text:
Here's a neat little concept that FOA introduced briefly in 1999. I think it explains a lot about the inflation, deflation, hyperinflation debate when it finally sinks in that this is where all the money went for the past 30 years: into inflating the credibility of the $IMFS far beyond the underlying reality. And yes, it has a direct impact on the Freegold revaluation as well. So here I will try to expound on this enlightening concept just a bit.
Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economic expansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding the expansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to a much more expandable "balance sheet money system" as I like to call it — or another name I like is "purely symbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life" gadgets, widgets and shipping lanes that the world had never before imagined.
For the next three or four decades we would be able to comfortably afford the new introduction of Betamax VCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digital cameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderful products would be built cheaper by someone else on the other side of the world and shipped to us cheaply using the oil purchased from the Middle East with easily available U.S. dollars.
Sony BetaMax®
The reason I like the term "balance sheet money" is that whenever there is a need for more dollars they can be easily gotten from any bank's balance sheet. The dollars don't have to be there in the bank. You simply jot down the "need" for them on one side of the balance sheet and the dollars magically appear on the other side. Presto!
Of course once that "need" (demand) is supplied, the balance sheet must then be serviced with interest. But the thing about easy money is that you can always borrow new to service the old. In the previous system (con)strained by its parity fixation to the U.S. Treasury's limited supply of gold all these wonderful life-enhancing advances would have put a deflationary pressure on the dollar.
What this means is that when all these new products came to market, the dollars we needed to purchase them would have become more and more precious with each new widget that came to market. The cost to borrow dollars to buy a new BMC-100P or DynaTAC-8000 would have been prohibitive. And even if you did borrow the money, the service of that debt would have grown more and more burdensome over the life of the loan as dollars became ever more precious.
This deflationary dynamic would have stifled the global economic growth rate and confined it to only reasonable risk-taking. Which is part of the reason the foreign central banks, represented by the BIS, did not lobby the U.S. to officially devalue the dollar against its Treasury gold in 1971.
Rather than closing the gold window, the U.S. could have, for example, raised the price of gold to $200 and kept the system going for another 30 or 40 years. A move like this would have been the mathematical equivalent of increasing the Treasury's physical stockpile 5X to double what it was at the height of the Bretton Woods experiment.
But while that would have satiated the monetary transgressions of the past, it would have done little for the future. It would not have substantially changed the system to one of easy money. It would only have extended the old system of hard money.
BMC-100P - The first camcorder
It was reasoned at that time that more than just the ridiculous price of gold being broken, the system itself was broken, and needed a global finance structural change. So the international consensus was to let the U.S. default outright on its gold obligations rather than lobbying for a revaluation of its gold at a new fixed rate. But then continue using the dollar anyway, as long as relatively cheap oil could be gotten for dollars.
And with this decision, the stage was set for a renewed global (Western?) economic growth spurt, much like after the end of WWII. Only this time, the value lost through the non-delivery of U.S. Treasury gold would be more than replaced by the value oil brought to the new world economy, especially with first-of-a-kind products like Pong, released for the Christmas season in 1975.
Pong™ - The first video game
Even at the higher oil prices of the 1970's, the economic demand for oil proved to be a far superior "backing" to the dollar than the depleting Treasury gold had been. And in a certain (limited) sense, the world got its first small taste of Freegold in the 1970's.
But as gold's price began freely rising in the global marketplace, the old alarm bells went off in the dollar's management office. The dollar, which had always been viewed at par with gold, was now seen to be falling as gold soared. So during the mid to late 70's the U.S. Treasury and the IMF held a series of gold auctions to flood the market and quell the perceived danger. But by 1979 the demand for gold was so overwhelming that the auctions had to be stopped.
Through '78 and '79 the dollar plunged against foreign currencies, and in July of 1979 a desperate Jimmy Carter appointed the tough New York Fed President Paul Volker to head the "deeply divided, inexperienced, soft and indecisive" Federal Reserve Board. Then in early October of that year, while attending an IMF meeting in Belgrade, Yugoslavia, Volcker received "stern recommendations" from his European counterparts that something big had to be done immediately to stop the dollar's fall. The general fear at that meeting was that the global financial system was on the verge of collapse.
TRS80 (Pronounced "Trash Eighty")
Returning to the U.S. on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy. The Fed would switch from controlling interest rates through the Fed Funds rate to directly controlling the money supply through bank reserves. One of the side effects of this sharp policy change was that interest rates would now be governed by the marketplace rather than the Fed. The Fed did still raise its discount rate from 11% to 12%, but then the market took the Prime Rate up to 20% within 6 months where it mostly stayed for the next year and a half.
It was later observed that Volcker's 1979 policy change was the most significant change in Fed policy since 1932, when in the middle of the Great Depression the Fed abandoned its "real bills doctrine" and started massive open market purchases of government bonds.
In early 1980, Volcker's new Fed policy began to bite. As interest rates rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold were lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar.
LaserDisc™
Many facets went into this change in investment attitude, but one concrete change in the U.S. financial system was the most telling. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $400 Billion. By late 1982, U.S. funded debt had tripled to about $1.25 TRILLION. But the "permanent" debt ceiling still stood at $400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary!" In late 1982, realizing that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.
The way was cleared for the subsequent explosion in U.S. debt. With the U.S. being the world's "reserve currency," the way was in fact cleared for a debt explosion right around the world. It was also cleared for five of the biggest bull markets in history.
The global stock market boom of 1982-87
The Japanese stock market/real estate boom of 1988-90
The Dow (and then Nasdaq) led boom - late 1994 to March/April 2000
The great global real estate boom of 2002-06
The global stock market revival of 2006-07 [1]
DynaTAC-8000
And thus, in 1980, began the modern era of Credibility Inflation.
Salting the Mine
Most simply stated, credibility inflation is the expanding confidence in the fiat financial system to always deliver a higher payoff tomorrow than today. And through credibility inflation we ultimately destroy the currency structure by believing it can somehow deliver more than reality will allow.
Credibility inflation is the exact antithesis of price inflations like the 1970's. It is why we saw low consumer price inflation for the last 30 years relative to the massive monetary and financial product inflation. It is partly why we saw gold stagnant or falling for 20 years. Yet it is just as much a product of monetary inflation as regular price inflation is (more on this in a moment). And it is much more catastrophic in the end.
Periods of high credibility inflation are generally not followed by smooth cycles of credibility DEflation. Instead, they tend to SNAP BACK into sudden real price inflation when confidence abates. What happens in the most extreme cases is real price HYPERinflation.
This is one of the main concepts deflationists and mainstream economists completely miss; the SNAP-BACK of credibility inflation that can instantly take down their precious fiat currency. And it is their intentional avoidance of this obvious concept that delivers aid and comfort to masterprinters like Gideon Gono and Ben Bernanke.
When people try to protect their assets against the effects of fiat money, what are they really fighting against? The first inclination is to say "rising prices." Yet it's much more than that! Most everyone agrees that the interest rate paid by the banks never covers the loss of buying power brought on by price inflation. Especially the "after tax" return. It's the same old story, played out decade after decade. We must "invest our savings" (or become a day trader?) because the money will erode in value! Even at 3%, price inflation can eat away at any cash equivalents.
But, price inflation isn't the only story that impacts us. Rising prices come and go, but money inflation continues to affect us without fail. So why do people feel better when price increases slow or stop, even as money inflation runs ever upward? The good feelings usually evolve from the effects that money inflation (increases in the money supply) has on financial instruments. These assets take on the very same characteristic that the rising prices of goods once exhibited. They run up in currency price.
During these periods of "less goods inflation" another sinister form of mindset lurks in the shadows. Credibility inflation! Yes, it has been here many times before as every fiat currency alternates its effects upon the feelings of the populace.
Fiat currencies must, by definition, always expand in quantity. Their continued usage and acceptance is always obtained with the bribe of "more wealth to come!" Without that bribe, humans would never fall for holding a debt to receive the same goods in the future if they could get the real thing today. Human nature has always dictated that we buy what we need now instead of holding someone's IOU to receive it later. That nature is only changed through the "greed to obtain more." Like this: "I'll hold my wealth in dollars as long as my assets are going up. Later those increased assets will buy me a better lifestyle as I purchase more goods and services than I could buy now."
This is the hidden dynamic we see today. Just as destructive as "goods price increases," "credibility inflation" impacts our emotions to "hold on for the future, more is coming!" In every way, "credibility inflation" is just as much a product of an increase in the money stock as "regular price inflation" is. As cash money streams out to cover any and all financial failures, we begin to attach an ever higher credibility to the continued function of the fiat system. In effect, the more money that is printed, the higher we price the credibility factor. [2]
Selling the Salted Mine
Is this not where we are today? Interest rates – and with them, bond valuations – have run their 30 year course from 20% down to 0%. The credibility of paper assets has taken at least three severe beatings in the last decade. And now, to simply slow the acceleration of credibility DEflation, every manner of bailout and market rigging is being employed, practically in broad daylight. And this on the assumption that the global flock of sheep will only watch the numbers, not the men making them or the underlying economy from which they spring.
GDP is one of the great deceivers in the fiat money world. During the last century (??) or so, some form of GDP has always been used to measure the great mass of human endeavors. Yet, throughout this time, some form of fiat currency has always been in effect. Even during the Gold standard, fractional reserve banking expanded "gold note money" more so than the "gold money" in existence. Prior to 1929 this effect, if not creating outright "price inflation" during a time of Gold standard policy, was creating "credibility inflation" in the minds of investors. Using the backdrop of a growing GDP, people bought into inflating financial assets and ignored these signals as evidence that the fractional currency system was failing. Even though the dollar contained a policy statement to supply gold, back then a gold loan was still only good until everyone asked for gold.
The same thing is happening today. People destroy the currency structure by thinking it can deliver more than reality will allow. Instead of all debt failing slowly with each upward march of price inflation, prolonged "credibility inflation" snaps all at once as investors try to suddenly revert to a "buy now mentality." The inability of government authorities to contain the fiction of "good debt" is usually the feature behind the investor mood change. The "snap back" into a sudden "real price inflation situation" caused during this stage by a currency failure always breaks the whole structure. We approach this end today!
The GDP has been the relative gauge to mark all other measurements against. Even so, its numbers reflect little more than the result of an "expanding fiat money supply." Yes, there have been recorded downturns in GDP, but these contractions would have been worse if measured in real (gold) money. In opposite fashion, expansions paint a much brighter picture as all financial liabilities seem less a threat if held against a rising GDP. I submit that the GDP figures offer little more than a way to entice investors to increase their "credibility image" of our monetary system. Fiat moneys are always on a long term upward expansion, and they can hardly do less than bloat the picture.
Someone I know once said; "your wealth is not what your money say it is!"
A great historical example of credibility inflation with parallels to our present financial and monetary system was the system in France under the direction of the esteemed Scottish economist, John Law. In 1716 Law established the first French central bank, the Banque Générale, which was later nationalized and renamed the Banque Royale. Law used the Banque to introduce paper money in France.
Simultaneously, Law aggregated the trading companies in the French colony of Louisiana into a singular monopoly under the name "Company of the Indies" and sold shares of this company back in France. Law exaggerated the prospects of the company so well that he was actually appointed Controller General of Finances (essentially the first French Central Banker) by Philippe d'Orléans and given the official job of pumping this stock. In a way, John Law was kind of like the "Jim Cramer meets Larry Summers" of his time.
Wild speculation on the shares of the Company of the Indies led to the Banque Royale issuing more and more paper money to fund the monetary demands of the buying frenzy. And the "company profits" owed to the shareholders were also paid in fresh paper money. John Law's credibility was being entirely financed by his printing press.
Then, in late 1720, opponents of John Law's paper money attempted en masse to exchange their paper notes for gold. This forced the Banque Royale to cease physical gold "delivery," declare the essence of "force majeure" (which incidentally is a French term from French law), and admit it had issued much more paper than it had in gold. Both the Company stock value and the paper money itself plunged, ultimately to worthlessness. The monetary system in France was revamped six years later, but by the end of 1720 John Law had been disgraced, relieved of his official job, and had to flee France a poor man. He died in poverty nine years later.
Trading Salted Mines
One observation we can make is that in the long-line cycles of monetary history, technical (momentum) trading emerges in the very late stages of cycles in its most frenetic fashion. This is when it draws the most people into the unproductive activity of trading for trading's sake. And this is when it draws in the greatest profits, right before it delivers a catastrophic total loss.
In the early stages of these long-line cycles the greatest profits in society come from productive enterprises like building large companies from the ground up. But in the very late stages the greatest profits seem to come from paper churning and speculation in things that were previously traded mostly on fundamentals, based on actual, physical use.
We can see this in the famous bubbles like the tulip bubble, the Mississippi bubble, the South Seas bubble, the dot com bubble and the housing bubble. But it also occurs at the end of currency cycles. History is full of stories of traders frantically trying to trade out of their positions at the end of long-line cycles, while the currency burns around them. Look at any list of historic hyperinflations to find examples.
The modern version of this late-stage trading fad is most prevalent in the West, because that is where modern currency flows into financial assets at the highest rate relative to their real world, physical counterparts. For example, Western paper gold traders look to the seasonal preferences of Eastern physical gold users to plan their buys and sells. The Asian harvest season, after which farmers invest some of their year's surplus income in gold is closely watched by Western traders. As is the Indian wedding season where every year Indian brides are adorned with physical gold.
Western paper gold traders love front-running these Eastern gold-buying seasons. Recall ANOTHER's comment on this from my last post:
Everyone knows that western minds don't like or want gold, but if they think you like it they will trade it up in price for the sake of "sticking it to you." Enter the world of "paper gold."
This paper trading mentality works really well right up until the moment it doesn't. And that's when it can deliver a total loss. I sometimes wonder if it should even be considered a profitable activity when a split second of fundamental phase transition can take away a decade of technical trading profits. Or the inverse, when the price of a fundamental misjudgment can be the opportunity cost of generations' worth of wealth. In a way, this is the hard question Freegold poses.
Getting Out Before the Collapse
Above I mentioned that the snap-back effect when a fiat currency loses its credibility (hyperinflation) is one of the obvious concepts intentionally ignored by deflationists and mainstream economists alike. Another obvious concept they remain oblivious to is that the two primary functions of money are in no way necessarily tied together. Those two functions being: "medium of exchange" and "store of value." Just because we have suffered their apparent fixation for centuries, they are most definitely not fixed by nature.
As long as you have the freedom to spend your money – the freedom to spend the fruits of your labor, which exists everywhere outside of outright whips-and-chains slavery – you have the choice of how to save your money. If you can spend your money then you can save your wealth in something other than money.
This is the essence of Freegold.
A medium of exchange need only have value in its usage (trade clearing) function. It can quickly lose all value when it is no longer used. This long-forgotten principle can be easily comprehended in Antal E. Fekete's "A 'fairy' tale" which I used in The 100 Year Clearing:
Those who would call scrip money "credit created out of nothing" were utterly blind to the true nature of the transaction. Fairgoers did not need a loan. What they needed, and got, was an instrument of clearing: the scrip, representing self-liquidating credit.
In this example the scrip money at the fair had value only through its use at the fair, not intrinsic in itself. After the fair, if you ended up with a trade surplus (extra scrip money), you turned in your medium of exchange for gold coins, the tradable store of value at the time. Can you imagine how this concept could work in a fair that's open for business 24/7/365?
So how can we possibly have one thing as a medium of exchange and something else as the store of value in our modern world? Has this ever been tried before in recent times? Of course it has! We have been doing it all along!! But the problems that ultimately come arise from those stores of value that are denominated in, and tied to, the durability of the scrip money, the medium of exchange.
Once upon a time, when the medium of exchange was physical gold coin, it was very durable. And stores of value denominated in that durable medium of exchange, denominated in gold, were quite durable for a time. But through the gold standards of the past century that "paper denominated in gold" became the medium of exchange. And now gold will once again become the store of value.
You see, these two monetary functions play off each other in a see-saw fashion. As "assets" (claims really) denominated in the medium of exchange fail and collapse, true physical "store of value" assets alternately rise to the occasion. It is only our ingrained misconception that both monetary functions must be somehow fixed at parity with each other that leads us to foolish ends. And understand also that the Giants of this world know better.
The Freegold Monetary Quadrangle – Explained in Gold is Money - Part 3
Today all governments of the world hold only two assets in reserve, meaning "for a rainy day." They hold claims against counterparties denominated in the medium of exchange and they hold gold, the store of value. And some of the more forward-thinking governments are already floating their gold reserves on the books, for all to see.
Now, the claims held in reserve have two vulnerabilities; the solvency of the counterparties and the durability of the scrip they are denominated in. Of course new scrip can be easily conjured on the national balance sheet to keep the counterparties technically solvent so most assuredly it will be the scrip itself that fails. The gold in reserve, on the other hand, has no counterparty and plenty of durability. So what monetary asset do you think will rise to fill the global monetary reserve void when the scrip finally fails? Palladium?
Bear in mind too that these Giant balance sheets can move the price (value) of gold more in a split second than all of us could in a lifetime of buying. And with any such tectonic shift in the importance of gold on international balance sheets, you can say goodbye to the fractionally reserved commodity (paper) gold trading arena and anything remotely associated with it.
The Collapse of the Salted Mine – Hyperinflation
First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).
Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat.
And what sets the stage for hyperinflation is a period of high credibility inflation followed by the loss of credibility. During our period of high credibility inflation the dollar was invisibly hyperinflated in a near-monetary sense. This has already happened. We are already there.
When I say the dollar has already hyperinflated in a near-monetary sense, I am talking about the number of dollars people, entities and even foreign nations think they have in reserve. Not in a shoebox, but in contractual promises of dollars to be delivered more or less on demand by somebody else. Claims denominated in dollars. This is how the vast majority of "dollars" are held; as promises to deliver more dollars. And this is why they are held this way. Because of the more in "more dollars." "Let me spend your dollars today and I will give you more dollars tomorrow!"
The Credibility Waterfall
I think it is fair to say that we have finished our 30-year run of high credibility inflation and we are now in the early stages of credibility deflation. The real question now is, can the credibility of the financial system deflate without tripping a breaker, without causing a credibility waterfall in the currency in which it is denominated?
The difference between today and a few years ago is that a few years ago credibility inflation was being fed by private credit (debt) expansion. Asset values, like homes, were being sustained and driven higher with the arrival of new marks. But today the Ponzi cycle of credibility inflation has peaked, there are no more new marks, and its decline is being managed centrally with the government expansion of new base money to conceal the failures one at a time.
And as in any Ponzi scheme there comes a point when redemptions can no longer be financed by new marks. I think the tipping point of credibility must come once it is clear that Bernie Madoff, I mean Uncle Sam is writing redemption checks that can never be cashed. The point is, we are already past the tipping point. So timing isn't really a question anymore. The credibility waterfall has already happened. But somehow we still have early marks continuing to stockpile rubber checks as if they are worth something. Does this mean credibility still exists? I think not.
I suppose this begs the question, is all that dollar debt out there in the world really worth anything anymore? If you answer yes simply because you cashed some of it in today for new underwear, then I say you didn't answer the question. The question is, is all that dollar debt out there in the world really worth anything anymore? The answer is no, it is not. Only at the margin, where you reside, can it still be cashed in for new underwear. But in aggregate, it is worthless, even today.
And then the next logical question should be, what is gold really worth today? If you answered $1,240 per ounce simply because you bought a gold Eagle today for $1,240, then I say you didn't answer the question. The question is, what is gold REALLY worth today? And the answer is it is priceless, but probably could be had in extremely large volumes for somewhere between $10,000 and $50,000 per ounce. (How much physical gold could China realistically get today if it tried to cash in $2T in debt paper for gold? At today's price it could get more than 50,000 tonnes, but only if that's the real value of gold.)
Only at the margin, where you reside, can physical gold still be had for $1,240 per ounce. But in aggregate, in the vaults of the world's central banks as the only reserve asset not tied to the medium of exchange, it is priceless, in the truest sense of the word.
My advice: Get as much of this priceless reserve asset as you can while it's still going for $1,240 at the margin. Seems like a bargain to me.
[1] Brown text from The Early Gold Wars by Bill Buckler, The Privateer
[2] Blue text written by FOA in 1999
Two!
As I told someone recently, my blog is not written for the gold novice. The concepts and principles I entertain are not found in any Gold 101 class. If you find them interesting, you should probably go read ANOTHER and FOA and then come back. In fact, you should probably read them a couple times to really understand where I'm coming from. The links are to the right.
This weekend my blog turns two! And over the past two years I have watched the number of regular daily visitors grow from 30 to 3,000. Very roughly, that's an exponential growth rate that transpired at about one order of magnitude per year. From 30 to 300 the first year. From 300 to 3,000 the second. And these are the people that stop by almost every day.
To some extent, I believe this growth has a natural limit in the size of the online gold community. Because while my regular daily visitors have grown, the total number of views on certain posts that received wide distribution remained pretty much the same. Ranging from 10,000 to 20,000 readers total on the top posts for the last year and a half.
I share this data without interpretation.
My posts can certainly be read for their face value only, which is how most people read them. And at that level, most counter-points to my concepts appear relatively straight forward. But there is a deeper level of understanding that is available. And at that level comes a certain reward, which some of you know. The rest of you have no idea what I'm talking about. That's okay. Perhaps I'm crazy! Onward…
To set the proper frame of reference for this post I am going to paraphrase/quote from a couple recent articles and then summarize the relevant perspective. The first article comes from the Wall Street Journal yesterday and the second from Bloomberg a couple days ago. What I hope you'll pay attention to is the concept of "The West" as a distinct entity on this planet.
How to Win the Clash of Civilizations
By Ayaan Hirsi Ali
Paraphrased for meaning and to avoid receiving a copyright violation notice from Dow Jones:
In the mid-1990's, the late Samuel Huntington coined the term "The Clash of Civilizations" referring primarily to the clash between "The West" and "Islam." But there are many more than just these two civilizations. There are perhaps seven or eight total. But the most important three that are the building blocks of the post-Cold War era, according to Huntington, are the Western, the Muslim and the Confucian.
The balance of power among these three civilizations, Huntington argued (a year or two before Another started posting), was shifting. The West was declining in relative power, Islam was exploding demographically, and Asian civilizations—especially China—were becoming more and more economically powerful. He also said that a civilization-based world order was emerging in which states that share cultural affinities would cooperate with each other and group themselves around the leading states of their civilization.
This view was not popular with the powers that be in The West. Their vision was for One World, a New World Order if you will, based on Western norms. Huntington's paradigmatic view of a multipolar world was rejected from the left by those who believed all states could be brought together under a single standard of liberal capitalist democracy and never go to war with each other again. A one-world utopia, if you will. And from the right by the equally rosy scenario of a "unipolar" world of unrivalled American hegemony. Either way, Huntington's detractors believed we were heading toward "One World" (presumably under the financial rule of the $IMFS).
China Drains Obama Stimulus Meant for U.S. Economy
By Andy Xie
Bloomberg Opinion
Partially paraphrased for brevity and relevant meaning:
Deflationists in the West are in for a rude awakening, probably in 2012. Stimulus is the only thing the West ever does when a recession hits. But in today's globally-connected economy (where dollar inflation is automatically exported abroad through its reserve function) it isn't effective in the best of circumstances, and is outright wrong for what ails the West right now.
Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated (unbalanced and bass-ackward). So when a government introduces stimulus, the initial increase in demand doesn't necessarily boost local supply.
Just as water flows down, [Western] stimulus affects low-cost [Eastern] economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.
The ideal end to this East-West goods-dollars exchange would be for the multinational corporations to shift production to the West because the cost of labor had shifted. This would have to happen before inflation takes hold in the West. This is impossible because the cost of labor in the West is still 10 times more than in emerging markets. And there are five people in the latter for one in the former.
The more likely scenario is that the West will have to stop stimulus programs when inflation spreads to it from the emerging economies. The most immediate channel is through rising commodity prices. It's a tax on the West to benefit emerging economies that produce raw materials. That's the irony: The stimulus in the West can immediately bring harm to itself. It's also the magic of globalization.
The prices of imported consumer goods will rise with increasing labor costs in emerging economies. China's nominal GDP is growing at about 20 percent per year. The odds are that its labor costs will surge as its worker shortage bites.
Lastly, labor in the West will demand wage increases to compensate for current and future inflation. One may argue that high unemployment rates will keep wages in check. Think again. In the 1970s, the U.S. suffered a wage-price surge even with high unemployment because workers saw through the Fed's "growth first and inflation be damned" intention.
In 2012, the Fed will run out of excuses not to raise interest rates. As the excess liquidity in the global economy will be gigantic by then, the tightening will probably trigger a global crisis as asset bubbles burst.
What really ails the West is declining competitiveness. Globalization is pitting the Wangs in China or Gandhis in India against the Smiths in the U.S. or Gonzalezes in Spain.
Multinationals such as General Electric Co. or Siemens AG decide on whom to hire. The Wangs and the Gandhis offer productivity but have little money. So they are willing to accept low wages to accumulate wealth. The Smiths and the Gonzalezes have wealth and won't accept Third World wages. When their governments give them money to spend, their demand just makes the Wangs and the Gandhis richer and themselves poorer with rising national debt.
When ANOTHER began writing in late 1997, the terms West, Western, and Westerners were prominent from his very first post. We know from later revelations that ANOTHER was himself a Westerner. And we also know that he was writing specifically for the benefit of Westerners, "Western Gold Bugs" in particular.
I believe ANOTHER's delineation of the West as a distinct group in need of a new frame of reference regarding physical gold is one of the most significant and underappreciated concepts in the entire archive. And the shift I believe he described is so all-encompassing as to say everything you think you know about gold, the gold market and the biggest players in that market is mostly wrong.
I believe this is still true today. That most of what you and I read about gold today is wrong on some deep level. And that herein lies the puzzle that is yet to be solved.
In my opinion, the portions of the above articles that I used set a nice frame of reference for the rest of this post. What I have done is quite simple. I have compiled almost all of ANOTHER's paragraphs that directly referenced "The West." Most of the paragraph breaks do represent contextual breaks within the original archive. Yet viewed together as presented here, with the above perspective fresh in your mind, they reveal a few remarkable pieces to the puzzle.
This type of exercise I sometimes do on my own. Today I do it for you. Enjoy.
Westerners should not be too upset with the CBs actions, they are buying you time!
The Western governments needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The Western public will not hold an asset that is going nowhere, at least in currency terms.
Ever notice how many important middle eastern people keep a residence in London. It's not because of the climate. The most powerful banks in the world today are the ones that trade oil and gold. It is in the "city" that the deals are done by people who understand "value"! Westerners should be happy that they do because the free flow of oil and gold has allowed this economic expansion to continue these past few years.
The western world today, as we know it does not use money ! They use "paper currency". To fully understand what that really means you must come to terms with this fact. "When you use paper currency you are placing a value using another persons concept of value" You are using a thought as a means of value! When an investment in stocks, bonds, bank accounts, CASH, businesses etc. is priced in US$ currency you are really holding the "intentions of providing value" locked away in the thoughts of another mind.
One of the great money troubles facing the western currency system today is that many third world people are starting to put a "mind value" on real money, gold. These people don't know the true value of gold money but they know its worth a whole lot more than the world paper currency price now placed on it. And that brings us to the next problem; how can paper currency that represents "the thoughts of a nation blowing in the wind" be used to value real money of ancient world class proportions, gold? It cannot! Any price you can think of will do, as in no price will work!
If the world price can be maintained in the $300s it would be a small price for the west to pay for cheap oil and monetary stability. The battle is now between CBs trying to keep gold in the $300s and the "others" buying it up. In effect the governments are selling gold in any form to "KEEP IT" being used as 'REAL MONEY" in oil deals! Some people know this, that is why they aren't trading it,, they are buying it.
Asia put an end to a sweet deal for the West! From the early 90s it was working very well. But now… The problem with gold physical supply is very real indeed! But, there is no way that the CBs will continue to sell off an asset for its commodity price that has many times more value as money!
Western thought is still linked to gold as a commodity. That thinking is going to change! The world will witness an almost instantaneous run into this commodity the likes of we have never seen before! It will not be "a trading rally" or "a two way street". Bullion will have become a holding for "the lifetime" never to be sold. "Sell and spend everything but not gold"!
If a bank that uses Yen has lost 90% of its loans and holds gold and bullion has risen 500% in yen in a week, to use a western way "would it cut its winners and let the losers run?"
Who can know the thoughts of the "Big Traders" of the world? If they press the physical market, it will end tomorrow. They are by no means dumb as they sometimes show! Most would like to keep their gold at today's price and allow the economies to continue in prosperity! In time and with luck it could all be worked out. But, it is the equity/debt/currency markets in general that are a problem! If only a small, very small very few "western people" begin to buy?? Remember, the other world no ones have gold in their hand. They care not about YOUR debts, these small people have won a great deal and know it not.
To make a long story short, many people who would have purchased bullion years ago have now squandered much of their "safe insurance money" on wall street. It is no wonder that many WESTERN gold investors have now turned bitter on gold. If they knew the truth about this new market they would have turned their bitterness on wall street instead.
Try to live in this outcome and see how different the world will be. It will not be the end of all things, only the changing of most things in "western thought". The "Digital Currencies" will still trade, but we will value them as not before. Anyone who has sold gold they do not have will not be allowed to cover that position. Anyone who has bought gold they do not have will not be allowed to cover that position. Many will lose all they have in a world without honor! Looking back, one will ask, "how could I have thought that noone wanted gold, when more of it was being bought than existed?"
The falling price of physical gold only hurts the mining industry ( and its stockholders ) and leveraged paper buyers. All others benefit from a lower value of gold. Look now as even the western public are buying coins. They help themselves even in the face record Dow Jones.
Will the BIS try to settle this unbalanced market by destroying LBMA? Or will they drive the CBs to lease another 20% in an effort to inflate this "paper gold currency". Just like the fiat dollar, if inflated it loses value. This is not lost to the oil states.
If you owned an oilwell in your back yard and no-one could take control of it, then oil is the best investment. But, most people use various forms of western paper to trade oil and that paper will burn in a currency fire. Make no mistake, a currency fire is now in process and it has much fuel remaining. Even Korea will find out that oil is all that counts. Their paper will die! Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno. If one owns real gold , it will be with ease to view the world currency developments. They will be truly of biblical proportions!
I ask you, when your worth in the ground is equal to much of the earth, is an IOU of the same future value? Only gold has such a history book for reference. These people do not trust foolish thoughts of value from western minds. That history book is only in the first chapter.
This same mindset creates a worry in the back of many a mind in the oil states. It is clear to most, that even a small amount of gold in the asset mix, makes one appear "less western" and therefore "less foolish" when the concept of value and currency are discussed. But, the problem has always been that oil is "so large" in relation to gold that any attempt to convert, even a portion of ones assets creates a distortion in the markets. Of further concern is that; everyone knows that western minds don't like or want gold, but if they think you like it they will trade it up in price for the sake of "sticking it to you".
Enter the world of "paper gold".
You and all western minds must weigh this offer as it is heavy for your side! A great many losses will be for the holders of debt and paper things, but the gains are for a better life.
Thru these "thoughts" I have made effort for many months, in haste, to make clear. My words are plain, but hard, and others have presented this truth in a western way. But, you sir, have made the best of it!
As a "currency of gold" springs from this wind, western trading in this metal will end. The "terms" of all currencies will change as the "use" of these moneys is changed. Many will now know true worth as the "terms" of every asset does find a "real price" and a "real value" in the "true world of things". For the future of most, "the wealth that was shown in paper" will be seen as clouds in the sky!
The gold market is made up of a very broad spectrum of investors. At the very farthest ends of this spectrum lie the persons with the largest influence on the physical bullion. The super wealthy at one end and the "third world no ones" at the other. The middle is occupied, mostly, by the "investors with western thought". The far ends buy bullion. And they don't buy it as a gamble or a game! It is a way of life that has worked, through thick and thin, even before the West was "The West".
Now, on the other hand, this "modern day middle of the spectrum"! Well, they have read why we need gold, but they have never "Experienced" the need for gold! Until that day, when they gain "Experience", most of them will make "A Gamble That They Never Intended To Take". Yes, they do invest in all forms of paper and or leveraged gold and all the while, expounding from the roof tops the coming currency crashes and stock market declines. Even looking for bank closures and bank runs, as they cling dearly to comex options and gold stocks!
Anyone, from the outside looking in can clearly see that "westerners" do lack "experience".
There is a "flaw" in this modern market that many do not quite grasp. In time, they will! There have always been people and companies that make a living dealing in gold. It is an ages old business. Today, we see a phenomenon that is "as none before". It is mostly done by the investors at the middle of the spectrum. The "trading of gold" has grown to a level never seen in history! You read every day, that no one wants or needs gold! In a way those statements are very correct! No investor wants to hold gold, but everyone and his brother ( and sister ) want to trade it! The volume of paper trading, worldwide, on and off market is beyond belief! It has created a type of "Parallel Paper Gold Universe", existing side by side with the physical. The major "flaw" in this system is found in the makeup of the "traders" of this "paper gold universe". Without fail, the majority is made up by those in the "middle of the spectrum", those without "loss of currency "Experience" ". Mostly, they are of "western thought".
I have tried to offer these thoughts as a way for many to understand why this modern gold market is not as before. Most of these letters apply to investors at the far two ends of the market ( see my last post by another ) . Many, from other places, do understand these "expressions" as given. For many here, I resist the replies to questions that offer results for "gold traders". The intents and reasons are for persons to "consider" and "see" this market in a true light for today. Not for paper trades that will lead to certain loss for the future. I now believe, that by way of other posters, these thoughts are "in grasp" by many traders of "western thought". One may not "accept" the conclusions, but they can, "mentally experience the outcome" of the future. For this end I will now offer real direction. That of Why, When and How Much! I do this for those of "Family and Country", and persons of Honor. Those that live to help, not take, in times of change! Some say this knowledge should not be in a "public way", but I say secrets are for fools.
We must grasp that all commerce is done, at least, in the US dollar concept of "valuations of real things". In this way, " the true value of the purchase of real money" is hidden from view! Persons will say in the future, "how could gold be $500 one day and $5,000 the next"? I tell you now, it is already past that level, as in "present reserve currency dealings" it is not seen! Consider, that in all that you do and think, your "western values" are of paper concepts. From your birth, real things are not used to cross value themselves! When the battle to keep gold from devaluing oil ( in direct gold for oil terms ) is lost, the dollar will find "no problem" with $30,000 gold, as it will be seen as a "benefit for all" and "why did noone see this sooner"?
This question from you, it proves for my eyes what I have said. Indeed, if I viewed as a western person, gold money as $30,000 paper dollar credits, my thoughts would also show "this cannot be"! But, from another world, I view this US$ and say "how can it be of such value to all and have numbers as the stars in heaven"?
The Western public has always thought of gold as money. Even after the 70s and 80s, most private investors held a small side thought, that gold was still, somehow dollar money. It was only during the late 80s and 90s that people started to completely lose the connection of paper spending money and gold. Clearly, all evidence shows that prior to the 90s and particularly prior to the 50s, the push was to change the public's thinking away from gold money, to paper currency as money. In this political climate, gold mine investments were the correct move, as the business of gold was encouraged over the usage of gold as money! That is why the metal was called in and the mines were untouched.
However, today, the change will be counter to the prevailing public opinion, that gold "is not money". The world debt system and currency exchange, as we have now will implode and leave little room for political maneuvering. The governments will revalue gold and "demand" that the public carry it and use it! It will be the source of all gold, the mines, that will be controlled! That's Controlled, with a capitol "C", not confiscated!
The Western mind does focus on "what I buy today for the lowest price". Yet, in this modern world economy, the lowest price is always the function of "the currency exchange rate"? The Yen, it is compared to the dollar today, and used to purchase goods. One year later and the Japan offers these goods for much less, as the Yen has fallen to the US$. The currency value of this purchase, was it "true " today or a year ago? Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or the Indonesian ?
Please understand, this "gold trading arena", both physical and paper, will be subject to "GREAT" surges, up and down, in US$ pricing. The removal of the political "world dollar settlement" price of gold will revalue this asset in terms that noone of "western thinking" can understand. This "gold war" will leave a great landscape of burned and destroyed "gold companies" along with the investors who "stood for battle without real metal" as a shield!
For many, the years have passed and this noble metal has not revealed the value it hides. Ones of western thought have held long and strong, with great demands that it should obtain a high price in American currency terms. Yet, in some two decades of time it was the dollar and paper investments that bring forth their hidden strengths. For you, this history has proven gold is without value in these modern world economies!
My friends, events will change your thoughts. Often you are sold gold that is called "deliverable", yet the broker does lend you much percentage cash to buy. Perhaps this transaction is "deliverable after full payment" and as such the broker doer deliver "little real gold", yes? Much of the western world does "attach" to gold in this form. This metal is sold with the "modern concept" of "gold is the commodity for fabrication" and "is dead as money" in "this new era". This "concept" say that only "leverage" and "trading" does add to your estate. In this fashion, many have lost the long term benefits this "world class money" will soon bring. These persons wait for the event that does not come. In the future, many "salesmen of leverage" will tell stories of the fact that could not be. "The demand for gold "the element" will vanish, as the dollar price for "gold the money" does soar". What chart will be used to view this new high gold price, that will remain, for many years, "unaffordable" as a commodity, yet all bid for daily as the right to buy "money"?
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.
Yes, rare gold will be good, but not as liquid as "bullion type" gold.
Many savers consider "no need for the gold". As spoken to Mr. Kosares, I think these investors of "young eyes" do not know the value of this insurance. Please add the amount you pay for the "Western insurance" of all personal things. The Automobile, House, Health, Life and Other. What is the "return on this investment"? It cannot be known until time to collect, yes? Perhaps, a fortunate person will find "never a return".
The physical gold, this money insurance, it will be collected in future. In that time, the return will be easy to see.
I hope you enjoyed my little exercise. I have done it in the past with other search terms like "BIS." It is always an enlightening experience to read his words written over the period of a year within a condensed focus parameter.
As I said above, we learned that ANOTHER was, himself, a Westerner. So what subset of "The West" might he be representing? I think the following gives us a bit of a clue.
[**USAGOLD questions in italics**]
Mr. Kosares,
A few thoughts for you, as the questions are asked?
** It seems that both you and your friend believe that the world is splitting up into currency/trading blocks -- much as the world did for both World Wars. There has been much discussion around the world about the imposition of a NEW WORLD ORDER and international one world government. Simultaneously, we see another, opposing force at work -- regionalism, nationalism, even tribalism. What do you make of this? Is the Euro a child of the forces of the New World Order, or the forces of regionalism/nationalism/tribalism? **
I would say, "Old World Order" to return. To understand/explain better: " A very easy way to view this "order", would be to simply say that the American Experience is reaching the end! As we know, world war two left Europe and the world economy destroyed. Many thinkers of that period thought that the world was about to enter a decades long depression as it worked to rebuild real assets lost in the conflict. It was this war that so impacted the idea of looking positively toward the future. The past ideals of building solid, enduring, long term wealth were lost in the conception of a whole generation possibly doing without! In these fertile grounds people escaped reality with the New Idea of long term debt, being held as a money asset. Yes, here was born the American Experience that comes to maturity today.
New world order, regionalism and tribalism are but modern phases that denote "group retreat to avoid paying up". The worldwide currency system is truly a reflection of an economy built from war, using the American Experience, the US$ and the debt that it represents. But, for the American dollar to continue as the representative of the global financial system, in the form of being the reserve currency, maturing generations of all countries must accept it, and the tax on real production it clearly imposes! In the very same mind set, that people buy the best value for the lowest price (Japan cars in the late 70s), and leave an established producer to die, so will they escape the American currency and accept any competitor that offers a better deal. Because we are speaking of currencies here, the transition will be brutal!
As you ponder these thoughts, consider that; all economies today are truly equal in production as the exchange rates are the manufactures of profit!"
** Is Europe (led behind the scenes by the BIS) an opponent to the United States?**
Sir, Yes, but not in the ways of war, as it is in the feelings of "pride" and "we go our own way". The downfall of the Russia, did allow for the Euro and all that it will build. They now see the debt of the US$, as a reserve money can be escaped! As even the US citizen will leave its own workers to die as products are purchased "overseas", how much less will the world also flee the dollar! Opponents? No, I would say they are learners of the "American Way" as they embrace the "American Idea" of a "free world market economy".
*** If so which countries are in which camp? Your associate seems to feel that Asia is split between the United States which has Japan as an ally, and Europe which has China as an ally ( a notion I found particularly intriguing). Where is Britain in this? Japan? And most importantly, the Gulf States, particularly Saudi Arabia? **
Sir, I feel he is correct in this thought. Europe does grasp for a relationship with Asia as the US did have with the Japan. It would build a mighty economy on a foundation of oil and gold as backing for new money. As China and Arabia was once a part of the Europe economy, in a small way. They may now return with no fear of Russia. Britain? A lost nation. Japan? This one is "of the American Economy" and is to live and die by it! They will seek your Alaska oil before loss of face with gold. A dead Yen be a dead Japan.
**Along these lines, I too believe that currency movements will flow through Europe because the Euro currency will be gold backed. Where does that leave Japan with over $200 billion in dollar reserves, let alone its massive U.S. Treasuries' holding? **
Perhaps, they be like Korea? Rich in paper until the world says, "this paper, it is not good"!
***Your associate says that BIS helped China increase its gold holdings. Please tell me what the source of that information is, or is it simply a speculation on his part. ***
The BIS is the gold broker for all interbank sales/purchases. Bullion Banks are for sales to other entities. I think, at first, China was leverage against the oil producers. Then Arabia was allowed into BIS for Euro.
**One other item you might clarify for me is "Who is really behind BIS?**
Perhaps, "who control them"?
**The Swiss?
**The eurocentral banks?
**Who does BIS really represent?
"old world, gold economy, as viewed thru modern eyes" or " way to move from US$ without war".
**Why was Saudi Arabia just included in BIS?
**Has Saudi Arabia gone with Europe?
Sir, there is much more to this, but we talk over time, yes? I will be away for perhaps ten days. We speak again.
Lastly, someone recently asked me to explain my understanding of the following quote from Relativity: What is Physical Gold REALLY Worth?:
In this modern world, the current value of every asset is formed by a relationship of gold/currencies/oil. This cross relationship is the "very basis of our modern world banking system"!
Through this basis, all currencies are given value as the local government treasuries hold US$ as reserves. The US$ is given backing as its government is guaranteed that all crude oil, worldwide, will be settled in dollars. An oil reserve backing, if you will. And the "value" that the "future supply of" currency traded "oil" imparts to the world economy, is guaranteed by an "INTERBANK paper gold MARKET" that values "physical bullion" in the Thousands!...
The key to this quote is... ""the "value" that the "future supply of" currency traded "oil" imparts to the world economy..""
This is a value that is """"priced"""" into EVERYTHING!!!
It is guaranteed by the paper gold market which delivers physical to those that want it at a paper price.
If that (paper gold market) disappears, so does the (known currency) """"price"""" of EVERYTHING!!!
Posted by FOFOA at 12:28 AM 60 comments
Confiscation Anatomy – Part 2
Every few months or so a new farmer shows up here at FOFOA with a fresh vial of fox urine to scare the hungry bunnies away:
I hate to be the bearer of bad news but friends, we got problems! Phillips argues that we will face gold confiscation when a new currency is created to replace the US Dollar as the world's reserve currency and it will be backed, partially, by gold. He is probably correct. When FDR confiscated gold in 1933 the US was on the gold standard and in order to increase the money supply, the government needed more gold to allow them to create more dollars to fight the Depression. Since 1971 when we left the gold standard, there was no particular benefit for governments to own gold since gold was not needed to back a currency. But everything changes if a new currency is issued that IS GOLD BACKED."
If gold is confiscated, how will it affect FREEGOLD?
FOA had a good analogy to describe these Chickens Little. He said they were running forward while looking backward, and that they would surely run into something they didn't see coming. That something being Freegold, the end result of an internationally induced movement away from using the US dollar as the global reserve currency. It's hard to see (understand) Freegold coming right at you while focusing backward on the gold standards of the past and almost a century of dollars held as international banking reserves.
I call these guys Chickens Little because there are a couple more parallels with the Chicken Little fable. There's Foxy Loxy, the unscrupulous fox that uses the fear spread by Chicken Little to lure the scared animals into the "safety" of his lair where he promptly eats them. Foxy is the financial advisors and "gold product" sellers that use the confiscation scare to sell you "gold products" with, sometimes, 60 times the markup of regular gold bullion. And of course there's the lesson taught by the Chicken Little story; the necessity for careful deductive reasoning.
Looking back to 1933 (but not running forward while doing so), we can see that a shortage of money existed at the time. This is what deflation is often called: "a shortage of money." In a money shortage, the service of existing debt becomes more and more burdensome as debtors compete for scarce money to pay their creditors, often defaulting in the process. You also see falling consumer prices in a money shortage because products, like debtors, must compete for the money. And these falling prices deflate the profits of businesses that make the products forcing layoffs and downsizing, further burdening the – now unemployed – debtors.
Of course falling prices can be a good thing if you're not in debt. Much of the 19th century was characterized by robust industrial and economic growth concurrent with consumer price deflation. This is when the economy is growing slightly faster than the money supply is expanding and/or circulating. In a healthy economy without too much debt this slight deflationary tension is a very positive thing.
But in 1933 it wasn't. And when you're the one running the global gold standard scheme, it turns out that the printing press is no solution to a money shortage. Prominent Swedish banker Marcus Wallenberg said as much in this 1957 Time Magazine article, The Capitalist Challenge: THE SHORTAGE OF MONEY. "Cranking up the printing presses is no solution, says Wallenberg. It would simply cheapen currencies."
What FDR faced was a GOLD shortage! Not a dollar shortage. A REAL MONEY shortage! And as political administer of the global gold standard and the bank reserve fiat currency, his solution was to outlaw "real money" domestically, effectively eliminating the domestic money shortage, and to raise the official stockpile needed for servicing the "REAL MONEY shortage" internationally. He did this by calling in most of the circulating domestic US gold currency and melting it down.
And then, in January of 1934, with the stroke of a pen, he increased the US gold hoard by another 70% (in US dollar terms), thereby eliminating the international money shortage.
So he stole some gold from the US, and the rest from the rest of the world by devaluing the dollar. All to restock the gold standard vending machine.
This confiscation was really more of a forced monetization (sale) of gold assets, and a demonetization (melting) of gold coins. What made it particularly nasty was the 70% revaluation of the gold right after the forced sale. As gold was demonetized domestically, the citizens were forced by law to keep their tender legal by exchanging it in form.
But the people were allowed to keep up to 5 ounces in gold bullion or coin per person, in addition to their collectible coins and gold jewelry, even after the "confiscation." So a family of four could keep at least 20 ounces of gold. If they had more than that it had to be sold to the government at the going price (which was raised AFTER the forced sale!)
Another nasty part of the "confiscation" was the enforcement clause that called for a fine of $10,000 ($170K in today's dollars) and/or 10 years in prison for people that refused to turn in their gold. Of course not one single person suffered this fate, but the threat alone was (and still is) repulsive.
As it actually turned out, most of the gold collected was in the form of certificates, bullion and coins deposited and circulating in the banks. Many citizens who owned large amounts of gold quickly had it transferred to countries such as Switzerland before the deadline. And few in the general population had more than the five ounces to turn in.
In fact, many people turned in their last ounce even though they could have kept it, because they feared that it would no longer be legal tender and would therefore be useless. They failed to see how their gold could be worth more as a physical holding, a wealth asset, than it had ever been as a transactional currency. So they turned it in for $20. In total, only about 500 tonnes were "confiscated."
Only one man was charged under the presidential order for not turning in 5,000 ounces of gold (worth $103K at the time). But the case was later dismissed and his gold was forcibly sold to the government. There were a handful of other cases through the following years in which someone was prosecuted for hoarding gold. In one case the hoard was 10,000 ounces! But those other few prosecutions were all for tax evasion or unrelated charges, not the "confiscation order."
As it turned out, incredibly, FDR's game-changing move seemed to cure the money shortage problem, at least temporarily. In March of 1933 the plunging CPI essentially "turned on a dime" and began to rise.
But here's the thing. It wasn't gold that caused the money shortage. There is no shortage of gold at the right price. There is only a shortage of gold when it is confined at a FIXED price.
So it was the US dollar's fixed relationship to gold and the dollar's use as an international bank reserve, equally interchangeable with gold, that caused a "shortage of REAL money." And as we'll see, this would happen again and again.
FDR's confiscation and revaluation of gold did not increase its use as money as the solution to the money shortage. What it did was increase the percentage of the official US gold hoard as a portion of total US reserves to a level that would sustain centralized balance of payment clearing for a few more decades. In essence, it restocked the one-way gold market known as the international gold exchange standard. Gold is always a one-way flow (out) when the price is fixed. That's why to get any "in-flow", you have to force it!
Sidebar: I am certainly not defending the actions of FDR. They were obviously hideous. But I am making the point that it is extremely important to view history as objectively as possible when deducing the future. Otherwise you inadvertently end up applying inductive reasoning, which leads to qualitatively different conclusions than deductive logic. Chicken Little used inductive logic.
Here is an example of inductive reasoning/logic:
1. All of the swans we have seen so far are white.
2. Therefore, all swans are white.
It is a form of logic that allows for a false conclusion even when the premises are correct.
Now here's an example of deductive reasoning:
1. All fiat currencies are eventually worth no more than toilet paper.
2. The dollar is a fiat currency.
3. Therefore, the dollar will eventually be worth no more than toilet paper.
The difference is that deductive reasoning presents a conclusion that must necessarily follow the set of premises. Inductive reasoning, the kind that leads to fears of confiscation, does not.
I always try my best to engage only in deductive logic, because I don't like surprises.
In hindsight, if FDR had instead declared the US gold window to be a two-way (buy and sell) physical gold exchange, open to all, not at a fixed price, but instead at a global market-discovered floating gold price, the economic and monetary results would have been the same, only without the nasty confiscation and repulsive criminal penalties… and it would have been perpetually sustainable.
The difference is that this act (had it even been considered) wouldn't have had the same degree of perpetual deficit enabling/exorbitant privilege granting effect on the US dollar administrator. This is important because you can't force the world to grant you perpetual deficits and exorbitant global privilege. It must be "the lesser of two evils" under consideration. Once it becomes "the greater of two evils," it will end one way or another.
Normally, a gold revaluation would be a dreaded mea culpa for a politician like FDR, something to avoid at all costs! But what made 1933/34 politically palatable was that it could be blamed on, well, the depression. But over the next 37 years there were no depressions to be found. And while a gold revaluation/dollar devaluation was warranted (and needed) a few times along the road, no politician with the necessary fortitude ever stepped up to the plate.
Then came Nixon.
Did you catch that? Yeah, he blamed it on "the speculators!" So much for fortitude.
So what led up to Nixon closing the gold window? Well, like 1933 it was another money shortage. I summed it up with this quote from Lamfalussy in "Gold: The Ultimate Wealth Consolidator"…
In 1969, shortly after the collapse of the London Gold Pool and the devaluation of the pound sterling, while the Bretton Woods gold exchange standard was imploding, Alexandre Lamfalussy gave a speech at the IMF titled The Role Of Monetary Gold Over The Next Ten Years. In it he addressed the fact that gold, being of relatively fixed supply, when also fixed at a specified par (price) with the inflating currency, automatically disappears as a source of new international liquidity. Here is a short excerpt:
"The striking fact apparent from this Table is that over the last ten years, gold has practically no longer contributed to the growth of international liquidity. In ten years, total foreign reserves rose by nearly 19 billion dollars; the greater part of this increase -- some 14 billion -- was due to increased holdings in foreign currencies, whereas the increase in the reserve positions with the International Monetary Fund was about 4 billion. The increase in gold stocks was less than one billion; in fact, there was a decline between 1963 and 1968 [thanks to the London Gold Pool]. Consequently, the share of gold holdings in total reserves, which was 66 per cent at the end of 1958, fell, to 51 per cent at the end of 1968.
"It is therefore right to say that over the last ten years and in particular since 1963-64, we have witnessed a gradual decline in the role of gold as a means of reserve and its complete disappearance as a source of new international liquidity. At the same time, the mechanics of the gold-exchange standard have ceased to function: the creation of reserves by the spontaneous holding of dollars or Sterling has come to a halt and has been replaced by the creation of negotiated reserves."
So this time it was more clearly just a gold shortage. And it was really, quite obviously, only a shortage of gold at the US Treasury gold window. (Remember, there is always plenty of gold at the right price. But there is NEVER enough gold at a fixed price.) And you see, the whole world was trying to buy gold at this particular window because it offered the amazingly low price of only $35 per troy ounce.
Certainly no one was at this gold window trying to SELL their gold to the US Treasury for $35/ounce. Why would they do that when they could sell it on the open market for $44/ounce? This is why gold is always a one-way flow (out) when the price is fixed. And it's why, to get any "in-flow" of gold at a fixed price, you have to force it!
Sidebar: The following quote is from ORO, one of the brightest hard money advocates that faced off with FOA. I think it sums up the flaw in hard money thought with one sentence: "In short: for a monetary system to work, someone, somewhere, must be able to exchange the currency for gold AT A FIXED RATE. We call this parity." If you can detect the flaw in ORO's statement you are well on your way to a surprising revelation.
So why didn't Nixon just force an inflow of gold like FDR? Well, for one thing, US domestic gold had already been demonetized, so there wasn't any circulating gold currency to seize from the banking system like there was in 1933. So instead of trying to REPEAT the step of his predecessor, for which there was no rhyme or reason, Nixon took the next LOGICAL step following the direction set by his predecessor. He removed the NEED for a gold inflow. He closed the gold window.
Again, in hindsight, Nixon could have allowed the price of gold at the window to float with the market that was already pricing it at $44. Eventually the one-way outflow at the Treasury window would have stabilized at the price of golden equilibrium and the system would have become stable and sustainable for the first time in decades (if not centuries). But alas, he did not.
The gold window of Nixon's era was similar in many ways to the modern COMEX. It lent support to the illusion of a strong dollar (measured against gold) by providing a visible outflow of physical gold to certain parties in exchange for paper gold contracts (US dollars) that vastly outnumbered the physical ounces in the vault.
When global faith in this system started to wane in the mid-1960's driving up the price of gold outside the system, official CB gold was deployed into the marketplace surreptitiously through the London Gold Pool. This was an effort to enhance the illusion of plentiful supply, both in London and through the US gold window. Ultimately this effort was abandoned in 1968 when some of the European central banks started taking in (exchanging their dollars for) gold.
This is not unlike what we have witnessed since the 1999 Washington Agreement to limit gold sales from European central banks. Since then, official gold sales have declined until last year when the trend reversed and the CB's showed a net intake.
The WAG was a portent to the bullion banks in the same way the collapse of the London Gold Pool was to the US Treasury. In both cases it was a warning from the European CB's to the Anglo-American paper gold printing machine to reverse the acceleration of fractional paper issuance or face the consequences of a REAL MONEY shortage.
And now that we know the bullion banks responded to their 1999 prodroma the same way the US Treasury did in 1968, by cranking up the printing presses, we can fully expect a similar result on the COMEX as we got with the gold window in 1971.
And using this analog as a roadmap, we can logically deduce some of the necessary and inevitable consequences, including the probability of an official "confiscation."
In order to logically deduce the future we must first understand the past. And the applicable history here begins in 1922 when dollars were first accepted internationally as official bank reserves, equal to gold.
After 1922 the US slowly discovered that it was possible to run a perpetual trade deficit with the rest of the world as long as it had enough gold to trade with the few bankers who preferred heavy gold reserves to light and less filling paper dollars. This meant that the US economy, you me and the guy next door, could, in aggregate, import a higher value of goods from overseas than we manufactured here and shipped back to them.
In other words, unlike everyone else in the world, we would never face a balance of payments crisis because we could buy foreign goods with our own currency. We didn't have to exchange our currency for that foreign currency in order to import stuff, a process that normally would have put pressure on the dollar to either devalue or increase real goods exports whenever a trade deficit went on too long.
This is the very definition of the "exorbitant privilege," a term coined by the French in the 1960's as the Bretton Woods system was starting to show a few wrinkles. And it can only apply to a national currency in use as a global reserve. It cannot apply to regional reserve currencies or supranational currencies.
As time went by, the US federal government also discovered that it had the ability to run a perpetual budget deficit in its own finances. This was an unexpected result of the perpetual trade deficit. As net goods accumulated in the US economy, net dollars necessarily accumulated in our trading partners' central banks. These dollars had to go somewhere. And as it turned out, a lot of them were given to the USG in exchange for the rights to the future tax revenue of its citizens, a no-brainer swap for any short-sighted politician.
And the troglodyte (un evolved, undeveloped, simplistic) vision of a future US gold confiscation put forth by the Foxy Loxys and Chickens Little flows from a poor understanding of how these things (described above) actually work. And it goes something like this:
When the dollar loses its global reserve status TPTB in DC will lose their blank-check funding and will have to start paying for essentials like oil for the US war machine with gold from Fort Knox. This will quickly deplete the remaining US stockpile of gold and the USG will obviously fall back on its old habits like seizing its citizens' gold to replenish the public purse.
This "early man-ish" view of reality ignores not only the way things actually work, but also logic, history and facts.
I have briefly addressed some of the history above. Now let's hit a few of the facts.
Fact: Back in 1933 when physical gold was still plentiful within the system and circulating through the banks as a currency equal to dollars, the USG was only able to "confiscate" 500 tonnes. There were no "jackboots" going door to door grabbing gold coins. This has never happened. And it never will outside of total war where pirates (soldiers) grab coins for their own personal bounty.
If the USG (poorly/suicidally) decides it wants to steal some gold in the future, it will ONLY go after soft targets, like bullion bank accounts (most probably unallocated since there is no direct claim) and funds (like hedge funds, ETF's, and other publicly reported/traded large hoards). It will also go after the gold mines to which it issues digging permits and therefore retains control. And it will not outlaw the physical gold trade. More on this later.
In the same way that bankers fear bank runs more than anything, governments and politicians fear civil unrest more than ANYTHING ELSE. Everything they do is to keep the public calm and sedate. And there's no faster way to arouse your worst nightmare than ordering your underpaid forces to turn on their friends.
At the peak of the US-administered gold exchange standard, the US had 22,000 tonnes of physical gold. The 500 tonnes "confiscated," at a time when it was easy because gold was circulating through the banks and could simply be swapped for paper dollars, was only 2% of that hoard. Any "jackboot confiscation" today would net much less than that. And it would carry significant (deadly) political risk.
Additionally… having New York City on US soil, those fancy funds holding OPG (Other People's Gold) make a much softer target.
No. The US will NEVER confiscate physical gold directly from its citizens again.
Fact: There is plenty of gold at the right price. At the right price, there is no shortage of gold. At the right price, there is no profitable risk/reward calculation under which any major global entity would decide to steal someone else's gold, especially its own populace. The risk would be much greater than the potential reward.
And if that "right price" is a FREE price, a FLOATING price, then there will NEVER be a shortage of gold to keep the gears of global trade lubricated. And as long as they are lubricated the USG will have international trade that can be taxed.
Fact: There can be no "money shortage" in a purely symbolic fiat currency regime that doesn't fix its currency to gold. There can only be too much money, and/or a shortage of "asset valuations" if that currency's debt-assets are mismanaged.
As I wrote in "Inflation, Deflation, Snails and 30 Days":
Just my two cents on Inflation/Deflation. If I buy a house on a street with 5 houses for $100,000, then later someone buys a house for $200,000, all of a sudden, all 5 houses are worth $200,000. My net worth went up $100,000. The street's net worth went up $400,000. But 400,000 dollars were not created. Asset inflation happened.
Asset deflation is happening now, which is the reverse effect. If I bought a house for $500,000, and now someone sells for $250,000, then all the houses on the street are now worth $250,000. So the net "loss" to the street is $1.25 Million. That is deflation.
This is happening with all types of assets, things that were assumed to be good investments. But as we bail them out, we take some of that phantom net worth, like the $400,000 in the first paragraph, and make it real, spendable cash.
That cash is no longer going to go into bad "assets" that were previously thought to be good investments, it is going to go into real things, like gas, oil, gold and milk. And because it is newly printed spendable cash, it is going to bid against the previously existing spendable cash. That bidding process will cause the cost of real things to go up. That is inflation.
So we can have both asset deflation and real world inflation at the same time. Necessities will cost more. Luxuries and Mortgage Backed Securities will cost less.
Fact: The purpose of the confiscation and revaluation of gold in 1933/34 was to weaken the US dollar; to stop deflation and to cause inflation. The confiscated gold was then used to pay off a few of the trading partners with a balance of payments surplus. This cycling of real goods into paper currency into gold only happens centrally (at the CB or Treasury) while the reserve currency is functioning.
A country or zone's total reserves include international liquidity held anywhere within that zone by any entity, public or private. The official reserves are only part of the total reserves. The official reserves are the first line of defense in a balance of payments emergency. The total reserves are the last line of defense. The official reserves are effective in defusing a crisis as long as the international fiat currency system is still functioning. When it stops functioning, there is no longer a mechanism for funneling the international demand for international reserves into the central authority. At that point the demand must be met "where the rubber meets the road."
The "gold liquidity" described in Julian Phillips' piece is paper gold liquidity. He seems to be suggesting that countries running a trade surplus still prefer Treasuries over paper gold in a balance of payment function. This is the centralized decision of the CB's. These CB's still have this decision-making ability because dollars are still flowing to local exporters and then working their way through the local banking system into the CB. But when the dollar loses its global status this process will end.
Exporters "where the rubber meets the road" will require either their own local currency or acceptable international liquidity which at that time will be physical gold. This is the automatic and uncontrollable decentralization of the payment balancing mechanism. And this is the major flaw in most of the economic thinking today.
International liquidity schemes like the SDR only function at the centralized CB level. They still require a functioning international transactional currency like the dollar or the euro to cycle control of reserve composition from the marketplace back into the central authority. Without this mechanism the reserve par excellence will be decided by the marketplace. So let's look at the possibilities that could unfold.
Possibility 1: Physical gold becomes the only acceptable international liquidity for a while. This is decentralization in extremis. And this is Freegold in extremis. It would likely be a transitory stasis followed eventually by possibility 2 or 3.
Possibility 2: Only local currency is accepted in international trade forcing all trading zones into a foreign (FOREX) currency exchange like I described in "Bondage or Freegold". But without the anchoring metric of a global currency like the dollar, this exchange would have to find a market-driven currency price discovery mechanism. And the logical (market) winner is the price of physical gold trading in each currency inside that currency's zone to set the value of that currency.
This would be an extremely reliable and relatively foolproof mechanism due to the currency arbitrage that would happen whenever gold was underpriced in a currency. For example, if the US tried to keep the price of gold down, all the gold inside the US would flow out of the zone (purchased with higher offers). And if the US tried to prevent this outflow of gold, its currency would be ostracized on the global exchange. This would make it extremely difficult to trade for ANY real goods, including oil.
So the US will have the incentive to encourage a vibrant physical gold market within its zone with little or no restraints (like a VAT or sales tax) to increase the credibility of its printed fiat currency on the global FOREX exchange. If you add a VAT to gold it simply raises the price of gold in your zone relative to other zones without a tax, which lowers the value of your currency on the global exchange.
Possibility 3: A new international currency that embraces a free floating gold price for maximum international liquidity (no more money shortages) will replace the dollar when the dollar finally fails in its role as international liquidity provider par excellence.
This is what FOA meant when he wrote:
All of the many items ThaiGold posted today about government control of gold pertains to past policy in a different ""gold is official government money era"". The use of gold through that era is riddled with failure. In the future (see my latest Gold Trails) currency reserve competition will require a country to keep gold free for private trade. Making price discovery a physical affair only. This will come about in a completely different atmosphere from today where gold is still manipulated as a world "official currency" asset. Mostly now manipulated by a failing IMF/dollar system. The next reserve currency, the Euro will not compete with gold and will require it to find its FreeGold value level. The US will have absolutely no incentive to controlling gold to defend its currency in that era.
Price discovery will be "a physical affair only" because the dollar's reserve status and the paper gold market are like conjoined twins sharing all vital organs. Their fates are inseparable. Once one of them goes, so does the other. And at that time there will be no incentive to control the price of gold like there was in 1933. In fact, the opposite will be true. There will be the ultimate incentive all over the planet for physical gold to quickly find its equilibrium price in each zone's currency so as to alleviate the shortage of international liquidity that will follow the dollar's demise as internationally liquidity provider par excellence.
At the right price, there is plenty of gold. When there is plenty of gold there is no good reason to seize gold. And with the right currency, there is plenty of money.
See also: Confiscation Anatomy - Part 1
Yes I am passionate about this gold confiscation issue. That's because I view it as more insidious than even the mainstream paper-pushing BS we see every day on CNBC. This issue is targeted at those who are already so close to securing their future. And it is used to cut them off just before the finish line. As you can tell, I view those that spread this confiscation argument as belonging to two general groups; the Chickens Little and the Foxy Loxys. And within these two groups are five sub-groups:
Chickens Little
1. Individual gold bugs who tend to be genetically predisposed to paranoid psychosis.
2. Published gold analysts who insist on running forward while looking backward.
Foxy Loxys
1. Gold sellers that use this argument to sell more expensive gold numismatics to customers that have no business investing in numismatics, which requires years of experience to do well.
2. PM sellers that use this argument to steer customers into silver, platinum, palladium, rhodium or mining stocks instead of gold bullion. Akin to advising you to invest in socks, leg warmers, knee pads, garters and shoe factories when what you really need is something to protect your feet.
3. Gold haters that use this argument to scare people away from physical gold.
I find all of the above despicable, even when they stem from ignorance.
And I do realize that there is a whole 'nother angle to this confiscation issue: confiscation through taxation. Not gonna happen. Not the way you think anyway. The phase transition/lightning (Freegold) revaluation cannot be taxed efficiently. And if it can't happen efficiently, ain't gonna happen. The risk/reward calculation facing any taxing authority will be as clear as this blog. 95% of the global private physical gold stock has no recorded cost basis on which to collect a "flash revaluation" capital gains tax. It is impossible. Only paper gold has such a widespread cost basis. And you can't really collect taxes on a capital loss, now can you? But that is for another post. Perhaps it will be part 3.
I apologize if any of the above offended anyone. That was not its purpose, even though I used some biting analogies. I just think it's important that certain normally private Thoughts are spoken out loud at least once before it's too late. And IMO, it's almost too late.
Have you ever been close to tragedy
Or been close to folks who have?
Have you ever felt a pain so powerful
So heavy you collapse?
No? Well...
I never had to knock on wood
But I know someone who has
Which makes me wonder if I could
It makes me wonder if
And I'm glad I haven't yet
Because I'm sure it isn't good
That's the impression that I get.
Have you ever had the odds stacked up so high
You need a strength most don't possess?
Or has it ever come down to do or die
You've got to rise above the rest?
I'm not a coward,
I've just never been tested
I'd like to think that if I was, I would pass
Look at the tested and think there but for the grace go I
Might be a coward,
I'm afraid of what I might find out.
I've never had to knock on wood
Never had to, but I better knock on wood...
Cause I know someone who has
Which makes wonder if I could
It makes me wonder if I
Never had to, I better knock on wood...
Cause I'm sure it isn't good
Am I'm glad I haven't yet...
FOA: It was pointed out that one need not invest in gold to negate the effects of inflation. All we have to do is buy real things that increase in currency value faster than the loss of buying power. True, in that light gold is but one of many things that should keep us at least even. However, we are in the process of experiencing a "breakdown" or at the very least a major change in the entire financial system. Not just an ongoing inflation during a phase of a longline expansion. Our goal for certain individuals, is to show this dynamic at work as the real life events unfold and document its progress. For private individuals that read these pages, historical purpose and present day logic will build further support for the holding of physical gold as these events reveal the true season. In this light I offer Another's direction given some many years ago, "in this special season, let others buy things to hedge their present worth, let us buy gold in support of our future generations."
Someone asked me to post the answer to Sidebar #2. Here it is...
"In short: for a monetary system to work, ANYone, ANYwhere, must be able to exchange the currency for gold AT A FLOATING RATE. We call this Freegold."
Posted by FOFOA at 3:13 AM 61 comments


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> not much, if anything, we can do in this respect.
> > would impart more loss on the re-encoding back to MP3..no?
> >>> with this hardware???
> >>I suspect you already know.
> >>transmittable -- maybe through a fail-safe transmisson protocol.