Current Rules, Future Rules

I must stress the presence of the word "this" in my observation. We stand before a monumental (for us at least) change, but this change will not be the end of the world but rather the end of the world as we know it.

This "world" will qualitatively differ from the one which follows, because in this next world the most fundamental influence upon how we interact with each other will have been altered... for the better. Gold performing its natural function is the catalyst for this change, but it is not necessary to actually own gold yourself to enjoy these benefits fully, only that it is possible for anyone to unambiguously exchange possession of gold with anyone else.

It is not necessary for one to grasp all the technical details of how this system functions to utilize it any more than it is necessary to fully understand the technical details of a car, aeroplane or computer before utilizing them. You don't need to understand the molecular structure of an apple to know when it tastes good.

Relax, take heart, be positive. The future may not be perfect, but it is very, very bright.

The rule that applies in the next "world" is the golden one, so it shouldn't really be a surprise to find that it is actually elemental gold which facilitates it by supplying the necessary objectivity.

Of course, one doesn't need wait until then to start applying it.

Sign o' the Times

Stroke of Insight

Freegold 10: Paper, Pyramids & Paradigms

For much of its history, society utilized a direct exchange system of goods or services for other goods or services, called barter. All physical goods involved in barter were assets, and as such constituted payment in full.

Most of these goods were eventually either consumed or decayed over time. Gold was the exception, being subject to neither of these forces. Being compact also it was ideal as a portable exchange asset, for trading over longer distances. Over time it accrued in the hands of and became associated with those who tended to produce more than they consumed: the wealthy.

Needing to be kept somewhere secure, a lot of this gold eventually came to be deposited for safekeeping on the premises of those who had continual need for a secure gold vault: those who worked the gold, the goldsmiths.

This deposited gold was accounted for in a ledger book, with the depositor receiving a corresponding note, this note being an obligation of the goldsmith to exchange it for gold upon demand.

As gold is fungible (which is to say that any weight of gold is interchangeable with any other equal weight of gold (all other things being equal)), it was often more convenient for these notes rather than the gold itself to be exchanged in transactions, with the goldsmith’s obligation to deliver gold being to the note’s bearer. These notes are the paper currency of a de facto gold standard monetary system.

Gold is a physical wealth reserve asset, thus it represents payment in full, whereas paper currency is a debt based currency that represents a claim in the system.

This is the birth of a paper currency-based monetary system, as distinct from a system of trade based upon barter. We can see that it is gold (as an asset outside this monetary system) acting as the reserve asset which supplies the paper notes (the currency) with their VALUE.

It is at this point that the goldsmith (now the banker) sees that much of the gold held in the vault never physically leaves, and decides to lend some, for a fee (interest). Since they exchange for goods at par with gold, notes for gold can also be lent, and notes held as an asset by their bearer can be held on deposit too. Thus is a synthetic supply of currency levered into existence, with multiple claims potentially issued on a given weight of actual physical gold on deposit, and this is before the advent of fractional reserve banking. This is a synthetic supply of claims on assets, claims on value.

Today’s monetary system is an extension of this, where all forms of paper denominated “asset” have a counterparty (someone else for whom this asset represents a liability/obligation), and as such are claims in the system rather than payment in full, and are all derivatives of the original gold-backed notes which birthed the system.

"Despite the huge tide of paper pyramided currency and notes which are now flooding the world, at some point, every credit extension must return to be based, in however minuscule a fashion, on some deposit of gold in some bank somewhere in the world."[1]

Even more succinctly: All Paper is STILL a Short Position on Gold.

“The U.S. Treasury bond market has a sine qua non adjunct in the gold futures market. Without it, bonds would be irredeemable: they would be promises maturing into more promises, maturing into more promises, etc., ad libitum.”[2]

To which we could add that the gold futures market has a sine qua non adjunct in the physical gold market, without which futures would be irredeemable: promises maturing into more promises...

The best form of savings one could hold would be that which values the paper currency, rather than in the paper currencies themselves, or in that which is valued by the paper currency.

"In this light, the ‘preservation of wealth’ simply means - he who holds gold has already been paid."[3]

******

Let's reconstruct Exter's pyramid based upon this new appreciation of how the monetary system is an abstraction leveraged from value stored in physical gold, the pre-eminent wealth reserve asset, firstly by building a pyramid of tangible assets. Surplus value moves to the top of such a pyramid, as and when it becomes available, with the top of the pyramid being physical gold, store of all truly surplus value for whose owners all other assets represent greatly diminished marginal utility (ie. they already have every asset they realistically have any use for, aka the very wealthy):

Physical gold is an asset, and as such finds its place at the pinnacle of the asset pyramid of tangibles as the wealth reserve asset, freely chosen by the market in which to store surplus value for any (potentially infinite) length of time. The inverse debt pyramid which stands atop the asset pyramid is composed entirely of abstractions rather than tangibles. These abstractions are all claims on assets, or further derivatives thereof as merely claims on claims, excess claims (synthetically created by being “borrowed” into existence rather than representative of value already created), wagers on the value of this claim or that claim, spreads between claims... the list goes on.

All these claims (ie. the entire inverse debt pyramid) are subject to counter-party risk, which is to say that default will diminish their value. They are promises of payment, dependent upon the means and intent of the debtor (counter-party).

All assets in the tangible pyramid merely are what they are, dependent upon no one in the sense that they are payment in full, already taken.

As claims on assets, the inverse debt pyramid is a derivative of the tangible asset pyramid. Long before any element of the claims pyramid ever came into being, gold was the pinnacle of the asset pyramid as the supreme store of surplus value (wealth) in a barter economy. The first of these claims originated as claims on gold, as notes claiming ownership of x amount of gold stored at y by z (and as such “z” is the issuer of the notes), circulating as a medium of exchange for the sake of convenience. After gaining currency in this function of convenience, the quantity of notes could quietly become greater than the quantity of gold they purported to represent... as discussed earlier.

The values of the assets and the claims had been disconnected.

All monetary claims making up the inverse pyramid are ultimately extensions of credit based originally upon physical gold. These extensions have been steadily inflated for the entire existence of the debt-based monetary system... should physical gold, the wealth reserve asset, cease to be available in exchange for claims upon it, the debt pyramid will deflate. This contraction of credit will not be slow and steady as the inflation was, but rather sudden and catastrophic. Being based purely on confidence in the claims, the situation can and will change as quickly as one can change their mind, with this loss of confidence being known, paradoxically, as hyperinflation. (It will be much like the popping of a bubble, because all this debt in fact is a bubble of epic proportions; when people start finding the utility of an item to be in its value (ie. ever increasing value or capital gain) rather than its normal utility, then it is a bubble.)

Initially, this process creates demand for paper money and paper gold, as whatever value is present in the upper levels of the inverse debt pyramid must pass through these on the way down into gold and the security of the asset pyramid... contracts must be redeemed for dollars before gold and other assets can be purchased, and paper gold is far more readily available than much rarer physical item. This is the deflation which precedes hyperinflation, where the paper currency (cash) increases in value as the value flees the less liquid claims higher up the pyramid. Hyperinflation follows, as the value of physical gold decouples from paper gold claims, and the paper currency circulates faster and faster seeking refuge in anything tangible, becoming practically worthless in the process. This is in reality the deflation of the remains of the inverse pyramid against physical gold, and the consolidation process is complete.


The market has discounted the claims in accord with their true value as given by the assets.

******

The nature of the system which binds individuals into a society has a great deal of influence upon the nature of that society, of the motivations, behaviours and resulting experiences of the individuals within it.

To state that differently: Human society arranges itself in response to the monetary system it utilizes to facilitate the flow of value between its constituents. It is the monetary system that dictates the nature of the society, and the motivations of its individual members. It exists as a society because of the existence of this flow of value; because it has a monetary system. Without a monetary system we are simply many self-sufficient individuals, not a society.

A focal point is a point of convergence. In optics this is the convergence of light, which is caused to converge by a lens whose influence alters its trajectory. In game theory a focal point is a convergence of attention or action, brought into focus once again by a lens.

The paradigm we inhabit as a society is created by the monetary system we utilize to trade our value; change the system and the paradigm changes too.

As our confidence in the integrity of monetary instruments we currently use to store value diminishes (because these instruments are claims on value rather than assets of value), so physical gold is increasingly coming into focus as the foremost asset in which one can have confidence others will also turn to store their value. Value (the expression of utility) is the fundamental good a monetary system circulates, and this circulation is the very reason for the system’s existence; our desire to specialize in our productive efforts for mutual benefit whilst avoiding the austerity of self-sufficiency.

This diminishing confidence in the integrity of the claims in the current system is the lens which is refracting our attention, bringing into focus the point at which a paradigm shift occurs.

When the monetary system’s existence is threatened, those with value held as claims in the system (savings) naturally seek to preserve it by removing it from the system, exchanging their claims on value for assets of value. That a replacement system will emerge is guaranteed by the distaste for and the inability of most individuals to be self-sufficient. The path of least resistance to a replacement system would be to one that is essentially the same as the current one, except for one crucial difference: the stock of surplus value (savings) is never returned to be stored in the monetary system, but instead held outside the system in physical assets. Such assets can be sold as and when their owner desires in order to utilize the value they have stored. The storing of value inside the monetary system has always been the root of our problems.

The paradigm shift occurs as we collectively transfer our stock of value (savings) from the abstract claims of the monetary system into tangible assets, extinguishing the claims and their counter-party risk and receiving our payment in full.

Only one physical asset, gold, specializes in the storage of value (gold's only utility), with a potentially infinite time horizon and a stable stock. Any other asset will store value too, but for a limited time in a fluctuating stock, sooner or later being consumed as all other assets have other utilities too. Gold is simply the best asset in which to store value.

"Indeed, there can be no other criterion,
no other standard than gold. Yes, gold,
which never changes, which can be shaped
into ingots, bars, coins, which has no
nationality and which is eternally and
universally accepted as the unalterable
fiduciary value par excellence."

-Charles de Gaulle

An honest monetary system requires but one denominator.

The process by which we change our monetary system is both natural and spontaneous, and it is already underway. An honest monetary system is one in which the money is valued by the assets, not the assets by the money. In such a system gold, as the best value storage asset, will serve as the proxy for all assets, for value, as the denominator of the monetary system we utilize to flow value between us.

The current paradigm is within an inequitable system, while the future paradigm is within an equitable one. We will experience a paradigm shift because the inequities of the current system are finally overwhelming our society.

It's just time.

[1] http://www.cephas-library.com/federal_reserve_chapter_6.html

[2] Position Paper professorfekete #8, October 27,2010 Is There Life After Sudden Death?*

[3] Ender's Angle: The Flow of Value

h/t Golden, Ender, John Exter, FOFOA

Right on the Money

"Indeed, there can be no other criterion,

no other standard than gold. Yes, gold,

which never changes, which can be shaped

into ingots, bars, coins, which has no

nationality and which is eternally and

universally accepted as the unalterable

fiduciary value par excellence."

-Charles de Gaulle

Freegold 9: Gold as Pure Equity

When (physical) gold is revalued by the free market, in order to give payment in full to the current surplus of claims (dollars), it will represent to its holder a pure equity position.

A pure equity position in what? In human value, no less.

A bold claim? Let's examine it a little.

The quantity of physical gold in the world is fixed. When one owns some physical gold, they own a fixed share of that quantity. It is an undilutable position, unlike currently traded equities, the supply of which is regularly inflated by their issuers to raise more capital, thus eroding the value held by existing shareholders.

Equity held in free floating physical gold is the very definition of “a hedge against inflation”, inflation of every description (except the inflation of real value). Every dilutable item in the world will depreciate against physical gold upon dilution. Gold retains its buying power.

But free floating physical gold (Freegold) actually does much better than this. It is often claimed that gold pays no dividend, no return on investment. Freegold needs no return on investment for the traditionally cited reason - the offsetting of loss to currency inflation, because it automatically offsets inflation anyway.
Freegold likewise has no need to allow for losses incurred through malinvestment or misallocation of capital - being fully hedged against inflation automatically - there is no longer a need for any capital to ever be deployed in anything other than the soundest of productive ideas. Capital written off on “speculative” investments gone sour will be almost non-existent, for two reasons: the lack of impetus for such investing as described, and the severe punishment of losing some of your golden equity in a less than sound venture.

Why will this be regarded a severe loss?

Because the vast majority of investment made will be productive, and to be productive means to be valued by the market. Thus investment will produce new value, exclusively. And the excess of this new value will be stored in the safest possible place... gold.

The owner of physical gold will experience continual capital gain through their pure equity holding for as long as humanity can continue to create value. Pretty big incentive to protect your holdings. Pretty big incentive to create some value in the world yourself, in order to buy in, no matter how meager the quantity, considering the direction of the capital gain and the fact that you can never be diluted out.

Looks a better buy than any other form of equity position currently available... and it’s currently available at pre-float valuation (for a limited time only).

In the absence of a strong dollar (absent soon for indisputable reasons), gold will find its function as the settler of those claims, as the master proxy for monetary value in the collective mind, and the current ridiculous dollar/physical gold exchange rate will be history. Literally.


What are you waiting for?

Next: Freegold 10: Paper, Pyramids & Paradigms

Freegold 8: A Freegold Standard

Value is created whenever one brings into existence a good or service in which anyone finds utility. Any surplus value (stock of value, aka wealth) accrued after income and expenses (flow of value) are netted out is most expediently stored in unencumbered physical gold (Freegold). Currency finds value in accord with its ease of exchange for gold. If a currency is valuable, it is easy to find gold bidding for it, if not then more currency must be offered until gold is coaxed out to exchange for it.

The monetary system, as the sum of its functions (unit of account; medium of exchange; store of value), is simply the system we collectively agree to use to facilitate the flow of value between individuals and groups in society (without such a flow we would all need to be completely self-sufficient individuals). As such, the functioning of the system is much easier to visualize when we consider it in terms of only the value and how the value circulates, is stored, and ultimately consumed as a sophisticated spontaneous and continually evolving arrangement of stocks and flows. Viewing money as simply currency (medium of exchange), and accounting for transactions only in nominal currency terms is misleading - currency has value in accord with the value of real goods or services for which it may be exchanged only, and this exchangeability is not fixed, but rather always in flux. Value is simply the measure of utility, and if a currency buys less or none of what one wants, then it has little or no utility, and hence little or no value. A system of account requires a unit with at least some sort of objective basis to have relevance.

To perform well, any store of value should not be used also as a medium of exchange, as at least part of the value being exchanged in any given transaction would not be kept as savings, and would need to be further exchanged to meet current expenses. This increases the velocity of the store of value, reducing its value. Gold, like any other store of value, stores value best when it lies very still.

With a Freegold Standard, only the exchange rate of a currency with Freegold need be established to find the currency’s value, as Freegold is the proxy for the stock of value, wealth.

Freegold acts like a sponge, absorbing surplus value in any given zone, and transferring it between zones through arbitrage, out of deficit zones (net value consumers) and into surplus zones (net value producers). All sovereign entities, whether individual, state, or nation, interact with this system in the same way, only on different scales (micro/macrocosm). They may have different motivations for individual transactions when storing value in or retrieving value from Freegold, but the mechanism they use will be the same - the purchase or sale of unencumbered gold in a floating free market.

The Freegold market is established by the bidding for unencumbered physical gold in preference to encumbered gold derivative products, as these derivatives are found to not perform as well as unencumbered physical in monetary crisis, and as a result are discounted by the market. This is a simple and spontaneous reaction in accord with the self-interest of market participants. When monetary confidence falters the preservation of value becomes the focus, and in this gold is the obvious focal point.

In practice, any currency is valued by the market only by that which it can be exchanged for. Under a Freegold Standard, currencies are technically, but not officially, backed by gold - a currency that cannot be exchanged anywhere anytime by anybody for gold will be avoided in favour of one that can. It is privately-held gold reserves that make themselves available for this exchange, at the right (floating) price, not Central Bank gold reserves. CB reserves are for currency credibility purposes, and a national savings reserve for facilitating international trade in times of distrust and/or great monetary stress. A Central Bank buys or sells gold to manipulate the value of its currency, buying to inject currency into circulation thereby weakening its exchange rate, and selling to remove currency from circulation and strengthen it.

The Gold Standard

The fixing of the exchange rate between gold and a given currency (aka the classic Gold Standard) is a (barbarous) mechanism which seeks to appropriate surplus value (aka wealth) into the currency rather than the gold reserves via fixing, making the value available to the issuer of the currency (ultimately the government), and obviously no longer available to the savers who stored their value there (this deception leads to bank runs and bankruptcy). Official gold reserves dwindle, while claims on them rise. Inequitable and unsustainable.

The Fiat Scam

The ruse of ceasing redemption of currency for gold leaves the creditor with no benchmark to evaluate said currency as time passes, and as such leaves them behind the curve as currency continues to be issued, now relatively unimpeded, the creditor always imputing more value to the currency than they should. Until that day when confidence is entirely lost, at which point the debtor consolidates their position by revealing that they place a very high current value on their gold reserves - one high enough that they can pay down their entire obligations with only, say, half of their physical gold reserves.

Keeping the actual quantity of the debtor’s physical reserves a mystery all the while adds to the debtors advantage, and every extra day that this scam can be kept intact in the latter stages is worth far more to the debtor than many days were in the early stages.

Debt as Wealth

Deferred payment (debt) is only able to be accumulated with accompanying deferred purchase of goods and services of real (tangible) value. In other words, if the overhanging debt (deferred purchase of tangibles) is corralled in non-tangibles like bonds and currencies.

Stored there it will have no effect upon the perceived values of real goods and services, because it is not bidding upon them. As discussed in It's the Value, Stupid, debt is synthetic/promised/yet to be created value circulating at par with real (already created) value, both in the form of currency. The difficulty in telling them apart is that you can’t, because currency is fungible. They both function equally as medium of exchange, exchangeable for either tangibles or non-tangibles.

This corralling requires inflating the credibility of the issuer of the non-tangibles. As the quantity of the non-tangibles inflates, so must the credibility of the issuer, because anyone storing their value in a non-tangible will only do so if they have confidence they can actually get the value back later, if they consider the issuer to be credible. To issue ever more non-tangibles, it follows that the issuer must have ever-increasing credibility in the face of these claims.

There are lots of savings in these non-tangibles containing almost no real value, but only the confidence of those using them to “store” their value. Of course when someone goes into debt by borrowing currency, and then uses the borrowed currency to purchase tangible goods or services, value passes into their possession. The currency was only a claim on this real value; it took an exchange of these claims for payment in full, a tangible, for actual value itself to pass into their hands. There are currently fantastic quantities of these claims corralled in non-tangibles, dwarfing the current supply of tangibles, or payment in full. When this confidence falters, it “snaps all at once” rather than unwinding smoothly.

A Freegold Standard

Unencumbered physical gold as the ultimate monetary denominator, benchmarking the value which the monetary system serves to exchange, acting as the objective reference point. From the exchange rate (price) of Freegold in any/all other items (currencies and assets alike), the relative value of any/all can be established in a completely objective fashion. In this arrangement it can be seen that it is gold valuing currencies, and therefore everything inside the monetary system, from its position as the physical wealth asset outside the monetary system. Gold is the master numeraire because it is the master proxy for value, denominating all lesser units of account, and thus providing relativity to all participants in the value-exchange (monetary) system.

This can only come about when gold is traded on a physical only basis - no form of gold derivative should ever be traded at par with physical, on the assumption that it is “as good as gold”, because any derivative is not and could never be as good as possession of the real thing, by definition. Gold is physical gold in the here and now only. Nothing more, nothing less.

Human society arranges itself in response to the monetary system it utilizes to facilitate the flow of value between its constituents. This is to say that the monetary system dictates the nature of the society, and the motivations which drive the behaviours of its individual members.

The current monetary system is completely inequitable, as can be seen in the continual movement of wealth (stored value) to the wealthiest .01% of individuals, and away from the poorest. This discrepancy has never been greater, and continues to grow. Value is liberated from its creators and spirited away through the continual depreciation of the savings medium. A Freegold Standard is a return to a fully equitable system, where the net value producer keeps the unconsumed fruits of their labour until such time as they wish to consume them, or give them away. It does not allow the government to sequester privately saved value any longer, to be spent arbitrarily by those not attributed with its creation. A great deal of certainty is found by all users of such a system.

With the benefit of a shared objective reference point to gauge relative value (the utility found in a good or service), all individuals will have the opportunity to go about producing the highest value/utility they can, in accord with this new objective data, which will result in myriad new possibilities to apply existing skills, capital and knowledge far more effectively and productively than at present.

To separate self-sufficient human beings, gold has no utility; but as part of a larger interconnected human super-organism gold has the highest utility, as the heart of an equitable value circulation system.

A Freegold Standard: elegant in its simplicity.

Next:

Freegold 9: Gold as Pure Equity

Intermission 5

Taxation = Theft

Huxley vs Orwell

Freegold 7: It's the Value, Stupid

Reposted from here.

Warren Buffet recently wondered publicly at the uselessness of gold, all of which ever mined, he noted, would fit into a cube 67ft to the side. $7 trillion worth he said, which could buy seven Exxon-Mobils and half the worlds' arable land and still have $1 trillion walking around money in your pocket or somesuch. He does concede it is nice and shiny and he could use the cube as a mirror.

------

When we create something which others find to be of value to them, we often enter into an exchange of this good or service for other goods or services of value to us (self-sufficiency can be fairly austere), and as a result we find that we can all better specialize in our individual efforts, thereby increasing our productivity, efficiency and level of technology. Utilizing a medium of exchange rather than engaging in direct barter further increases these benefits manyfold.

The medium of exchange is indispensable to human society, and to its continuing evolution, at least as we currently understand it. The exchange of value it facilitates brings its users together in such a way as to render the whole greater than the sum of its parts.

Everyone using this system of value exchange is likely to be wanting to accrue a surplus of value once they have acquired the goods and services they want from this flow, rather than run a deficit, no? They are aiming to have, overall, larger income than expenses, allowing the buildup of a stock of value, commonly referred to as wealth.

Some of this surplus will be redeployed into capital assets to fuel further productive growth and enhance the operating margins.

Some of this value will be saved.

So we have value, created by people (yes, some of it is arguably dug out of the ground or similar, but it must still be mined/harvested etc., in order to realize that which is otherwise only potential value), willingly exchanged between people, some of it consumed, some reinvested to create more value, and some saved.

The consumed and the reinvested values were exchanged using the medium of exchange, and in both cases the ultimate owner of these values took their payment in full in the form of an asset. The medium of exchange is simply a claim in the system, whereas the actual value, the utility the end user is after, is in the asset. The value to the asset’s ultimate owner lies in the utility the owner finds in the asset. Value is the measure of utility, subjectively assigned by each individual. The medium of exchange, in facilitating the acquirement of a useful asset, has instrumental value only. It is the means, not the ends.

What to do with the saved value?

It could be held in the medium of exchange if this medium held its buying power over time, if it could be exchanged at a later time for a comparable value with that which was initially relinquished, but this buying power is not maintained, as we know. Instead, today additional medium of exchange is created upon the signature of a borrower, as credit, by banks as a matter of course; with the Government Treasury Department's issuance of bonds; and by the Central Bank expanding its balance sheet to monetize debt, all in accord with the aim of constant monetary inflation, itself a matter of regulatory policy.

So the medium of exchange is constantly diluted, by the promise of value yet to be created. These promises of future value circulate at par with value that has already been created, in the form of the medium of exchange. All three of these methods of medium of exchange creation are based upon promises of value yet to be created.

Saving surplus value in the constantly diluted medium of exchange is a losing proposition for the saver. Value is constantly being drained from such savings, as many people are using a promise of value not yet created to acquire assets, to receive payment in full, concurrent with the ever expanding volume of the medium.

Gold historically served in the store of value function, which is why Buffet is even commenting upon it; it has been a fundamental part of the human monetary system for millennia. It served in this role as a simple physical asset, just like any other asset, but the only practical function of gold as an asset was as an excellent store of value. It rose in prominence in this role simply because it performed it better, for a long list of well documented reasons. Gold was the supreme physical wealth reserve, sheltering surplus value.

It stopped performing so well as a store of value once it was brought inside the monetary system. It was monetized.

Firstly, gold was deposited with a third party (banks, ultimately) for security and notes issued to the depositors, notes which eventually began to circulate as a medium of exchange. At this point, all the value is still intact and undiluted - a 100% reserve ratio. But this changed when gold lending began, and particularly when notes were lent in lieu of the physical metal, as there was now only a partial reserve: the quantity of gold (or at least notes that traded at par with gold, and were accepted to be “as good as gold”) had been inflated beyond the actual physical reserve. There are now more claims on value than there is value currently available. Promises priced at par with the real thing.

Secondly, in an effort to divert some of this surplus value into their own possession, the exchange rate of gold with paper currency issued by Government Treasuries was fixed by decree, giving value to said currency. The Gold Standard. A scam, utilizing the reputation of gold. Savers feel secure saving in gold-backed currency, and as such they exchange their surplus value for these notes, printed by the Treasury. The surplus value that once accrued in physical gold, now, by virtue of the fixing of the exchange rate with the currency, accrues instead to the currency. Gold has been monetized, brought inside the monetary system.

The supreme physical wealth reserve was neutered, firstly by the inflation of gold receipts higher than the actual physical reserve (unofficial monetization), and secondly by official monetization. Both are (relatively opaque) misappropriations of the value stored in it.

The banks where the savings denominated in currency are regularly held on deposit are the public’s gold exchange window, and the front for the Treasury. In the event of a run, the bank simply closes when insolvent, leaving remaining creditors with no value. Where has their value gone?

Of course over time the Gold Standard could not be maintained as it could not facilitate large-scale wars (WWI and WWII could not have been financed on the Gold Standard), and because its reach was not global; foreigners without a fixed exchange rate for gold found gold could be acquired from regions where it was fixed more cheaply than their local price, so gold gradually migrates to where it holds the most value.

The Gold Standard became the Gold Exchange Standard, with the physical gold window only open to foreign Central Banks, until finally that window too was closed to stem the flow before the stock was exhausted.

We are left with a system of unbacked fiat currencies, all floating against one another with no objective benchmark from which to ascertain their true value. This is no accident; it is the logical last stage of the surreptitious pilfering of value. Gold was this objective benchmark, historically, but in this fiat era gold has been encumbered with a plethora of derivatives, leaving no market value for physical gold. Physical gold is available instead at a massive discount: the “price” of gold in this fiat system is not found in a physical only market, but in one in which the physical is diluted with promises of future gold (all gold derivatives). The “price” is in fact a hybrid of physical and paper gold.

The value of the scarce physical metal is considerably higher than the value of the mass produced paper contracts which dilute the price but not the physical quantity.

And now we come back to the beginning, where the old becomes the new.

Buffet would feel quite differently about his theoretical cube of gold if physical and paper gold were not treated as interchangeable with regards to their value (how can they honestly be when there is a ratio of possibly 100:1 paper to physical?), and the physical were valued in a physical only market as a physical asset. The perfect vehicle for the saver’s surplus value. As demand for physical gold gold intensifies, this decoupling is inevitable.

The divisibility of that cube to absorb value is practically infinite. As value is stored in it, the exchange rate with currency rises, all else being equal. Gold is once again valuing not only the currencies, but by extension everything else too. It is the objective benchmark allowing us to ascertain the relative values of everything.

Central Banks and the very wealthy the world over hold reserves of physical gold in preparation for this inevitable change.

It is notable that Buffet valued that $7 trillion in todays assets. It is only the assets available for exchange with currency that give currency value. This is why gold was monetized at all; to eliminate it as the physical asset which openly and accurately valued currency, thereby terminating the ability to debase currency and divert a flow of value into the hands of those who expended no effort for it.

Of course when physical separates from paper gold, gold will then be accurately showing just how much value has been channelled away from savers paper savings, and where it now resides.

Freegold is unencumbered physical gold as the wealth reserve asset outside the monetary system. Gold will spontaneously reassume this function when physical separates from paper. A casual glance at the balance sheets of those Central Banks who mark-to-market their gold reserves reveals that this is not only expected, but it has been prepared for.

From this position outside the monetary system, as a simple physical asset, gold denominates everything inside the monetary system in terms of value, because accrued value is all that this asset is, accruing value is all it does. This is its function. The function of gold.



The ONLY function of gold.

Next: Freegold 8: A Freegold Standard

Fun to Imagine: Richard Feynman

Shelter From The Storm

'twas in another lifetime, one of toil and blood
When blackness was a virtue and the road was full of mud
I came in from the wilderness, a creature void of form.
"Come in," she said, "I'll give you shelter from the storm."

And if I pass this way again, you can rest assured
I'll always do my best for her, on that I give my word
In a world of steel-eyed death, and men who are fighting to be warm.
"Come in," she said, "I'll give you shelter from the storm."

Not a word was spoke between us, there was little risk involved
Everything up to that point had been left unresolved.
Try imagining a place where it's always safe and warm.
"Come in," she said, "I'll give you shelter from the storm."

I was burned out from exhaustion, buried in the hail,
Poisoned in the bushes and blown out on the trail,
Hunted like a crocodile, ravaged in the corn.
"Come in," she said, "I'll give you shelter from the storm."

Suddenly I turned around and she was standin' there
With silver bracelets on her wrists and flowers in her hair.
She walked up to me so gracefully and took my crown of thorns.
"Come in," she said, "I'll give you shelter from the storm."

Now there's a wall between us, somethin' there's been lost
I took too much for granted, got my signals crossed.
Just to think that it all began on a long-forgotten morn.
"Come in," she said, "I'll give you shelter from the storm."

Well, the deputy walks on hard nails and the preacher rides a mount
But nothing really matters much, it's doom alone that counts
And the one-eyed undertaker, he blows a futile horn.
"Come in," she said, "I'll give you shelter from the storm."

I've heard newborn babies wailin' like a mournin' dove
And old men with broken teeth stranded without love.
Do I understand your question, man, is it hopeless and forlorn?
"Come in," she said, "I'll give you shelter from the storm."

In a little hilltop village, they gambled for my clothes
I bargained for salvation an' they gave me a lethal dose.
I offered up my innocence and got repaid with scorn.
"Come in," she said, "I'll give you shelter from the storm."

Well, I'm livin' in a foreign country but I'm bound to cross the line
Beauty walks a razor's edge, someday I'll make it mine.
If I could only turn back the clock to when God and her were born.
"Come in," she said, "I'll give you shelter from the storm."

-Bob Dylan

We Have Met The Enemy, And He Is...

Your Life According to the Government

Prison For Your Mind

h/t Mr Beyond

Zeitgeist: Moving Forward

De Gaulle v. the Dollar

Reposted from Time Magazine, Feb 12 1965

Perhaps never before had a chief of state launched such an open assault on the monetary power of a friendly nation. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in 1944. There was Charles de Gaulle last week proclaiming that the primacy of the dollar in international dealings was finished, calling for an eventual return to the gold standard —which the world's nations scrapped 50 years ago — and practically inviting other countries to follow France's lead and cash in their dollars for gold. It was a particularly nettling irritant just as the U.S. was deeply involved in making some hard decisions about its monetary policy.

The Drain. President Johnson faces the unpleasant task of producing what he calls "strong and specific" actions to deal with the persistent U.S. balance-of-payments deficit, a problem intimately related to gold. The President's advisers are still debating just how "strong" these imminent measures should be.

There is a growing awareness, heightened by De Gaulle's offensive, that past attempts to close the payments gap have been mere palliatives — and that the problem has begun to undermine U.S. influence around the globe.

Just before De Gaulle spoke, Treasury Secretary Douglas Dillon made the first public admission that the U.S. payments deficit in 1964 moved higher than anyone had expected. It totaled about $3 billion, all of which the U.S. is legally committed to exchange for U.S. gold on demand. The Federal Reserve announced that the U.S. gold supply declined last week by $100 million, to a 26-year low of $15.1 billion.

France converted $150 million into gold last month, plans another $150 million conversion soon. Following that lead, Spain has quietly exchanged $60 million of its dollar reserves for U.S. gold—the biggest such transaction of the Franco era. To free more gold to meet rising demand, a congressional committee last week approved President Johnson's proposal to eliminate the 25% gold backing now legally required for deposits held in the Federal Reserve System. But concern is growing in Washington that nations that have so far refrained from converting dollars out of consideration for the U.S. may cash them in for gold once the extra bullion becomes available—and thus send still more gold-laden truckloads rolling out of Fort Knox.

Signal Privilege. Into this tense situation stepped De Gaulle, disregarding his 1963 promise to support the present international monetary system, in which the dollar plays the dominant role and all free world trade is financed by a mix of dollars, British pounds and gold. The time has long since passed, he told a press conference (see THE WORLD), when the currencies of any one or two nations can enjoy "this signal privilege, this signal advantage." The present-day world, said De Gaulle, needs "an indisputable monetary base, and one that does not bear the mark of any particular country. In truth, one does not see how one could really have any standard criterion other than gold."

De Gaulle seemed to be calling for a somewhat modified form of the classical gold standard when he ambiguously recommended "complementary and transitory measures" to accompany it. Nonetheless, there was no doubting his intention: to promote his drive to reduce U.S. economic, military and cultural influence abroad.

Under a gold standard the U.S. would no longer be able to pay its foreign debts in dollars, but only in gold. U.S. businessmen would have to curtail their investments in foreign companies. (De Gaulle last week called such U.S. investments "a form of expropriation"). Until the U.S. balanced its payments in gold, American consumers would also have to reduce their purchases of foreign goods. Reason: since dollars would no longer be as good as gold, they would be cashed in abroad for gold as soon as spent. The U.S. would immediately become less potent in world economic affairs because, though it has twice the gross national product of the Common Market nations, it holds scarcely more gold than the Six.

Stern Discipline. Conscious no doubt of the irony involved in his unneighborly attack, De Gaulle christened his plan the "Golden Rule." What could be said for his proposal? The value of money would be guaranteed by the immutability of gold. In theory, the world monetary system would become more stable, less vulnerable to crises of confidence. By tying the money supply to gold, the system would prevent overspending. In the U.S. and Britain, which now can pay their deficits out of their own currencies, it would impose a stern fiscal discipline, curb deficit financing and do away with many of the excesses that lead to inflation and recessions. Among other things, it would force the U.S. to eliminate its balance-of-payments deficit quickly, by hook or by crook.

To counter criticism that the system would also paralyze international trade because of the global shortage of gold, champions of the gold standard advocate another step that they consider necessary: to double or triple the $35-an-ounce price of gold, thus vastly increasing the monetary reserves that finance world trade.

For the present at least, most of the world's leading economists, money managers and financiers believe that this golden future, however desirable in theory, is nearly impossible to achieve in practice. After De Gaulle's press conference, British and West German government leaders said that they took a dim view of a return to the gold standard. The U.S. Treasury declared that the scheme would produce economic warfare: nations would demand that their foreign debtors pay off fully and immediately in gold—and many countries would not have enough gold to go around. Many nations would then have to embargo gold, raise tariffs, restrict trade. At a recent meeting in Bellagio, Italy, 30 of the world's top 32 international economists opposed a return to the gold standard.

The great majority of economists and financiers also reject the idea of an increase in the price of gold—in effect, devaluation of all the world's currencies. Says Yale's Robert Triffin, a ranking gold expert: "It would help unfriendly nations and hurt our friends, and lead to the collapse of international monetary cooperation." The biggest gold producers, South Africa and Russia, would be helped; their gold would immediately become worth two or three times what it is now. The countries that have helped the U.S. by holding large amounts of dollars in reserve would be hurt, especially Germany, Japan and Canada.

Moreover, since Congress normally would have to debate and vote on changes in the price of gold, many holders of dollars would rush to cash them in for gold. In theory, revaluation of gold could be prepared in secret by all nations concerned and announced simultaneously. In practice, economists believe, this might be nearly impossible to carry out. For all these reasons, President Johnson, in his Economic Message two weeks ago, repeated six times that the U.S. is determined to hold gold at its current price.

New European Axis. De Gaulle probably does not really believe that the world will return to the gold standard. He has been much influenced by Jacques Rueff, his economic mentor and probably the world's foremost proponent of a return to gold; Rueff greeted De Gaulle's blast last week as "an invitation to a common enterprise that will deliver the West from an absurd monetary system." But De Gaulle, however much he may admire the theory, is an artist of the possible, and he is probably using the threat of a gold standard in hopes of pressuring the U.S. and Britain into accepting lesser changes in the monetary system favorable to France. For the past six months he has been urging the creation of a new international reserve currency called the "cru" (for collective reserve unit), which would give greater weight to gold and more financial power to nations with heavy gold supplies. The U.S. has opposed it, but De Gaulle's attack on the dollar may force Washington to reconsider.

High officials of the Federal Reserve Board believe that De Gaulle, aided by Spain's Franco, is trying to form a new European axis designed to embarrass and weaken the U.S. by attacking the dollar. To buttress the dollar, Federal Reserve Chairman William McChesney Martin Jr. has been strongly urging President Johnson to move swiftly and dramatically to wipe out the deficit in the balance of payments. "Some way or other, something has to be done," Martin said recently. "It is important that we face up to the fact that we have become a chronic deficiteer—and that leaves us in a weak position."

Martin, Douglas Dillon and Budget Director Kermit Gordon are lobbying for measures that would drastically affect the nation's foreign and domestic policies. Among the proposals that one or all three of them have forwarded: an exit tag of $50 or $100 per person to discourage tourism abroad, direct controls on U.S. investments abroad, a further cutback in foreign aid and, if necessary, a sharp reduction of U.S. troop strength in Europe. These proposals have been hotly debated at a series of secret meetings in the White House. The State Department is dead set against foreign aid cuts or troop withdrawals, and the Commerce Department argues that restrictions on investment would destroy the U.S.'s reputation as the world's freest capital market. The White House figures that a "head tax" on outward-bound tourists would be political poison.

Johnson's Compromise. The State Department believes, in fact, that a $3 billion payments deficit should not really bother a nation that boasts both a $650 billion economy and twice as much in claims against foreign currencies as foreigners have against the dollar. It argues that the U.S. could reduce the deficit by $500 million simply by counting short-term foreign deposits in the U.S. as assets instead of liabilities.

Strong support for this optimistic view came last week from Pierre-Paul Schweitzer, the managing director of the International Monetary Fund and the world's top currency controller. "A more realistic assessment would some what lower the figures for the overall deficit," he said. "The structure of the U.S. balance of payments is one of underlying strength."

With his usual preference for compromise, President Johnson had decided early last week on some fairly mild prescriptions. These were to include a slight tightening of the domestic money supply to prevent dollars from flowing abroad, a tax on loans by U.S. banks abroad, and a jawbone campaign to persuade U.S. businessmen to reduce their foreign investments. De Gaulle's bombshell may have convinced the President that tougher action is needed. In any case, official Washington agrees with De Gaulle on at least one point: some changes should be made in a world monetary system that puts the U.S. under such strain.