How The West Was Lost

Current Rules, Future Rules

2012-01-17T12:08:00.000+13:00

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

2011-11-17T19:56:00.001+13:00

Stroke of Insight

2011-09-14T22:56:00.000+12:00

Freegold 10: Paper, Pyramids & Paradigms

2011-08-27T20:50:00.012+12:00

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

2011-08-21T20:35:00.005+12:00

"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

2011-08-13T13:21:00.003+12:00

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

2011-07-18T07:35:00.002+12:00

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.

Freegold 9: Gold as Pure Equity

Intermission 5

2011-07-03T19:18:00.000+12:00

Taxation = Theft

2011-06-12T14:30:00.000+12:00

Huxley vs Orwell

2011-05-05T22:42:00.003+12:00

Freegold 7: It's the Value, Stupid

2011-04-04T23:32:00.003+12:00

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

2011-04-02T12:44:00.002+13:00

Shelter From The Storm

2011-03-20T20:20:00.001+13:00

'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...

2011-02-17T16:10:00.002+13:00

Your Life According to the Government

2011-02-15T11:36:00.001+13:00

Prison For Your Mind

2011-02-05T09:03:00.000+13:00

h/t Mr Beyond

Zeitgeist: Moving Forward

2011-02-04T15:54:00.002+13:00

De Gaulle v. the Dollar

2011-01-29T20:50:00.006+13:00

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.

Over The Hills and Far Away...

2011-01-15T09:48:00.003+13:00

"Many times I've wondered... how much there is to know"

"Many dreams come true, and some have silver linings ,

I live for my dreams... and a pocket full of (Free)gold..."

Fractals: Hunting The Hidden Dimension

2011-01-15T09:01:00.001+13:00

Telling It Like It Is...

2010-12-10T06:51:00.000+13:00

200 Countries, 200 Years, 4 Minutes

2010-12-09T19:59:00.005+13:00

Hans Rosling's conclusion at the end of this fascinating video are not only quite likely but seemingly inevitable, but we will not get there utilizing the current system which has reached the end of its timeline.

Everything's Turning To Gold

2010-12-07T23:02:00.000+13:00

Freegold 6: Individual Sovereignty Analogy

2010-12-04T21:30:00.004+13:00

Danny MacAskill demonstrates here things that will cause you to alter your perceptions of what it is possible to do on a bicycle, in a similar fashion to that which Freegold will alter your perceptions of the implications of the term "individual sovereignty".

Next: Freegold 7: It's the Value, Stupid

The Secret Life of Chaos

2010-11-30T21:35:00.002+13:00

Hitler Saves Ireland

2010-11-26T08:59:00.001+13:00

The system cannot save the system. Replace Hitler with Freegold, and the stringing up of leaders with the cutting free of the people, and we have a revolution worthy of the name.

A Revolution in the Head.

Redemption Song

2010-11-14T21:00:00.000+13:00

Simpsons Banksy Intro

2010-11-07T10:42:00.001+13:00

Freegold 5: Gold Is Not Money

2010-11-06T13:40:00.009+13:00

These three functions:

store of value
medium of exchange
unit of account

collectively form the abstract concept we refer to as "money".
All three functions are separate mental processes to which we ascribe different mediums, depending upon circumstance. Money is not one or another of these things, nor anything else. Money is the sum total of these three functions. Period.

This is the definition which I will apply to the term “money” hereafter. Please keep this in mind.

Past Circumstance
There was a time when gold and silver coins filled all three roles, and at that time it would have been accurate to describe gold as money. Human nature put an end to that. (Technology would have inevitably intervened at some stage too, but human nature got there first.)

Human nature demands money it can borrow. I differentiate between money you can spend before (borrowed) or after (earned) you exchange some form of value for it as either easy money, or hard money, respectively.

FOFOA:

“In a gold money system with gold lending (which is always demanded by the collective will) fractional reserve banking is the inevitable result. And from there, bank failures are the inevitable result at the first sign of panic (loss of confidence). And from there, some of the savers lose their money.

In a fiat system, the fiat is lent and the savers hold the notes, one way or another. This lending and note holding always increases the money supply just like gold lending and gold-denominated notes expand the gold money supply. You lend something and then you can claim it in the form of a note while the borrower claims it in the form of the currency. Even the notes circulate as they become marketable.

So lending always expands the money supply, whether it is gold or fiat. And when the savers save in the same thing being lent, collapse ultimately comes (or at least threatens), whether gold money or paper. And then the system must undergo a fundamental change one way or another.”

Access to easy money has traditionally resulted in more coupons entering circulation than there is value backing them.

If the coupons are for gold (eg. gold backed dollars pre 1933), not everyone can receive the gold owed them. If the coupons are fiat (modern dollars), everyone can get their cash (it’s printable, after all), but its buying power shrinks.

When there was not enough gold to meet dollar-bearer demand in 1933, it was decided that to boost supply gold held by private US citizens would be confiscated, to reduce demand dollars held by private citizens would no longer be redeemable for gold, and to extend the newly consolidated reserves gold would be revalued, higher.

The exact same symptom resurfaced on an international scale less than 40 years later, and as a solution the redemption of dollars for gold was ceased altogether in 1971.

Another 40 years on, and the same situation requires a remedy once again. This time, though, it is orders of magnitude larger, compounded by the fact that no-one was forced to take their losses in 1971, as the problem was technically just papered over. Today the majority of dollars and their multitude derivatives are held digitally, and with the dollar no longer officially redeemable by the bearer for anything tangible, the solution will be different in appearance, but not in practice. This time, everyone requiring payment has agreed by their participation that they no longer need gold: they will accept cash. And this time, they will get all that is owed them. Of course, when they do, there will be so much of it that it won’t be worth anything. The result is the same as previously: savers pay with their savings. Value is lost.

So you can see that in just the last century we have tried using gold simultaneously as both the medium of transaction and store of value, and then the same with fiat, with the same result. It was the lending of the money that forced the departure from a gold money system, when it was deemed more expedient to socialize the losses than to let the banks collapse.

Left to its own devices, the market will naturally remedy the inflationary loss of the real value of money with deflation, as demonstrated by this chart:

The chart above shows clearly that the market has not corrected this loss of real monetary value for the last 80 years. This chart is presented for conceptual purposes only, as the official data used has been manipulated over the last 30 or so years to deliberately understate inflation: in real terms, there would quite likely be even more blue on the right hand end.

Present Circumstance
Deflation increases the real value of money, when measured against the real goods and services it can be exchanged for. We are now at a point where real deflation will prevail, because aggregate credit is contracting, and the global deleveraging process is destroying debt-based fiat faster than it can be created.

I refer to this deflation as real deflation because there are no longer any reliable (unmanipulated) traditionally used metrics with which to measure it (the marking to market of credit, for example, has been suspended. This does not mean that it still has value, it just means we are unable to know the degree to which it has lost value), but this does not mean deflation is not really occurring anyway, whether visible or not.

Historically, the medium of exchange deflates against the store of value to reinstate real value to money, as seen in the first 3/4 of the chart above. In a gold money system, this meant that either the physical gold rose in value, or the excess paper coupons in circulation to represent it must be destroyed, to return to a monetary value equilibrium. This process is the bank failures and loss of saver’s money FOFOA spoke of in the quote above.

This "monetary value equilibrium" can be found as a balance in the ratio of value between the store of value and the medium of exchange monetary functions.

Today though, the debt-based dollar is used in all three monetary functions, meaning that the store of value has a counterparty. The counterparty holds dollars (and derivatives thereof) as collateral assets.

How can the dollar deflate against itself?

FOA:

“Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt...”

If the debt this present monetary system utilizes for all three monetary functions is allowed to default, which would be the natural course of events, it will quickly cascade into default on the sovereign nation level and complete systemic collapse. The only way to counter this, as FOA pointed out, is the printing of more (and more...) money by the Fed to buy all this debt, until ultimately it buys it all. When debt-based fiat is used concurrently for all three monetary functions, these are the only two options when the debt load finally becomes too large.

The dollar cannot deflate against itself. It can collapse in total default, or collapse in hyperinflation. Under the current arrangement with the dollar as the "only money”, these are the only two options to restore the monetary value equilibrium.

Future Circumstance
What if, in a break with tradition, the current monetary function arrangement were altered?
With the debt-based dollar performing all three monetary functions, we face a choice between two unpalatable options, both of which culminate in collapse.

Circumstances dictate a different medium be assigned the store of value function, to give the dollar something to deflate against.

Voila! A third option, one which does not result in collapse.

The only feasible store of value the market can select is the same one the market had always used, because it is the only medium meeting all the criteria that the store of value requires, with the top of the long list being... no counterparty, and the inability to create more at will. Physical Gold.

There is a hidden (in plain sight) escape hatch from the losses this switch in store of value medium would otherwise cause: existing holders of physical gold will be automatically recapitalized when the exchange rate between gold as the monetary store of value and paper currency as the monetary medium of exchange is left free to float. Central Banks will still hold valuable reserves, for the value lost from their foreign currency (FX) holdings would be offset by the value gained by their gold.

When Adam Smith wrote “Wealth Of Nations” in 1776, he spoke of an “invisible hand”, a concept which remains a fundamental economic principle, in which the cumulative effect of individuals' actions of self interest move the market as an unseen, self-regulating force. It is this self interest which will force the change of monetary function, as the only viable option. The very biggest and most influential market participants already hold gold reserves for just this eventuality, for their own recapitalization in this event. Some of the Central Banks, such as the ECB and Russia, already mark their gold reserves to market. For them, this recapitalizing is already underway, as the value of their gold reserves grow in response to the diminishing value of their FX reserves.

Another conceptual example:

This process of reinstating gold as the monetary store of value is a mental process, one already underway. As the market gradually becomes aware of the inevitable choice it faces, the trickle of value into physical gold will become a flood, and the invisible hand will uplift debt-based paper from its role as the monetary store of value, and install physical gold as replacement. Recapitalization is automatic, but only for holders of physical gold.

While paper currencies may have turned in a miserable performance as a store of value, they have excelled in their role as medium of exchange, in more ways than one. In digital format it has introduced new efficiency to international trade, and to its usage and management daily by billions of people. While its quantity is easily adjusted by its issuer, indiscriminate issuance of paper can be kept in check by a rising price of gold in said currency, through an international floating exchange rate with physical gold.

This new arrangement leaves us with a self-regulating monetary value equilibrium: physical gold becomes the perfect hedge against inflation. Capital now has a safe harbour, where it can be stored without loss of value while awaiting a sound investment opportunity, not being rushed into misallocation in an attempt to outperform inflation.

Aristotle:

“I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free.”

And what of the monetary unit of account function? Which medium will it utilize?

Both. Whether one uses gold or paper currency in this role will depend entirely upon what one's intentions are for the monetary value in your possession. If this value is to be used for current expenses, paper currency will be most adequate. On the other hand, if this value is surplus to your immediate requirements, it would fall into that category usually regarded as "savings", and for this gold would be the best vehicle.

All three of the monetary functions that constitute money are purely mental, and a change of medium in any of them is a collective mental decision. This is a decision our elected leaders are wise to let us make for ourselves.

5/26/98 ANOTHER (THOUGHTS!):

"Do you know the value of gold?

From the day of our birth we are taught to value all things using the one factor alone, currency! Can one contemplate the value of all possessions in other terms? Do you not have to think first as to "how many dollars is that worth", then "how many dollars is this worth" to compare two items? If it is deep within our mind, that we can know value only in terms of paper, to this I ask, can one know value at all?

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 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 an Indonesian?

One should grasp that "today, your wealth, is not what your currency say it is"!

In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds it's worth, as in the exchange rate for another currency?

Many will "think long and hard on this", but will find little reason for this position. For it is in your history to know only "things valued in paper terms". Some say, "I hold investments of great increase these past years, and am much ahead of the inflation, if it should come". I say, "your investments, worldwide, have moved little, as it has been the currencies that denominate your assets, that fall a great deal". The price inflation that comes, it is larger than your vision can see! Your past, holds little of knowing value outside of currencies, this does block the good view!"

To paraphrase Aristotle:

The flow of value- Create value to earn currency, buy what you need, save in gold, enjoy what life has to offer.

Ender: “... he who holds gold has already been paid.”

Gold is not money.

Gold is the master proxy of value.

Money is the means by which we collectively manage value.

Blondie

h/t all Physical Gold Advocates, everywhere, for sharing the view.

Next: Freegold 6: Individual Sovereignty Analogy

Remember, Remember...

2010-11-06T13:37:00.001+13:00

h/t William Banzai7

Check For The Odd One Out...

2010-11-05T10:36:00.004+13:00

Intro To Fractals

2010-10-31T23:02:00.000+13:00

No Sale

2010-10-31T00:00:00.004+13:00

Reposted from The Flow Of Value

There are two sides to every transaction.

Viewed from one side, we see currency bid for physical goods. The monetary bids upon the physical. A dollar bids for a sandwich.

Looking from the other side, we see the physical bidding upon the monetary. The sandwich bids for a dollar, for example, as an exchange of perceived equal value.

Currency collapse is when the physical stops bidding on the monetary with physical goods. Not when the monetary bids up the physical with lots of paper.

Prices may appear to rise dramatically at this stage, but this is a symptom, not the cause.

The cause is the value of the currency becoming questionable.

The monetary is being consolidated into the physical.

Blondie

???

2010-10-25T11:59:00.001+13:00

It's more powerful than God.

It's more evil than the Devil.

The poor have it.

The rich need it.

If you eat it you will die.

Market Burst

2010-10-24T13:51:00.002+13:00

Watch the Big Boys (in red) exit as the market blows up...

Everyone else?... they're the water.

If you're still in the markets, best of luck timing your exit.

Going, Going...

2010-10-17T10:05:00.002+13:00

A little tough on the eyes, perhaps, so let me requote the entire Financial Times editorial from April 16, 2004, when gold was "grossly overpriced" at US$400:

Going, Going, Gold

The pointlessness of holding bullion continues to sink in.

The barbarous relic, as Keynes called it, is crumbling to dust. When even the venerable NM Rothschild has quit the gold market and the Bank of France, among the most stubborn of the official goldbugs, is thinking again about its bullion holdings, the end of gold as an investment holding has come a little closer.

It will not be before time. The fetishisation of the shiny yellow metal, decades after it ceased to be used as the anchor of the international monetary system, is a lingering anomaly in modern financial markets. Perhaps Rothschild’s last service to the bullion market could be to keep a live gold trader on display behind glass as a reminder of a bygone age, like the former coal miners who now make a living giving tours of defunct pits.

The one advantage of gold as a reserve asset is that, unlike assets based on fiat money, governments cannot make it worthless by inflating it away. But in an era of low inflation, and given that independent inflation-targeting banks are the norm across the industrialised world, that risk has sharply diminished.

Indeed, for both private and official investors, gold is now a rather risky asset with a nil or low return. The intrinsic value of gold, determined by its use in various industrial processes, is well below its market price. Gold does not grow. So its value to any one investor as an asset is dependent on other investors also holding it as an investment asset. The gold price hangs precariously by its own bootstraps.

For private investors to hold gold on this basis is their own foolish affair. For central banks and governments to hold it as a reserve asset is a betrayal of the public on whose behalf they are acting. Despite recent sell-offs, governments and central banks still hold about a fifth of the world’s bullion. Their large holdings relative to the size of the market by themselves make gold particularly ineffective as a reserve asset: the very act of official selling of bullion on any large scale to raise cash will itself drive down the price.

This danger was amply demonstrated by the UK’s unhappy experience of trying to sell some of its gold holdings. Announced in 1999 in a sensibly open and transparent fashion, the sales sparked such a fall in the global bullion price that a group of central banks signed a concord (?) limiting such sales. That has been recently superceded by a new agreement providing for limited official sales.

Given the pointlessness of holding gold, the speed of its official sell-off scarcely matters, unless leaching the gold into the market bit by bit somehow maximises the return to the public purse by limiting the impact on the price. That would imply some irrationality on the part of the market. But then holding gold is irrational in the first place. Perhaps the central banks are right to go slowly.

Whatever the speed, the direction is clear. Gold is on its way out as an investment and a reserve asset. Three cheers for that.

Having waded through that well spun instance of Establishment Media objectivity, it may be timely to revisit yesterday's post - Won't Get Fooled Again.

Won't Get Fooled Again

2010-10-16T12:16:00.000+13:00

Der Frauder

2010-10-11T09:21:00.000+13:00

The Jungle

2010-10-11T07:46:00.001+13:00

by B9K9
on Sun, 10/10/2010 - 06:19
#637926

Hasn't anyone here read Upton Sinclair's "The Jungle"? The process of setting up and destroying rubes & taking advantage of the clueless is an age old tradition. There are passages in the book that read identical to GL's portrayal of this couple ie the protagonists trying to do the 'right thing' and getting hosed by operators. (In fact, the 'victims' stand out in such stark relief to 'spotters' that they could have brands on their foreheads.) Sinclair thought he could gin up all sorts of sympathy for the downtrodden, but the book's true effect was the creation of the FDA so everyone could go back to eating steak with confidence.

Now, let us pull away and view the situation as illustrated in The Jungle from a wider macro perspective. What critical incipient trends were just beginning to take hold at the time of the book's publication (1906)? Large scale automobile manufacture anyone? And what about all the major oil discoveries yet to be made, both domestically (TX) and overseas? Think radical economic growth had anything to do with papering over these prior class conflicts?

Ok, fast forward to today. I keep trying to tell everyone that only fools & chronic complainers would be wasting their time @ ZH if there was any inkling of potential economic growth. That is, this shit would all be long forgotten if there was some new glorious path to riches. If we don't come up with something quick, and I believe the event horizon is now long past, then we not only have to deal with the current manifestation of the collapsed bubble as represented by housing/mortgage fraud, but the roll-back of the entire ponzi that began in 1694.

For 316 years there has always been an out by reflating bubbles to cover up the sins of fathers ad infinitum. First, wiping out the inhabitants of continents & re-populating them subject to charters, contracts, loans & investments (all tremendously inflationary). Secondly, leveraging the utilization of vast virgin resources via the slave trade. Then, for the grand finale, the whole enchilada was capped off by the kingpin, fossil fuels (first coal, then oil).

If this is really it, and I'm pretty sure it is, then it doesn't seem like there are a lot of options other than getting out now. Because, if you don't think the power-elite also "get it" and have contingency plans well in place, then you're just gonna be nothing more than a stepping stone on their path to survival.

by Cognitive Dissonance
on Sun, 10/10/2010 - 06:27
#637989

A free copy of Upton Sinclair's "The Jungle" for those who wish to read about their own misery, only from the safe distance of 100 years ago.

http://manybooks.net/titles/sinclairuetext94jungl10.

Wisdom from Randy

2010-10-07T20:34:00.002+13:00

There are a few Physical Gold Advocates out there who's views are always worth seeking out; none more so than Randy Strauss at USAGold.

For example:

"RS View: The eventual inevitable outcome will be that China will indeed manage toward a quickened appreciation of the yuan against the dollar, but at the same time (and this is key!) despite its upward direction versus the dollar we will witness that the yuan will be depreciating remarkably versus gold, and as such the price of gold as denominated in dollars will be rising most rapidly of all.

This will have a beneficial two-fold effect — 1) naturally attracting/channeling international hot-money flows of excess dollars more benignly into action elevating the gold market rather than having it assert its extra unwanted pressure upon the yuan; and 2) bolstering the wealth-effect and subsequent real purchasing power of the billions of Asians and Indians through the rising valuation of their culturally-significant personal gold holdings. This latter effect will thus compensate export-minded countries for the impending loss of the American consumer as the demand-engine for world trade as these 300 million debt-laden paper-ridden customers are to be outshone by the massive revitalization of gold’s purchasing power in the hands of billions of the world’s “poor” — people with a small amount of gold and very little else. Using their revalued gold savings to upgrade their lifestyle will keep the exporters of the world busy for decades producing all of the things that had traditionally been affordable only to the 300M American consumers. And another upside for the exporters in this NEW arrangement is that the balance of trade will become more fundamentally sound on the basis of tangible gold flows rather than having it all contingent upon the tenuous quality of American-style debt.

I made this same point several (4-6) years ago, and we are now simply that much closer to its headline reality. Have you been using your time wisely to accumulate gold before the jump?"

and

"RS View: This phase transition (like the melting shift of ice into liquid water, or, better yet, the steaming shift of water into vapor) has been a long time in the making — essentially on the political stove and absorbing heat for decades. Now at last, this past decade (since introduction of the euro in 1999) has brought the elevation of that heat to the critical 212° Fahrenheit (100° Celsius) and gold is beginning to make the steaming leap — from its old position as part of the managed stew in the roiling kettle — up into the relative freedom of the vapor phase where it can finally move freely and efficiently (at much higher prices) as dictated by the economic jetstream and all other related winds of demand."

Indeed.

Freegold 4: The Consolidation

2010-10-02T07:57:00.004+13:00

Reposted from The Flow Of Value

Soil liquefaction is the sudden change of unconsolidated soil particles from solid to liquid, generally occurring in young (10,000 years old or less) sedimentary deposits when subjected to large amounts of energy passing through them, for example an earthquake. This can prove a most unsatisfactory occurrence for those with a vested interest in the solidity of such soil.

Obviously, it is this application of energy that consolidates such deposits, making them far less susceptible to such relative instability in the future. Complete consolidation results in rock formation, which is definitely no longer able to be liquified by such tectonic activity.

We can see in our present day monetary system similar recent deposits of unconsolidated wealth, held in debt denominated paper, whether actual paper or digital. This unconsolidated wealth is held in far larger quantities than the real, tangible assets it can supposedly lay claim to.

With the aggregate contraction of credit currently underway, the value of the debt in which this wealth is denominated is being undermined. Without the willingness of the consumer to take on more debt, this undermining is unstoppable. The debt will collapse, being that it is supported only by further debt, and ultimately nothing more than confidence in the entire system by the system’s participants (as described in The Chicken and the Egg). The confidence that the debt actually can and will be repaid. The suspension of mark to market accounting rules for the world’s largest banks is perhaps the fundamental reason this collapse has been postponed for the last year and a half.

This looming loss of confidence in the value of these debts will supply the energy in much the same fashion as an earthquake: sudden, violent, and with unpredictable consequences of a destructive nature. The previously solid appearance of this unconsolidated wealth will suddenly become extremely liquid, as it energetically rushes to stake a claim on the real, tangible world, to consolidate itself in a more robust store of wealth.

The basic unit of this unconsolidated wealth is the US dollar, the heart of the world financial system for the last 66 years. Never before has a consolidation of this magnitude occurred.

Gold stands alone as the ultimate wealth consolidator. This is its true function, as the bedrock of the monetary world. Gold is unique in that as its price rises, its flow diminishes, further driving up the price. Collective confidence in its ability to store wealth virtually forever makes it the perfect storage medium.

The purchase of any physical good (or service) with currency requires both a willing buyer and a willing seller. It can be viewed from either side of the transaction: as currency bidding upon the physical good, or as the good bidding upon the currency. The consolidation occurs when the physical goods cease to bid upon currency. They have lost confidence in its value. Currency rushes to find a good which will still bid upon it, before none do any longer. This energetic process is also referred to as hyperinflation, the final collapse into worthlessness which is the ultimate fate of every fiat currency. Even Alan Greenspan recently declared "Fiat money has no place to go but gold."

This consolidation will reveal and revalue the true capital of the world, whilst destroying the illusory. The physical world will remain unchanged. You may want to have some of it in your possession prior.

Blondie

Next: Freegold 5: Gold Is Not Money

Intermission 4

2010-09-30T23:06:00.000+13:00

No Title

2010-09-27T23:12:00.003+13:00

by Reven
on Sun, 09/26/2010 - 20:09
#605212

The pensions and savings you refer to never really existed, only on paper and in your mind. If they don't continue to inflate this thing, it will collapse anyway in a crushing deflation, which will wipe out savings and pensions, bankrupt the Government, and force a default on treasuries, which will end all confidence in the US dollar and economy. The end of fiat as we know it approaches, either path, deflation or inflation ends in the hyper-inflationary loss of confidence. The IOUs our economy is built on cannot be sustained.

by B9K9
on Mon, 09/27/2010 - 04:24
#605479

And there you have it. It's not necessary to get emotionally worked up over the fact the Fed has declared war on the USA - their time is up and they know it. Just because we don't currently see any (overt) action by citizens right now doesn't mean it's not dunk shot guaranteed to occur.

The entire points FOFOA, and now Tyler, are making, is that the issue isn't really deflation, inflation or hyper-inflation in all asset classes, but rather, the end of the 97 year old $USD reserve system. Think about that for a moment. Seriously - think about what that actually means.

The Federal reserve system that underpins the entire global system of credit, trade & exchange is going to end. And with it, our entire known way of life, including the overseas global empire, domestic social safety net, and our existing security & justice system is going to either disappear or be radically altered/reduced.

I tend to focus not on what people/institutions do, but WHY they do it. And in this case, Ben is positively blaring on a loudspeaker that it's all over except for the crying. As others clue into WHY Ben is doing what he is doing, there will be a mad rush to hit the exits.

The only thing for certain is our world sure as hell ain't gonna look like what we have today. We're going to look back on the entire post-WWII period up until around 2011 (including the fraud, corruption & lies) and marvel at the relative peace & serenity. Believe it not, right here and now, these are the good old days.

by Return2Sanity
on Mon, 09/27/2010 - 07:00
#605662

Reven—I totally agree. This is how I always explain to people who are struggling to understand that concept:

Act 1 “The Prosperous Years”: Let's say you grow strawberries and I make baskets. Every year, we trade. One year, something happens and I can't make the usual number of baskets, so I give you an IOU. Suddenly, I realize something wonderful (for me). You are just as happy to get IOUs as you are to get baskets. This is fantastic! So I stop making baskets altogether, and just give you IOUs every year. You expand your strawberry fields and work harder, and every year I eat all your strawberries and give you even more IOUs. You are happy. You feel wealthy. You plan to retire someday and cash in all those IOUs for my baskets, so you can trade them for the goods you need.

Act 2 “Facing Reality”: You have almost reached retirement. You bring some IOUs to my house expecting to get lots of baskets. I only have two baskets on hand. You suddenly realize I have not been making and storing baskets all these years to give you as I've promised. Our credit system freezes up (that is, you refuse to take anymore IOUs from me).

Act 3 “The Government Tries to Save You”: You complain to the government that I have tricked you with empty promises. The federal reserve agrees to replace all the IOUs I gave you with their IOUs (federal reserve notes they have just printed). You are momentarily happy with this plan until you realize that the federal reserve doesn't make baskets either, and you won't be getting many baskets no matter who gives you the IOUs.

By the time we get to Act 3 (we are there), the bad debt (worthless IOUs) is already out there. The recognition that it will never be repaid is already in progress. There is nothing the Fed or the government can do to change this. Their only power is to determine how widely the pain gets spread (by replacing bad private debt with freshly printed currency).

Deflation = the IOUs held by private parties become worth less through default.

Inflation = the IOUs of these private parties are replaced with FRNs printed by the Fed, which then become worth less through loss of purchasing power.

The good news is that the USA still has lots of capacity to make baskets and grow strawberries, once we accept the fact that getting back to productive work is the only way out of this mess.

Preservation of Assets, Why We Need Gold

2010-09-22T20:05:00.003+12:00

By Cyber00

One of the most memorable incidents of my career. There has never before or after the price of gold in asset preserving been made so clear . it was in the seventies. The United States was removing its armies from the war in south Vietnam. Many South Vietnamese citizens had escaped their homeland due to the battlefield it had become instead of facing the avengeful communist forces that were moving in swiftly.

In my office, a man and his wife who were from South Vietnam who had been part in fleeing from their land were sitting on the other side of my desk. They wanted to sell their gold. The man did his best to speak to me in English as he explained the story of how they had escaped the overtaking of Saigon and some reprisals by the soldiers of the North Vietnamese armies. They escaped with only a few personal possessions and a small cache of gold the he placed in front of me. He became excited as he described to me why they had become lucky to have escaped and survived those final frightening days of the Republic of South Vietnam. They were able to escape in a fishing boat and sailed into the South China Sea. Where they were saved by the US Navy. They were the ¨boat people¨ of Vietnam, people who had survived that part of the Indochina tragedy. Now they had plans to salvage their life savings in gold so that they could begin a new business in this country, new to them.

Their type of gold which is called Kim Thanh, one that is commonly used in Hong Kong and the far east was wrapped in rice paper. Kim Thanh have the weight of about 1.2 troy ounces or a tael, as it is called in the east. They have the appearance of thick gold leaf rectangles 3 to 4 inches long, one and a half to two inches wide and a few millimeters deep. Kim Thanh are marked with oriental characters explaining the purity and weight. As a gesture to the west they have a stamp in the center with the inscription of OR PUR, “pure gold.”

The amount of gold wasn’t much, it was about thirty ounces, but to them it was worth a ton. The man and his wife considered themselves very lucky to have been able to escape with this small amount of gold. They were immensely grateful to me for buying their gold. As we talked about Vietnam and their future plans in the U.S, I had no choice but to become as enthusiastic as they were about their future. These resilient, hardworking people now had a new perspective in life. Once they left my office that day I pondered and had no doubt that they would become very successful in this new life they had chosen. It was satisfying to know that gold had done this for them. I felt very fulfilled knowing that I had helped them in this small way.

I didn’t let go of those golden Kim Thanh for a long time. They had become a kind of symbol to me, something that reminded me of the importance and power of gold. Today when economic and financial problems have begun to deepen, more principal preoccupation’s for the United States, I always remember that Vietnamese man and his wife and how important gold can become for the future of a family. If the couple had escaped from south Vietnam with paper money instead of gold, nothing could have been done for them. The South Vietnamese currency had no exchange rate now that South Vietnam no longer exists. The couple had been very wise to convert their savings to gold much before the helicopters took the US diplomats away from the American embassy in 1975.

As years pass I come to understand the importance of gold in all its uses, cultural, industrial, economic and artistic. Gold is unsurpassed as a high tech electricity conductor and for jewelry. Gold has medical applications in dentistry and in treating diseases from cancer to arthritis. Computers and many other information age technologies use gold plating. all of these dim, though, in gold’s ancient function as money. As a resort asset, the most important general welfare contributor is gold. One common thread is economically debacled through human history: the ones who survived financially did so because they owned gold. Lately, gold has regained its interest among American investors. This renewed interest in gold isn’t a hedge against the destruction of wars but against something more discreet, the likely devastation of wealth from an international dollar collapse and a subsequent economical breakdown.

Greenspan’s Warning on Gold

2010-09-17T07:49:00.002+12:00

Editorial of The New York Sun | September 15, 2010

Alan Greenspan spoke at the Council on Foreign Relations earlier today, and what was his advice? That central bankers should be doing what these columns, among others, have been rattling on about, namely that they should be paying attention to gold. “Fiat money has no place to go but gold,” the former Fed chairman said at the Council, according to economist David Malpass, who quotes Mr. Greenspan in one of Mr. Malpass’ emails on the political economy. Mr. Malpass writes that the former chairman of the Federal Reserve’s board of governors was responding to a question in respect of why gold was hitting new highs.

Mr. Greenspan replied that he’d thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities “simply don’t pan out,” as Mr. Malpass characterized Mr. Greenspan. “He’d concluded that gold is simply different,” Mr. Malpass wrote. At one point Mr. Greenspan spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes.* Said the former Fed chairman: “If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.”
To which, forgive us, one can only say, “Now he tells us.” The fact is that if Mr. Greenspan governed the Fed with an eye on gold, it wasn’t a particularly steady eye. He might argue that when he left the chairmanship of the Fed, in January 2006, he left a dollar worth a 400^th of an ounce of gold, slightly more valuable than the 461^st of an ounce of gold that it was worth when he came in nearly 20 years before. But in the first five years of the 21^stcentury, when he was in the last quarter of his years as chairman, the value of the dollar started its long collapse, plunging from the 282^nd of an ounce of gold that it was worth on January 4, 2000. In the years since, it has cratered to record lows once imagined only by such sages as Ron Paul.
Mr. Greenspan’s remarks at the council were not the first time he gave us a glimpse of his views on gold. He discusses gold on several pages of his memoir, “The Age of Turulence,” reminding that he once told a Congressional committee that “monetary policy should make even a fiat money economy behave ‘as though anchored by gold.’” He wrote that he had “always harbored a nostalgia for the gold standard’s inherent price stability.” But he confesses that he’s “long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of the appropriate functions of government — in particular the need for government to provide a social safety net.”
The American people, he asserted in his book, have for the most part “tolerated the inflation bias as an acceptable cost of the modern welfare state.” And he claimed, “There is no support for the gold standard today, and I see no likelihood of its return.” We’ll hazard a guess that the statement makes him a man more of the past than of the future. But at least some politicians are hearkening to his advice about the price of gold. They’re people like Congressman Ron Paul and his son, Rand, who may yet be a senator, and Governor Palin, who was one of the first to warn about the gold price, and Congressman Paul Ryan, who asked Mr. Greenspan’s successor, Ben Bernanke about gold.
And, by the way, a few journalists, like Glenn Beck, who are students of history and just can’t believe their eyes that the dollar has plunged to the level it has with so few people raising an alarm. We are in a period when gold is more than a canary — to cite Mr. Greenspan’s bird of choice — it’s a full-throated rooster, cock-a-doodling at the top of its lungs. It was nice to see Mr. Greenspan mark the point at the Council. Would that he’d taken more of his own advice. And nice to see Mr. Malpass mark the Greenspan comments so prominently in his letter to his economic clients. He is more for a gold price rule in monetary policy than a gold standard, but we hope he makes another run for high office at the first chance, and presses the principle for all its worth. It’s what we need in the national debate, and none too soon.
________
* Not just in World War II did the special role of gold come into focus. Covering the fall of free Saigon for the Wall Street Journal in April 1975, your editor witnessed a bank run in which panicked Vietnamese citizens, in the streets outside the financial institutions, bought, when they could, gold that had been pressed into sheets the size and approximate thickness of cigarette paper.

One of the largest gold nuggets in the world

2010-09-10T22:47:00.005+12:00

Sep 1st, 2010 by Jeroen

Last weekend the Western Australian gold prospectors assembled for their annual meeting at the pub in Ora Banda, a hamlet in the Western Australian outback. At the end of the meeting a nugget buyer from Perth, a guy named Andy Comas, made quite an interesting announcement: he recently acquired and sold a nugget weighing 23.26 kilogram, making it the world’s third largest gold nugget in existence (just after the Hand of Faith at 27.21 kg and the Normandy Nugget at 25.5 kg). When Andy showed a picture of the monster the bar went dead quiet. People just couldn’t take their eyes of it. This was of course what every prospector dreams of and keeps him going: the bloody big one!

The nugget had been found a couple of weeks ago with a metal detector somewhere in the goldfields around here.

Through various tests it had been established that the thing has a 92% purity. With today’s gold price of around 40 US Dollars a gram, the gold value of this baby would be around 860.000 dollars. But of course, nuggets of that rarity go for two, three times the gold value.

Anyway, Andy said that the prospector who found it, and who wishes to remain anonymous, gave him a week to sell it. Andy sold it for an undisclosed sum within a couple of days to a buyer in the US. No Australian could come up with the money, somewhat surprising with all the filthy rich mining executives around here.

Most prospectors in the room expressed regret or even outrage that this nugget would leave the country – although no doubt they would have done the exact same thing: sell it to the highest bidder.

And they even might get their wish because the story doesn’t end here. The Australian government might declare the nugget a National Treasure – and I think they should – and then Andy wouldn’t be able to export it.

And remember: this hasn’t been reported on anywhere, you read it here first.

Gold buyers Rob Sielecki and Andy Comas of Ausrox Gold with the world's third largest nugget in existence

update: It seems like this nugget is not the third largest nugget in the world.Larger nuggets – even larger than the Hand of Faith – were found in the eighties in Brazil, and are kept in the museum of the Central Bank of Brazil. It seems the Pepita Canaã is the largest nugget in the world at 60.82 kg.

Freegold 3: The Price of Gold is Arbitrary

2010-09-06T08:01:00.005+12:00

The price of gold has nothing to do with gold's value, but rather the nature of the currency you are using to price it.

Currency is a thought, nothing more. An abstraction. It produces no output, but functions to lubricate the real things that do. Gold just is. A physical, tangible, real thing, with a long history of use as money. It is real.

Today, currency is backed by debt, debt being an obligation of one party to another.

What is the likelihood this obligation will be met?

Well, that is what ratings agencies would have you believe they can reliably work out, but the evaluation of debt is an impossible task, because it does not rely on entirely objective factors. Whether or not the debt can or will be repaid is vulnerable to many subjective factors on the part of both the debtor and the currency, including the perceptions of the debtor, and the perceptions of other holders of currency. Amongst those perceptions is the likelihood, or not, of other debtors paying their own debts.

In comparison, how can we evaluate gold? Simply, and objectively.

Gold is either there, or it is not. To be entirely sure, keep it in your possession. Gold is something we can rely on, which may be why it has such a long and illustrious history.

Debt may, at any time, go bad, with the underlying obligation of repayment never to be met. The debt (and by implication any and all derivatives thereof) may go from being an asset, to vanishing altogether in terms of the value it represents, on the arbitrary whim of the counterparty. Physical gold in your possession, on the other hand, entails no such risk at all. It represents value extracted completely from the system as crystalized wealth, ever ready to re-enter the system at its owners bidding.

If we say that gold, by definition, simply is, then we can see that this is the antithesis of arbitrary.

Currency is not fixed, not to anything real. It constantly fluctuates, in accordance with the perceptions of the market. It is backed by debt, which itself is valued by nothing more than the confidence of the creditor in the means and intentions of the debtor. This is arbitrary. This would not necessarily be a problem, except that it is treated by most of the world as a store of wealth.

So, if we wish to price gold in currency, then the price is truly arbitrary, as this is the nature of the denominator. Reasonably, we cannot price the real with the arbitrary, unless we are willing to concede that the price is also arbitrary.

These days, a very large proportion of the massive wealth generated with the inputs in particular of fossil fuels and modern technology is kept in various forms of debt-backed currency and its derivatives, whether paper or digital. Confidence by the market in receiving the payment of this debt is all that holds this wealth there.

Without that confidence, this wealth would have to run rapidly to another, safer location before its value dwindled quickly to nothing.

Gold is that location, as the storage of wealth is its primary function, and it can be assessed objectively. You have it, or you don’t. And when this run occurs, gold will achieve exactly whatever price in currency is required to fulfill this function. It is the performing of this function that endows gold with its value. Gold is payment in full, whilst currency is merely a claim.

From the perspective of those who currently believe their wealth to be secure in some form of currency, or derivative thereof, this price will indeed appear arbitrary.

Blondie

Next: Freegold 4: The Consolidation

Wall Street Fat Cats!! How Does It Work??

2010-09-05T19:41:00.000+12:00

This Train'll Stop at Tucumcari...

2010-09-04T15:22:00.001+12:00

A Termite-Riddled House: Treasury Bonds

2010-09-01T08:10:00.000+12:00

By Gonzalo Lira

When termites eat your house, you don’t notice a thing. You don’t hear a thing, you don’t see a thing—you’re house stands there, silent and staid, while you and your family happily go about your days, without a care in the world—

—until your house crashes on top of your head.

Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: Nice glossy coat of paint, pretty shingles, bright clear windows, sturdy-looking plankings on the open-aired porch.

But Treasuries are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when.

Let me explain why.


First of all, what exactly were Toxic Assets—does anybody remember? I do: They were bonds made out of bundles of dodgy real estate deals. They didn’t seem dodgy at the time. What’s that old expression, “safe as houses”? At the time they were made, those bonds seemed safe as houses. Now we call them “Toxic Assets”—because now, we know better. But back then—before they collapsed—they were called “Mortgage Backed Securites”, or “Commercial Mortgage Backed Securites”, or else “Collateralized Debt Obligations”.

Essentially, all these sophisticated-sounding terms were to emphasize that the bonds were secured loans—the houses and commercial real estate were supposed to back up these debts. If the payments failed, the properties could be confiscated and auctioned off. So the bonds would be repaid. So the bonds were safe—safe as houses. Or so it was thought.

Of course, we saw how that show ended.

For those who missed those exciting episodes, a recap: Sub-prime mortgages began to default first, as the economy slowed down. This in theory should not have affected Mortgage Backed Securities based on those sub-prime loans. But the real estate which had been purchased with sub-primes weren’t worth what they had been purchased for—they were worth much less. So the bonds backed by the sub-prime loans began to explode.

Soon after the sub-primes, alt-A loans and prime loans, and finally commercial real estate—their prices all began to collapse, and so the bonds manufactured out of these loans also began to explode.

All those banks holding all those “safe as houses” MBS’s and CMBS’s and assorted CDO’s all of a sudden found that those bits of paper were not safe as houses. They were so un-safe in fact, that the banks damned near went broke—they would have, too, if it hadn’t been for the Fed and the Treasury, who bailed them out: The Treasury with TARP (cash), the Fed with “liquidity windows” (more cash).

But even that didn’t work—so we got “extend & pretend”, whereby the accounting rules were suspended in order to create the illusion of solvency among the TBTF banks. (My discussion of that is here.) That’s how bad the Toxic Assets were.

The reason these debts became “toxic” was that it became obvious in 2007–’08 that those bonds would never be repaid. They couldn’t be repaid: The properties which backstopped the value of the bonds had fallen irretrievably in price—or more properly, the real estate bubble which had goosed the valuation of those properties to absurd, Tulipmania levels had finally burst.

So even if the real estate was foreclosed and sold at auction, the holders of these now-Toxic Assets would only receive a fraction of the nominal price of the bonds. What had once been worth 100 was now worth 80, 60, 40, and in some cases, Cop Snacks.

I’ve never liked the term “asset”, when discussing bonds. They’re not “assets”—they’re debt. They’re a loan. And a loan only has value so long as it’s being repaid. If the debtor defaults—or tries to pay back the loan with something of less valuable than what was originally lent out—then this “asset” becomes a loss.

So to prevent these catastrophic losses, Backstop Benny—Ben Bernanke, Chairman of the Federal Reserve—essentially did the ol’ switcheroo on the Toxic Assets: In order to save the banks whose balance sheets depended so heavily on these now-dead turds, the Fed purchased the Toxic Assets at their nominal price. Then the banks—the so-called Too Big To Fail banks—took that cash and purchased U.S. Treasury bonds.

I have yet to find a better chart than this one here, that describes so succinctly how the Fed expanded its balance sheet to bail out the banks. (Hat tip Ashley Huston at WSJ.com: Alex Lowe designed the chart, based on reporting by Phil Izzo—extra-special kudos to them both.)

Meanwhile, the U.S. Treasury, in its attempts to finance bailouts, stimulus, health care, Social Security, and endless pointless wars, went into further debt—to the tune of $1.4 trillion dollars, roughly 10% of U.S. gross domestic product, for both 2009 and 2010.

Or to put it another way—a very scary way—in both 2009 and what’s projected for 2010, the Federal government has issued $1 of Treasury debt for every $1 of tax receipts. Between the actual budget deficit, plus Social Security liabilities, the U.S. Federal government is in the hole for about $13.5 trillion—or roughly 100% of GDP: That is what the Federal government owes. And if 2011 continues to be the same (as is almost certainly to be the case), then another $1.5 trillion or so (give or take a couple of hundred billion dollars) will be added to that tab.

All told, the United States will have a fiscal-debt-to-GDP ratio of 100% this year, and 110% next year—if not higher, depending on the tax receipts in 2011. A lot of wishful thinking is going on for 2012, but the way the numbers are playing out, another trillion dollars’ worth of debt is very likely in the offing—which would put the total fiscal-debt-to-GDP ration to 120%.

(Funny: That number—120%—reminds me of something . . . what was it? Oh! Right! Greece! This past spring, Europe had a medium-sized meltdown when Greece—roughly 2% of the EU as measured by GDP—revealed it was running a 120% fiscal-debt-to-GDP ratio. The Europeans and the IMF finally caved and bailed out Greece. Stupid Greeks! Always screwing up! But I digress, sorry—after all, the United States is not Greece. The United States has absolutely nothing in common with Greece—not at all! First of all, buddy, and for your freakin’ information, the United States is roughly 45 times the size of Greece, and . . . oh . . . wait a sec . . . )

Let 2012 take care of 2012—right now, September 2010, we have 100% fiscal-debt-to-GDP, in an environment of falling tax receipts and more strains on the various social safety nets. Right now, we have debt matching tax receipts dollar-for dollar. Right now, the interest on the outstanding debt, for 2010 according to government projections, is $375 billion—in other words, 25¢ of every dollar of tax receipts goes to pay interest. Right now, with recent economic numbers, the likelihood of a turn-around are unlikely—so because of the inevitable political pressure come the winter, more “stimulus” is likely in the offing.

Meaning more Treasury bonds, floating out into the market.

But who is buying all this new Federal government debt? Why, that’s very simple: The Federal Reserve.

The reason that the Federal government could go into the aforementioned massive spending spree was precisely because of the Federal Reserve’s bail-out: The Fed created money out of thin air (as is their power), in order to buy Toxic Assets from the Too Big To Fail banks. The banks, in turn, took this cash and bought Treasuries—which financed the Federal government’s deficit.

This is what I call Stealth Monetization: Unlike in some banana republics, which dispense with the niceties and simply turn on the printing presses whenever they need more money to spend, the U.S. Federal government and the U.S. Federal Reserve got creative, and used the TBTF banks to essentially hide the monetization of the fiscal debt in plain sight.

Many people complain that the bail-out money the TBTF banks received was never lent out—oh, but they’re wrong: The money was lent out. It was lent out to the Federal government.

After all, what did the TBTF banks do, with all that cash they got from the Federal Reserve for unloading all those Toxic Assets? Why, they went and bought themselves boatloads of Treasury bonds.

It’s been the Federal government that has been “mopping up excess liquidity”—mopping it up and spending it on stimulus that doesn’t work, wars that can’t be won, dodgy dinosaur-projects that aren’t going to do squat to improve people’s health. That’s why the TBTF haven’t been lending money to businesses and “getting the economy back on track”—they’ve been too busy lending to the Federal government.

Clever people call Treasuries “assets”—but like I’ve said, I’m just stupid: I just call it debt. When I look at all this Federal government debt—unprecedented amounts of fiscal debt—I can’t help but notice that it is all unsecured—because it is unsecured. At least Toxic Assets had something backing them up, even if they were worth much less than advertised. Treasury bonds, on the other hand, are based only—solely—on the “full faith and credit” of the United States Federal government.

Y’Know: The one in Washington. The same U.S. Federal government that is running 100% debt-to-GDP ratios this year, 110% next year, and likely 120% the year after that—if not more.

Mm-hmm . . .

What happens when a debtor becomes so over-extended that he cannot possibly pay back his loans? Naturally: They default—or they try to wriggle their way out of the debt, by giving you something less valuable than what you are owed.

It is not controversial to say—and indeed, it is widely discussed—that the U.S. Treasury has only two options: Default on Treasury bonds, or debase the currency by way of inflation, so that the nominal value of Treasuries is stable, but their real value decays by inflationary attrition.

Default is politically unacceptable—apart from pissing off foreign Treasury holders, it would cause havoc in America if the Federal government woke up one day, clapped its hands like a schoolmarm, and announced to the world, “Okay Treasury holders! Time for a haircut!” Default ain’t gonna happen.

So that leaves “controlled” or “induced” inflation—the only method for the Federal government to get out from underneath this debt.

Backstop Benny is doing his damnedest to bring about precisely this scenario: He is trying to print the economy out of this Global Depression. With QE, the recently anounced QE-lite, and the likely-to-be-coming-soon QE2, Bernanke is going to pump more and more money into the system—“Print ’til you puke!!” seems to be his motto.

Bernanke is being egged on by everyone, from Paul Krugman to the Republicans to Larry Summers and Tim Geitner—everybody wants him to print more: Either because they want more fiscal spending (Krugman, et al.), or because they want asset prices to be pumped up again to unnatural highs (Wall Street and their Washington lackeys).

And Benny is obliging. The way Bernanke is doing this printing is by buying Treasuries. The Federal Reserve buys Treasuries and squirts some more dollars into the system—just as he propped up the prices of Toxic Assets by buying them up, when there was the need.

Yields of Treasuries are at absurd lows, there is a veritable T-bond rally every single day that equities drop even just a bit—in other words, Treasuries are in a bubble. Why? Because the market knows that Bernanke and the Fed will backstop Treasuries—

—backstop them right off the cliff.

The more the Fed prints, the more it encourages the Federal government to “stimulate”—id est, go further into debt in an attempt to grow the economy out of this Depression by way of fiscal spending. But as I said, right now, 25¢ of every dollar of tax receipts goes to pay interest on the fiscal debt. How long before 50¢ of every dollar goes to pay interest? 100¢ of every dollar? Is thatwhen the fiscal debt finally becomes insurmountable?

Or will there be a Moment of Clarity in the markets? Will there come a day when the bond markets collectively realize that Treasuries will never ever be repaid—cannot be repaid? And when that day comes, when that Moment of Clarity falls on the markets, will it spark a panic?

In two previous posts, I essentially said “yes”: “Yes” to a collective Moment of Clarity, “yes” to a panic in Treasuries. I further argued that such a panic would lead—inexorably—to a flight to safety in actual, physical commodities, which would then result in a massive hyperinflation that would kill the dollar dead. Part I is here, Part II is here.

What is most important is, I do not know when such a Moment of Clarity will occur—but I have no doubt that it will occur. Inevitably, unavoidably: Treasury bonds are bound to collapse, triggering the sequence of events that I have described.

Plenty of people disagree with me. Actually, most people disagree with me.

Weirdly, plenty of people told me in no uncertain terms that, not only would there never be a panic in Treasuries—these people claimed that there couldn’tbe such a panic. A couple of these people claimed (I swear to God) that it was systemically impossible for there to be a panic in Treasuries—“Because the government can just print its way out of a panic!”

Uh-huh. So no hyperinflation after a Treasury bond collapse, ’cause the government can—y’know—print all the money needed to shore up Treasuries and avoid hyperinflation. Okay.

The people who defended this insane argument are under the spell of MMT—Modern Monetary Theory. It’s currently the most fashionable dismissal of the importance of Treasury over-extension. People in this camp effectively say, “Treasury debt doesn’t matter!”, and explain how government debt is basically a numbers game.

According to this theory—which is just a modern-day retelling of the chartalist myth—all money is basically government chits, which are moved around within a game-board, said game-board being owned and controlled by the government. According to MMT, governments which issue their own currency may go into as much debt as they wish, certain and confident that nothing bad will happen because the government controls the currency. In other words, macroeconomically speaking, MMT claims that it’s a government’s world—we only live in it.

My objection to this, in snooty eccy terminology: I think that these MMT macro-economic theorists are purveyors of an interesting new meta-neo-Keynesianist world-view. It seems they are employing a closed-system, zero-sum proto-monetarist model. This model—though compelling—does present certain structural issues and disappointing limitations, vis-à-vis the uses of a reserve currency, which might make the theory less than apropos, were it to face a real-world scenario. Or not.

My objection to this, in just plain ol’ regular words? I think this MMT theory is full of shit, propagated by fucking idiots.

MMT is just a clever way to justify insurmountable levels of fiscal debt—it’s a rationalization of this insurmountable debt, using a veneer of economic terminology to cloak the purveyors’ political ideology of spend!-spend!-spend!-your way out of a recession or depression: In other words, Keynesianism-redux. Keynesianism on steroids—Keynesianism gone fucking in-sane.

(I’m going to write a detailed take-down of these MMT fools in a couple of weeks. But for now, let me limit myself to just a couple of paragraphs.)

These irresponsible peddlers of MMT claptrap—because that’s what they are, irresponsible buffoons for peddling such irresponsible, arrogant bullshit—simply do not understand what money is: It is a medium of exchange. The government—which controls this medium of exchange, especially in a fiat currency—is supposed to be the honest broker between economic participants who use this medium of exchange for their transactions.

A government issues the medium (the currency), and the government can debase it at will, for whatever reasons it deems worthy. But if the medium—the currency—is debased to a tipping point, then the economic participants will no longer believe in the currency’s worth. They will therefore run from the currency, and turn elsewhere to fulfill the need that money satisfies, which is: To store wealth, and to act as a medium of exchange.

If the dollar and Treasury bonds are pushed hard enough—that is, debased hard enough—there will come a point where people will lose trust in them both, and not want them. It’s one thing if a currency organically inflates by way of ordinary demand on consumables and expansion of credit—that’s just normal fiat currency wear-and-tear. It’s quite another if economic parties realize that a government is deliberately trying to debase the currency, in order to get out from under insurmountable debt.

If people no longer trust dollars as a medium of exchange and Treasuries as stores of value, where will they go? They will leave both and go to something else—commodities, as I have argued. And when that day comes, people will doanything to get out of the dollar and Treasuries, and into something that is stable in terms of value storage and medium of exchange.

MMT doesn’t see this—it just sees spread-sheets and board-games. This story here, which giddily, girlishly describes Federal Reserve drones “printing money”—and how wonderful and magical that process is—is pretty indicative of the fundamental detachment from reality of this world-view.

It’s why MMT fails at describing both reality, and predicting the future. It’s why—among other reasons, which I will discuss more fully in another post—MMT is a big ol’ steaming crock of shit.

MMT is one theory as to why nothing bad will happen to Treasuries.

The other theory—much more sensible, and backed up with empirical evidence—is what I’d call the Japan Is Us theory of Treasury bond stability. It’s the only truly serious challenge to the argument of Treasury bond collapse which I am arguing. Therefore, it’s a challenge that must be met.

On the blogosphere, Michael “Mish” Shedlock is probably the smartest proponent of the Japan Is Us theory.

I have a lot of respect for Mish—he was one of the very few serious commentators who argued that the U.S. economy was going to experience deflation. He argued that position literally years before it caught on. Peoplenow—in 3Q of 2010—are wising up to deflation. Because of Mish’s insights, I was on to deflation as of 3Q of 2008—and was fortunately able to plan accordingly.

Mish also thinks I’m full of it, for claiming that there’ll be a Treasury bond collapse, commodity spike and then hyperinflation.

His rationale is, we are experiencing deflation (which I agree). This deflation has been brought about by destruction of credit (check again), brought by the bursting of the housing bubble and the concomitant reduction in mortgages and loans (check once again).

Mish further argues that, like Japan, the U.S. Federal government will spend-spend-spend on all sort of needless projects, but that the deflation is much stronger. Therefore, no matter how much the U.S. spends, there is no way to escape from a Japan-style Lost Decade (or two) of stagnant growth and systemic deflation.

This is where we part company.

Mish is convinced that through these deflationary years/decades, Treasuries will continue to be the only safe store of value. From a recent post, here’s a representative quote:

I do think corporate bonds, especially most junk is playing for the greater fool. In regards to treasuries, there is going to be an exit problem for sure, but that could be years away. In Japan, yields stayed low for a decade. Why can't it happen here?

Yields certainly might stay low for an extended period. Whether or not they do remains to be seen.

(The underlining is mine.)

Mish thinks that there’ll never be a Moment of Clarity, regarding Treasuries. He admits that there might be an “exit problem” in Treasuries, but vaguely posits that that might be “years away”. In the meantime, he thinks that Treasury yields will remain low, prices high (or go even higher), as companies and banks basically “keep money under the mattresses”.

Mish has a good case in arguing for the Japan Is Us theory—but he is wrong, on two fronts.

First, Mish doesn’t realize that Federal Governments’s deficit spending is rapidly approaching its limit. Because unlike Japan in 1990, when its deflationary death-spiral began, the U.S. Federal government started this depression already with a massive deficit. The eight years of Bush 43, to be precise, were all borrow-and-spend years: In those eight years, the fiscal deficit had already goosed the economy.

That’s why the massive stimuls Obama implemented hasn’t really helped—the economy is already hung-over from the Bush stimulus years.

Besides—and so obvious that it shouldn’t even be up for debate—yearly fiscal deficits of 10% of GDP per year are simply unsustainable. I don’t care what argument you make, deficits of this ever-increasing size will lead to a collapse in the economy. Certainly a blow-up in Treasuries—the instrument of this deficit—long before.

Mish further fails to realize that the Federal Reserve has abandoned both of its mandates—to fight inflation and to maintain full employment—in favor of its new mantra: Maintaining aggregate asset price levels. Whatever it takes. This means essentially inflating asset price levels back to pre-Depression levels.

Everything the Fed has been doing since September 2008 has been in the service of this goal. The MBS buys, the alphabet-soup of liquidity windows, QE, now QE-lite, QE2 soon to come—the Fed is hell-bent on maintaining the bubble it created between 1987 and 2007.

Since September 2008, the way the Fed achieved this goal was by effectively nationalizing private debt, and turning it into public debt—one look at the Fed balance sheet is enough to convince any skeptic. This means that all the bad debt accumulated during the last two-and-a-half decades have been effectively turned into Treasuries.

So Treasuries are getting squeezed and pulled two ways: By the U.S. Federal government, and by the U.S. Federal Reserve. Because of the massive fiscal debt of the Federal government, Treasury bonds will not be repaid, at least not in real terms. And because of the Federal Reserve’s constant goosing of their prices in order to both maintain low interest rates and prop up asset prices, Treasury bond prices have left planet earth altogether, and are in the realm of Bubble-land.

In a couple of private e-mails, Mish objected to—and dismissed—my Treasury-run/commodity-moonshot/hyperinflation scenario altogether. According to him, I was arguing for a Shazaam! moment: When all of a sudden—for no reason whatsoever—people would collectively panic and—Shazaam!—they would exit Treasuries en masse.

Mish is actually right—that’s what I’m saying. I pompously call it a “Moment of Clarity”, Mish more cuttingly calls it a Shazaam! moment.

But that is, in essence, what I am arguing: Because in a termite-riddled house, no one can predict when the house will collapse—but we all know deep in our bones that it will collapse. So the second you hear a creak in the plankings, what do you do? You run for the exits.

I have no idea when that Shazaam moment will happen: Tomorrow, next month, next year. But it will occur—because everybody knows that Treasurydebt cannot be repaid. So it’s not a question of if—the damage has been done, and is irreparable. It’s now just a question of when.

I hope I have explained why.

'Atlas Shrugged': From Fiction to Fact in 52 Years

2010-08-30T20:22:00.002+12:00

By STEPHEN MOORE (Wall Street Journal)

Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.

The art for a 1999 postage stamp.

Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.

Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?

These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.

The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."

When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."

In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.

The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."

Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.

One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:

Galt: "You want me to be Economic Dictator?"

Mr. Thompson: "Yes!"

"And you'll obey any order I give?"

"Implicitly!"

"Then start by abolishing all income taxes."

"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"

"Fire your government employees."

"Oh, no!"

Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.

David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."

Mr. Moore is senior economics writer for The Wall Street Journal editorial page.

This Is Why There Are No Jobs

2010-08-27T17:11:00.001+12:00

By Porter Stansberry

Saturday, August 21, 2010

I'd like to make you a business offer.

Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...

Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in – as long as it's legal.

But I can't give you any capital – you have to come up with that on your own. I won't give you any labor – that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.

Now in return for my rules, I'm going to take roughly half of whatever you make in the business each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits.

You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."

Now... after you've put your hard-earned savings at risk to start this business, and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out – to finally live the good life.

Whether or not this is "fair" – some people never can afford to retire – is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business.

Oh... and one more thing...

Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth.

After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children.

All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.

I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail.

That's how civil society is supposed to work, right? This is Amerika, isn't it?

That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs...

Rewards For Failure

2010-08-21T13:01:00.001+12:00

The Secret of Oz

2010-08-18T22:35:00.006+12:00

Bill Still makes the following points in his new movie:

The economy of the U.S. is in a deflationary spiral. Nothing can stop it -- except monetary reform.

1. No more national debt. Nations should not be allowed to borrow. If they want to spend, they have to take the political heat right away by taxing.
2. No more fractional reserve lending. Banks can only lend money they actually have.
3. Gold money is NOT the answer. Historically gold ALWAYS works against a thriving middle class and ALWAYS works to create a plutocracy.
4. The total quantity of money + credit in a national system must be fixed, varying only with the population.

Certainly some ideas here for consideration.

EDIT 30 August: I no longer find there to be much for consideration in this movie, having come to some conclusions (see my second comment below) which make Bill Stills points and question irrelevant, in my mind anyway. My reasons are:

The backing of a currency, or not, by debt or gold or dried bananas, is irrelevant, except perhaps as a ruse. Currency is nothing more than a concept used for transacting. This is its only function. It requires no "backing". It should not be expected to act as a store of wealth. This is something it cannot be. This is something it should not try to be, or pretend to be, either.

We already have something which has been used most successfully as a store of wealth for millennia. We simply need to free it from the constraints of the current flawed system. This is gold. When allowed to freely float it will provide all the checks and balances currency requires.

But even if we don't free it, it will shortly free itself, regardless.