe me, you’re preaching to the choir with almost all of what you write. Your agenda seems to be to express your views in hopes of "waking up" the masses to the shortcomings of fiat. I can relate to that, too. I spent several years doing exactly that, and I relate to both your passion for the subject and your frustration with the masses for "not getting it".
But to be honest, I’ve lost interest in personally volunteering my time and energy to serve as a sound money evangelist. I’ve spent a lot of emotional energy on that agenda over the last 5 years, and it’s been a very un-rewarding experience. The vast majority of the populus still don’t get it, and show few signs of wanting to. So now I focus my energy on trying to figure out what actually WILL happen, as opposed to what SHOULD happen if I were in charge.
bbacq, please rest assured that I agree with much of what you’ve said about what should happen, and why a commodity-backed currency would be better than fiat. I get it. Honest, I do. I’m just not interested in further discussing the subject - that’s all. I’ve resigned myself to accept the unfortunate reality that we are a long way from society at large recognizing these things, and I choose to focus my mental energy trying to figure out what is going to happen next, as opposed to evangelizing what I think should happen next. And unfortunately, I stand by my comments a few posts back: Sadly, we’re a long way from moving back to sound currency, and I remain convinced that the most powerful people in the world have a very strong personal incentive to preserve the fiat system, which is the source of much of their power.
All the best, and welcome to the site.
Erik
[quote=darbikrash]
Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?[/quote]
The fallacy of your statement is that there is "only a small, token, fiat component". The entire system is fiat, and the credit system that makes up most of the economy is denominated in fiat currency. This means that debt can be inflated away by debasing the unit of account (fiat currency).
The primary purpose of a gold standard is to limit the quantity of money. In the case of actual currency, there has to be gold to back it, so unless and until you can mine more gold, you can’t expand the money supply. In the case of credit, you still have the ability to create credit out of thin air, but to whatever extent you have a reserve ratio requirement, the need to back the system with a reserve of gold-backed money means that the growth of the credit system is proportionally limited.
Of course, this opens the door for those who believe in central planning to manipulate the economy by adjusting reserve ratios, and to that extent, there is good reason to observe that a gold standard doesn’t really "solve everything", although it would be a start.
But honestly, I think all this discussion is academic. The whole "Gold Standard Debate" is predicated entirely on the belief held by some people - myself included - that government being able to arbitrarily regulate the money supply is not a good thing. We need to face up to reality here, folks. If anything, the trend right now is more toward collectivism and "the Power of Government". Most people hold the belief that Governments needs and should have the ability to manage the money supply. That’s why Krugman has a nobel prize and most people never even heard of Von Mises.
I’m sure bbacq can provide us with 2,000+ words elaborating on why this sucks. But the simple, short, bottom line here is that most people think government controlling the quantity of money arbitrarily is a good thing.
Erik
[quote=bbacq]@Earthwise: How lovely for you and ErikT that you are engaged in mutual admiration! Do you have something constructive to add to the discussion other than offering up that it is better to trust others than one’s own mind, and speciifcally, to trust ErikT? I don’t understand the "deepest bench" comment. Is there a "home team" here or something? If so, the newbie (me) would like to know!
bbacq
[/quote]
bbacq,
There is no mutual admiration as I have yet to do anything that would warrant Erik’s admiration. But neither have I warranted your scorn that borders on the obnoxious. I can only surmise that it comes from a sensitivity caused by your misperception of partisanship on my part into a previous digital altercation between you and Erik. Gee whiz, that must have really hurt your feelings.
I never "offer(ed) up that it is better to trust others than one’s own mind" so please don’t try to put words in my mouth (or in my posts or whatever), but now that you mention it, how does one go about trusting one’s own mind if one doesn’t bother to inform it? This is what I was trying to express, my gratitude to everyone (especially Erik) for providing valuable infomation from a broad perspective, free from the taint of personal gain, so that I may go about trusting my own mind based on sound information from a variety of trustworthy perspectives. That gratitude also included you, but in light of your rudeness it is hereby withdrawn. Dude, I’m a blue collar guy, working in a construction industry, with three young children, a small farm and a million preps underway. I don’t have time to study the finer points of things economic. So therefore I am deeply indebted to those that freely share their expertise. So, no I don’t have anything constructive to say. I have an IQ two points above crash test dummy. Sorry; that’s my lot in life. All I have to offer is thanks to those who deserve it. If that’s not enough for you, then ignore me.
The deepest bench comment, likewise, was a hat tip to the valuable (to me) contributers here. If you look at other similar sites, after the marquee figures (Turd, Puplava, Quinn, Sinclair, King etc.) those who comment there (The Bench, if you will) aren’t nearly as enlightening as the "heavy hitters" (oops, there I go again with the baseball analogies. Sorry.) that show up here. The lively debate by knowledgable people is very rewarding and helpful to those less knowledgable. That is, however, when it’s not laced with condescension and sarcasm.
The gold chart sure isn’t looking pretty. When I commented on the major (since 2008) trendline being violated, I said I expected a re-test of 1640 - 1650 (where the line is now). We got 1600, then it turned south again. Selling off pretty hard now in the overnight session (daytime here in Asia).
Again, I’m not a TA guru, but IMHO if we decisively penetrate the 1525 lows of the last several moves, the next downside targets are in the 1300s. QE3 would change everything, but unless and until we get it, I don’t think the gold picture looks good at all.
Best,
Erik
[quote=Erik T.][quote=darbikrash]
Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?[/quote]
The fallacy of your statement is that there is "only a small, token, fiat component". The entire system is fiat, and the credit system that makes up most of the economy is denominated in fiat currency. This means that debt can be inflated away by debasing the unit of account (fiat currency).
The primary purpose of a gold standard is to limit the quantity of money…[/quote]
Fallacy? The amount of of credit-money (money backed by debt) created in the banking system absolutely dwarfs the fiat-money issued by the central bank.
A gold standard does nothing to limit credit-money expansion in the banking system, or the "roaring '20s" would have never occured.
The only reason that the goldbug herd wants a gold-standard, is because they think it will make them rich (or richer). I find that extremely naive, unless you are a banker. History has proven that "sound money" is a fairy tale.
Jeff