Friday, March 16, 2012

Sushi Island Savers Saga - Part 2


Great comments in the last thread! I wrote the following as a comment replying to a few questions that had come up relating to how the act of saving or net production contributes to the Superorganism's drive toward sustainable growth. But I really wanted as many people as possible to watch the video below, so I thought it would be more prominent in a post. So here you go!

The term "Superorganism" refers first and foremost to "distributed intelligence" or "market intelligence" as opposed to "centralized planning". If ever you feel the urge to make life better by changing some rule or adding a new one in order to control, cause or stop someone else's actions, you fall under the category of central planners. If, however, you are driven to personal actions to better your life (rather than the all too common obsession with changing the actions of others you deem to be wrong) you are part of the Superorganism. Central planners are, of course, also part of the Superoganism, but they are a retarding influence on that which would be far more intelligent without them.

Both distributed intelligence and central planning are capable of organizing the means of production. It's just that one does it infinitely better than the other so there's really no comparison. Somewhere along the way, probably in the 20s and 30s, governments switched from assisting the Superorganism to central planning, or retarding the Superorganism. I believe the singular factor that enabled this switch—made it even possible—was that the savers began entrusting their surplus production to the government as a fundamental function of changes to the monetary system that occurred in 1922.

Not everyone is capable of being a world-changing entrepreneur. But everyone is capable of consuming less than they produce and, therefore, saving. And it is the choices made by billions of average people that leads to the Superorganism's superior intelligence. As the video below explains, markets are processes of learning and mutual discovery through individual choices like entrepreneurship (individuals taking a creative stab at the future in the face of uncertainty) and the spread of knowledge (individuals building upon—expanding upon—the past contributions of others).

The chain of settlement amongst savers which I described in this comment is like a battery system for the storage of economic power. It gains its power and its storage ability from its perpetual nature. Economic power can be deployed or discharged at any time by any saver because there are always new net producers working to join the chain. Without this system of reserves, the surplus production of savers simply gets distributed and used up by whatever activity the debtors are up to at that time, or wherever the central planners want to allocate it. With the Freegold system, the allocation of stored purchasing power becomes a matter of the individual decisions of billions of savers with no reason to hurry.

I do realize that most scholarly Austrian economists probably ignore this blog because it seems somehow not up to their standards. Likewise, my readers tend to look down on modern Austrians because they are, for the most part, "Hard Money Socialists" as Ari and FOA dubbed them more than a decade ago. The Socialist part is because, even while they talk about limited government, they want the government to control the production of money "by locking gold into any official currency system to act as a gauge and controlling factor against socialist tendencies in government" (to quote FOA). Socialism is about non-market prices and any official gold standard is a Socialist standard.

But I want to caution you against dismissing the Austrian School simply because most modern practitioners are misguided with respect to their monetary prescriptions. The Austrian School is primarily a school of Economics (focused on subjectivism and a deductive approach to economics called praxeology), not money, and this is where it is truly great. From my limited time spent in the Austrian space, I am probably most impressed with Israel Kirzner among the living Austrians. His focus is more on the period of Austrian Economics before 1974 than it is on the activities of modern practitioners.

And I think you'll find that this video below, a lecture given by Kirzner this past summer, is so spot-on with regard to the discussion in the last thread that I want to say it is a must-watch for anyone following the discussion. Even if you've seen it before, or the older, longer and more complete version, you may want to watch it again:






And just for fun, here's the story of an intelligent super-sized organism named Nellie who finally had enough of the circus telling her what to do:

342 comments:

1 – 200 of 342   Newer›   Newest»
sean said...

I'm looking forward to having enough time to read these thoughtful posts and comments properly this weekend, but in the meantime I wanted to comment on:

"what is the wise aim of the superorganism?"

If we are thinking of the superorganism in evolutionary terms, it is worthwhile remembering that evolution is both blind and selfish.
For example it's a common misconception that humans are the pinnacle of evolution, and that evolution promotes the survival of humans because they're the most intelligent and advanced species. Actually evolution doesn't give a damn about intelligence, fairness, niceness, "wisdom" or anything else. It simply reflects the increased in survivability (ie: "fitness") of the organisms that reproduce and survive the best in the current environment.
eg: one might make different arguments that some of the most advanced organisms on the Earth currently are a species of bacteria - because there are so damn many individuals, crocodiles - they are virtually unchanged since prehistoric times so are evidently well adapted, or arguably humans because admittedly they are quite clever at adapting for survival.

Some brief interesting points:
- evolution works on natural selection, therefore it looks to the past, not the future.
- diversity is good - it's what evolution works on, allowing it to cope with change. If temperatures rise rapidly, only pre-existing individuals able to cope will survive.
- evolutionary change and therefore adaptability requires death (out with the old, in with the new)

Having said all that, superorganisms are somewhat different from organisms, because they are emergent properties. As languages is to humans, the ant-farms is to the ant, the financial superorganism is to individual transactions.
It's still interesting to think of them in evolutionary terms, and there seem to be many intriguing parallels -including blindness and selfishness. As for wisdom - well, I guess it depends what you have in mind. The wisdom for self-preservation perhaps. But the ant-farm doesn't care about individual ants, and will willingly "send" them out to the slaughter to fight invaders, if that behaviour increases the survival of the antfarm.
James Lovelock suggested the Earth is a superorganism, but she too, does not care if it is humans or dolphins who think they are in charge.

So, Freegold may be the next step in evolution, but perhaps Another knew what he was saying when he said "if you hated our last one, you will no doubt hate this new one, too"!

Just some food for thoughts. Hope it's not too off-topic.

Bjorn said...

FOFOA, i think that post was exactly what I was trying to say (to AD in my last post in the previous forum), although I didn´t have the time or perhaps more importantly the ability to say it so clearly. Well, thats why you are FOFOA and I still work as an engineer instead of running my own blog for donations i guess...

Motley Fool said...

AD

Neither the monetary nor physical plane has any relevance outside of the conscious judgment of human beings.

If one must bring them into the picture then perhaps consider FOFOA's current pyramid and for each level differentiate each individual thing to be found there. Then consider human judgment of value as something akin to a funhouse mirror that would enlarge or shrink each subset of the pyramid according to the judgment of value of all things.

To help the analogy have a look at these maps, then think of judgment of value applied to the pyramid.

World Maps

Peace

TF

Bjorn said...

And also, I stand corrected on the "breaking down the superorganism in to pieces" thing (from my previous post). The "market intelligence" and "central planners" definition (simplification) was indeed helpful to me.

AdvocatusDiaboli said...

FOFOA,
the above picture with the "PeterSchiff" perfect explanation of what are savings has a small but significant flaw:
How does who determine on what to spend the released/spared resources? A personal responsible entrepreneur will do this wisely, therefore the overall will benefit.
But this is not the setup of todays released/spared real resources (<=THOSE IN THE PHYSICAL PLANE). e.g. just image that dude in the picture, today he would probably run to the next TV station to organize an advertisement on Sushi.
Greets, AD

Bjorn said...

AD, I don´t think the picture is flawed. It just describes what happens when a responsible entrepreneur has access to savings. There are other pictures that describe the other scenarios.

The reason that is not the setup of todays (average) spared resources is because we the ants have been beaten so long and hard by the central planners "stupid-sticks". Well one of the sticks is about to break, so perhaps in the "hereafter" things will change for the better? (That´s not to say all things will be perfect, the central planners will still be trying their best to smack us around of course)

AdvocatusDiaboli said...

Bjorn,
really refreshing is the unlimted optimism of Freegolder :)

Has somebody followed recently the discussion in Germany about the next president Mr. Joachim Gauck?
That dude made some speeches about freedom (that freedom, libertarians and freegolders talk about).
He was the first since probably almost 20yrs. who ever dared to even take that horrible word in his mouth!
Now before he is even officially elected the masses start to bash him for taking that horrible dirty word into his mouth. The amazing logic is the following: Freedom prohibits social equality, therefore unjust, therefore bad, therefore we need central planners to prevent us from that, not freedom; what a bad bad person are you Mr.Gauck...

Jep, that the way it rolls today.
Greets, AD

Bjorn said...

AD,

Agreed, it is easy to get pessimistic in todays world. And as my late father used to say, "Son, you have to remember that half of the population has below average intelligence".
I guess most people who should/could be part of the "market intelligence" has develeoped Stockholm syndrome by now.
Maybe that is why I like the vision of a better tomorrow so much. (While being under no illusion that it won´t be a bumpy ride to get there)
/B

Nickelsaver said...

"Lennie—if you jus’ happen to get in trouble like you always done before, I want you to come right here an’ hide in the brush… Hide in the brush till I come for you." - Steinbeck : Of Mice and Men

Gold is a good hiding place.

Freegold - It jus' happen!

Jeff said...

Europe must love those $IMF derivatives.

Italy Said to Pay Morgan Stanley $3.4 Billion
By Nicholas Dunbar and Elisa Martinuzzi
Mar 16, 2012 10:10 AM ET

When Morgan Stanley (MS) said in January it had cut its “net exposure” to Italy by $3.4 billion, it didn’t tell investors that the nation paid that entire amount to the bank to exit a bet on interest rates.

Italy, the second-most indebted nation in the European Union, paid the money to unwind derivative contracts from the 1990s that had backfired...The cost, equal to half the amount to be raised by Italy’s sales tax increase this year...

http://www.bloomberg.com/news/2012-03-16/italy-said-to-pay-morgan-stanley-3-4-billion-to-exit-derivative.html

Woland said...

I am having a difficulty, which I hope will be addressed, with
regard to the superorganism. Adam Smith was no Austrian,
but also not a fool. My favorite quote: "Men of the same trade
seldom gather, whether for merriment or diversion, but the talk soon
turns to a conspiracy against the public, or some contrivance to
raise prices." This simple thought concerns what Mancur Olson
referred to as "distributional coalitions" , which seek over time
to gain dominance over the otherwise collective wisdom of the
superorganism, distorting outcomes not out of socialist benevolence
but rather sub-group self interest. On the island of Schiff the elder,
at the end, one views a guy with a new "capital good" , that being a
board with a spike in it. Sometimes these guys come in groups,
too. They have been around for a long, long time, socialism or no.

Nickelsaver said...

"Central planners are, of course, also part of the Superoganism, but they are a retarding influence on that which would be far more intelligent without them.

OBA hit on this in his Systems post.

"Termites are generally a group (singularly or collectively) who feel it their God-given right simply to interfere (usually for self-advantage).

All the more reason to be saving in Gold -vs- Wood/Paper.

Bjorn said...

Woland and Nickel,

Yes perhaps OBA:s term "Termites" is more apt to describe the destructive elements, consisting as they are not only of "central planners" but also various other bullys and thugs. I would however contend that the "central planners" are the ones causing the most damage to the superorganism. The regular thugs can be dealt with if there is a sound government which upholds a reasonable law and order. When the government is the thug, things get more problematic. I think I will go reread OBAs Systems post now.

Nickelsaver said...

Interesting observation...the placard the wall behind Israel Kirzner lecture.

"Let us raise a standard to which the wise and honest can repair; the rest is in the hands of God." - George Washington

julian said...

Savings is a store from which to draw on

If nothing is saved, nothing has been stored yet, something must be foregone to use human capital (idea, labour, action) to create more physical instrumental functional (productive) capital.

This new capital is a rung on the ladder of economy

The essence of economy, and of value, is human action

Decision-making and time preference, plus time structure of production

Decision-making is allocation of capital - this decision-making, the human action, is the focus of economy, while the resources, the capital, lays in the background

Decisions to allocate

Opportunity costs (for example, foregoing eating for a day to take action to build a net for future productive use)

When capital is acquired, it can be allocated into the market

The market is a process of mutual discovery, of learning and discovery

Thinking of FOA's explication of the Money concept, this makes much sense, for it was a longstanding process of mutual price discovery that shaped the reality of the monetary plane, which exists within the mental plane fundamentally, and plays itself out in the physical plane, as it mirrors and counterbalances the flow of goods/resources.

The focus of allocation decision-making is on the individual human actor

Not the societal (centrally-planned/organized) allocation

Human action of saving is a wild phenomenon.

Savings is stored decision-making allocation given the economic resources (lush island vs. barren island economic realities)

Savings really is nothing else than a thing, in the strictest, most literal sense of the word

Imagine the market with the bowls, and the oil, and the gold. There might even be a US dollar bill in there, or a silver certificate, too. What in that marketplace really, is money? What in there, really, is savings? The money is a function of the thinking human actors, and the savings is the function of the capital economic goods that are owned/operated upon, gold and bowls included, according to a time preference and marginal utility values...

The market is a process of mutual discovery

The Superorganism is a process of mutual discovery

The Superorganism is the market

At this stage, the superorganism is discovering money and time structure / preference of savings from a new perspective. "Parallel, not perpendicular" will be the new motto. We are discovering anew the idea of individual possession of wealth.

The individual allocating human actor is the driver of economy

That individual, to such a massive number, has had his strongarm institution of law and governance utterly corrupt the entire process of the market, through the monetary institution and the institution of savings capital

Human actors in large number are taking action to change the tides of money, in particular in the area of the time structure of life and wealth savings

Gold "Consumption" is a very interesting phenomenon.

FOFOA has shared several times its real world economic cause-effect benefits (like changing a status quo model of the solar system, for a much simpler yet much more effectively and efficiently functioning model of the solar system)

I want better understanding of the gold consumption phenomenon within free market economy.

burningfiat said...

Now I just got hooked on looking for Fofoa island in Tonga on google maps. Nice, that there's an island called Fofoa. Looks like a cool place to chill out with your stash after retirement.
But I don't know if anybody has presented the following fact before.

60 to 80 miles south of Fofoa there is an island called Foa. Look:

http://g.co/maps/qf43b

That some weird shit, hahaha.

/Burning

burningfiat said...

And of course... First relevant picture from Foa:

http://www.alltravels.com/niue/all-regions/pangai/photos/current-photo-47549668

Picture title: Catamaran bathing in Gold

Sure, why not? I'm moving there after Freegold :D

Woland said...

Bjorn:
The"central planners and the thugs" are like the keiretsu and the
yakuza; they enjoy a symbiotic relationship, each reinforcing the
position of the other, and each parasitic on the host body. The question
of which comes first, the parasitic "distributional coalitions" described by Mancur Olson, or the re-distributional efforts of the "hungry
collective" , is less important than the fact that they are both trying to
extract a surplus from the host. At some point, they team up with
one another, to give us the marriage between corporation and state
which goes by the name of fascism. What destroys this parasitism is
when too much energy is being sucked out of the host for it to survive.

Nickelsaver said...

Julian,

You very articulately demonstrate knowledge of economics.

Wouldn't you say the term "free market economy" is a bit of a misnomer?

Your thoughts?

julian said...

Nickelsaver,

I'm not too sure what your meaning is, so correct me if I misunderstood.


A misnomer is an error in naming something.

I consider "market" and "economy" to amount to just about the same thing

Free market economy can be juxtaposed against coerced market economy.

A free market economy is anarchic, in the sense that there is no single monopoly institution/organization with the legal right to use force in a given geographic location. Instead, only competition and voluntary contracts are used, and governance is an emergent property of the Superorganism's (the market's) desire for security and prosperity through natural market forces

Any institution of government, no matter how minarchist, removes the natural forces of a free market economy to whatever degree it restricts/edicts (centrally plans) human action (production by and trade betwixt market participants).

(Think of the retardation due to central planning that FOFOA mentions)

"The Market for Security" is an interesting presentation by Robert Murphy. You can find it on YouTube.

Or is it perhaps that the "Free" and the "Market" mean the same thing, such that no statist economy can be considered a market by nature of its coercive central planning bureaucracy? Such that unless it's voluntary, it's not a market?




After the punctuated equilibrium, we should all go out to FOA island and celebrate with some fresh sushi

Nickelsaver said...

Julian,

Thank you. I was trying to understand what you meant when you said, "I want better understanding of the gold consumption phenomenon within free market economy."

So if I understand you, you mean within the current economy, or paradigm I should say?

Nickelsaver said...

I say "free market economy" is a misnomer, because as you correctly state, "Free market economy can be juxtaposed against coerced market economy."

Market volatility alone suggests, at the very least, passive if not active coercion.

But what I am really trying to understand is what you meant by:

"FOFOA has shared several times its real world economic cause-effect benefits (like changing a status quo model of the solar system, for a much simpler yet much more effectively and efficiently functioning model of the solar system)

Are asking for the erection of a model that is closer to the status quo?

M said...

Austrian profs just completely overlook the idea of splitting the functions of money. They also just accept the idea that there will always be booms and busts, even under their thesis. Under their thesis,the booms would just be smaller followed by a smaller busts.

IMO,The pundit Austrians shun this blog is because the see the price of gold numbers that get talked about here and they just think "bubble". Doug Casey thinks gold is relatively expensive right now. Peter Schiff said before that he would arbitrarily sell his gold before it got around $20,000 an oz. I mentioned to him that everyone would be saving in gold. He just laughed at the suggestion that one day, gold would hold the highest percentage of the worlds savings.

AdvocatusDiaboli said...

what amazes me, that MMTs, austrians and all those other smart economic text book experts in general (but also here), concentrate exclusively on proving, defending and reasoning "their" own "believes", but most of the time completely blind out real life, today and in the past.
Lets forget about that "pursuit of happiness". Lets look at the other side, like Ben Bernanke called it: Very very bad outcomes, or like I (since I am not such a suffisticated economic) call it: No sushi means no sushi.
Why dont we focus more on the times of history, when people could not eat "their savings". Amazingly most of the time these did not happen in countries/cultures where you got those "lazy greek beach bums" (or lets say before they got that great euro, (sic)token of "prosperity").
But all these great freegold economics about "savings" will probably find no explanations. I want to put for discussion my thesis about that: SAVINGS is a real BS expression. It is a lie, completely misleading what it really means. You can not "save" anything. The only thing you can do reduce your consumtion in exchange to stack tokens for the participation in the future outcome/output (just hoping it will be with wise decision in physical terms WITHOUT ANY GUARANTEE), nothing more nothing less, but the word saving repeated here over and over again is just nuts.
And the PSchiff-picture above just shows one out of many outcomes of that "savings", the others are just blinded out: In the picture and in most of the minds here.
Greets, AD

M said...

@ AD

"I want to put for discussion my thesis about that: SAVINGS is a real BS expression. It is a lie, completely misleading what it really means. You can not "save" anything. The only thing you can do reduce your consumtion in exchange to stack tokens for the participation in the future"

This statement ^ is so ridicules that I dont know where to begin. If you save, you do not just get a "sack of tokens" to waste in the future. You can acquire a capital good with your savings and you can keep that capital good until you die. That is a far cry from a "sack of tokens to waste in the future".

Some people acquire so many capital goods that they live comfortably and still have surplus left over. In a world without freegold (now)This surplus is searching the galaxy for more nominal returns to retain its purchasing power, thanks to inflation. And not just central banks money printing inflation but the inflation created by all nominal savings competing for more nominal returns.

In a world of freegold, owners of capital goods that have a surplus will not search the galaxy for more nominal gains and compete with other surplus pools. They will store that surplus in gold because gold does not retain or gain its value nominally.

Nickelsaver said...

Ok, I just have to make the observation, because I am paying attention. I see a filter response at play here. Maybe I'm wrong.

Input = Savings really is nothing else than a thing, in the strictest, most literal sense of the word...Imagine the market with the bowls, and the oil, and the gold. There might even be a US dollar bill in there, or a silver certificate, too. What in that marketplace really, is money? What in there, really, is savings? The money is a function of the thinking human actors, and the savings is the function of the capital economic goods that are owned/operated upon, gold and bowls included, according to a time preference and marginal utility values...

output = I want to put for discussion my thesis about that: SAVINGS is a real BS expression. It is a lie, completely misleading what it really means. You can not "save" anything. The only thing you can do reduce your consumtion in exchange to stack tokens for the participation in the future outcome/output (just hoping it will be with wise decision in physical terms WITHOUT ANY GUARANTEE), nothing more nothing less, but the word saving repeated here over and over again is just nuts.

Twist and Shout

One Bad Adder said...

Burning: -

You could do a lot worse ....(moving to Tonga post-FG)
I had an enjoyable 12 months or so in mid-northern Tonga several years ago (cray-fishing venture)

The "local way" takes some getting used to though.
Plenty of "lost-treasure" tales to keep you entertained - aaargh!

AD: - your take on "savings" is exactly WHY there's a glaring need for FreeGold in the mix.

Motley Fool said...

AD

Your latest theory is 'interesting'.

Saving(s) is consuming less than you produce. You may perhaps be a sushi maker and are able to produce 100 pieces of sushi a day. Savings would be not eating all your sushi produced.

Now of course as you rightly point out, somebody else would consume your savings (sushi).

Here it gets interesting however.

Under our current system paper tokens can be created and exchanged to swop for your sushi by government, without any commensurate production and as such, as you point out, no saving actually exists.

However under Freegold things are a little different. You see, only savers will be in the part of the triangle with gold, so you will only be able to get gold to save in from those that actually produced, and consumed less than they produced.

I hope you can see that in this case the savings to account for your token (gold) actually had to exist.

Now of course the FreeGold hypothesis would still have paper money in the mix, so governments could still create tokens to consume savings with without commensurate production. Luckily however the floating exchange rate mechanism with gold would show how much value was destroyed by this act, and adjust the value (in savings) of gold accordingly.

Hope that helps clarify your misunderstanding.

TF

Herb said...

I watched both of the Kirzner lectures with great interest. His explanation of the Austrian concept is the clearest I have ever heard.

FOFOA said...

Excellent Herb!! You are exactly why I posted them. I thought they were awesome too. I watched all three hours.

FOFOA said...

Hello AD,

What if you defer consumption of 400 sushi bites today only to find out that there are no new savers willing to produce (or give up) 400 extra sushi bites for you in the future, in exchange for your savings? Isn't this your question?

And another question that was asked (in the last thread) was, what if you defer consumption of 400 sushi bites today only to find that there are no savers in the chain willing to sell you their savings at the last-known rate?

Price is what settles both of these conundrums, since no one answered my question "what happens next" in the last thread.

The real fear in question #1 (your question) is that the price would fall to zero sushi bites and that there would be no bid whatsoever for your savings at the point in the future when you really need a bid or else you might starve. And this is a real fear that all savers should consider. It has happened many times, even in recent history. Here's a list.

In a world like today where the choices for a savings medium are myriad, you are right to be concerned that your particular choice might go no bid at the worst possible time. But I challenge you or anyone to find me a time in history when physical gold went no bid during an economic collapse. In fact, just the opposite tends to occur. We've all heard the stories of gold coins in Weimar and poor Zimbabweans panning for gold.

But no one here is saying that gold is what will carry you through an economic collapse. That's not what it's for, even though it is one of the few "useless" things that historically holds value even during the worst shortages. As I wrote in Deflation or Hyperinflation:

"In his latest of several posts on this subject, Rick Ackerman presented two responses that he found "of particular interest." The second one is so ldo that I won't spend much time on it. It is a comment that explains the old truism, "you can't eat your gold." That's right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth *THROUGH* a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly."

Now, all of the above completely ignores Nellie, the fun circus elephant in the room, which is this blog's prime thesis. That today we are in the process of switching from a world where the choices for a savings medium are myriad, to one in which a single focal point savings medium will stand out above all else. Passing through this particular crisis is what will make its light shine bright, like a Firework for all to see. So this time, and this one time only, you'll not only shuttle your wealth through but you'll also expand it like you never thought possible. And then, on the other side, gold will continue performing as it has for thousands of years.

Of course your future (unknown) needs and wants are not set aside for you in a magic vault when you buy some gold. But historically there is always someone willing to trade with you for your gold. If, however, you find yourself in the middle of the Sahara trying to barter with your sack of gold coins for your friend's last sip of water, as I wrote above, you apparently planned poorly.

Sincerely,
FOFOA

JR said...

The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life's necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

Deflation or Hyperinflation?

================================================


Gold

This is where physical gold comes in. I have shown you what is wrong with the system when viewed from outer space. And I have shown you what is missing, and what will be found. And I have shown you how the really big money with really big foresight has prepared.

Notice that Greece and the ECB do not have palladium in their reserves. Just sayin'.

Of course you should also make other preparations to ensure that your bare necessities of food, clothing and shelter are taken care of. Some silver and even some dollar currency makes sense in this regard. This whole "gold thing" is really just for those people that have more money than they will need to live on for about a year. And it is for those that would like to store that excess wealth in the most universally liquid vehicle since they don't know exactly what they will be needing a year from now.

Perhaps they will need a generator. Or maybe a cow. Or maybe a gun. Maybe a new Ford F150. This is where gold comes in handy. You can store your wealth securely now in a universal package that should be convertible into the most needed things later. It can cost a pretty penny to be totally prepared now for every possible eventuality. Instead, it is best to prepare for the most probable events and keep a universal reserve for the unexpected!

http://fofoa.blogspot.com/2010/02/greece-is-word.html

RJPadavona said...

Hello Friends,

FOFOA said:

"Not everyone is capable of being a world-changing entrepreneur. But everyone is capable of consuming less than they produce and, therefore, saving."

I agree with this, but I'd like to add a little more insight to that statement.

Saving is the act of underconsumption. A sacrifice is made today in order to be realized at a future date. This is a conscious decision made by humans. Some seem to be more prone towards saving than others. Why is this? Is it a result of nature or nurture? I've studied this for a few years and I've made some observations.

As far back as I can remember, I've always been a natural born saver. I don't ever remember being broke. Even as a child, I always squirreled away some loot to a certain degree. If a purchase required me to spend all I had, I did without. The thoughts of not having that sense of security provided by my savings was worse than not obtaining whatever object I desired at that moment in time.

I used to attribute this characteristic to my father drilling in my head the virtues of thrift. He regularly preached on the evils of taking on too much debt and how the credit card companies would devour you with high interest rates if you weren't mindful of your spending. He always taught me how important it was to have a rainy day fund.

After my younger sister came along, the sermons on the evils of debt and the virtues of saving did not cease. If anything, they increased because my father had another set of ears to listen to his ramblings. However, the teachings of my father were not absorbed by my sister. She has mountains of credit card debt and lives hand to mouth. She even has a college degree, where I barely even showed up to high school.

So what happened? I believe you're either a natural born saver or you're not. In my profession, I get to know people in a personal way. People open up to barbers even more than they do to bartenders. As I get to know my customers and get a general idea of their saving and spending habits, I eventually get around to asking them what their parents taught them about savings and debt. In almost all situations, some of their siblings were natural born savers and some were natural born debtors. Regardless of what their parents taught them.

Although FOFOA is right when he says everyone IS capable of consuming less than they produce, that certainly doesn't mean they will. There will always be people who will never save and will live life in the most irresponsible way possible.

But there's one more thing that has to be considered: There is an unnatural variable that's had a major effect on how many savers there are, regardless of their natural instincts. That variable is the $IMFS. When you have a system that incentivizes indebtedness, of course you're going to get more debtors. And on the flip side, you're going to have less people saving because saving is punished under the $IMFS.

As I've talked about before, the evolutionary inevitability of honest money and honest information are colliding with this world at the same time. So as a Freegold system emerges, more honesty will be unleashed on the world. We're going to truly find out how many natural born savers there are. Won't that be a wonderful Thought experiment in "human action" for the Austrian school to ponder on? Maybe they'll come up with some new ideas (for a change) as a result of this!

I'll have more to say about the Austrians tomorrow. But for now, I have to go to sleep and dream about a sexy beast who tells me what she wants to do to the price of my gold:

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

RJP

Matt said...

Shout out to sean with first comment- what is one praising when they praise the superorganism? Evolutionary survivability? 'Progress'?

The superorganism doesn't care and it doesn't think, it's simply the seathing mass of the evolutionary process in action and perhaps its not the pinnacle humanity should aspire to - although I warrant that it is necessary to not retard it too much, it doesn't really matter if we do, as it will push on regardless. It even manages to push on despite the fraud of fractional reserve banking and the crime of the minimum wage.

The Austrians know how to build a perfect economy, but what good is that? For what ends? Show me a society throughout history that didn't develop its own form of government, where is anarcho-capitalism in action?

The evolutionary process will push on regardless..

Bjorn said...

RJP

Funny that. I have the same experience with my sister. It´s not that she really takes on a lot of debt compared to the average person nowadays, but she seems totally unable to save... Me, although unlike you I did go to college, I paid off my student loan in the first year after finishing. And I sure didn´t get that from either of my parents. My grandparents on my mothers side were savers, and my great granddad on my fathers... so like with most inherited traits it skips a generation or two sometimes.

/B

AdvocatusDiaboli said...

FOFOA,

"But I challenge you or anyone to find me a time in history when physical gold went no bid during an economic collapse. In fact, just the opposite tends to occur."

thanks for the list of HI. No doubts about that. So here's another list of real problems (with bodycounts):
http://de.wikipedia.org/wiki/Hungersnot#Hungersn.C3.B6te_in_der_Geschichte
As you can see, the lists do not really match 1:1.

"We've all heard the stories of gold coins in Weimar and poor Zimbabweans panning for gold."

I guess what I would suggest for the Zimbabweans is to stop digging for funny yellow stones, but rather starting to read from Charlie Munger, because you cant eat gold, although it will buy you at a very very bad performance ratio imported food, producing food for yourself is the best idea in the first place in that situation.

Hitler once said: We dont need gold, our paper money is backed by the force of our nations labour.
No doubts about that one and it worked perfectly for that time, but too bad if that is sometimes suddenly missing, so better to hold the original stuff no human can dilute in the first place, if you really want to "save" something outside of the physical plane of your fridge.
On the other hand these brave fine indian (gold) savers still dont have e.g. the infrastructure they would need for the benefit of the overall superorganism. Why? Its not a question of savings, its a question of social setup.
Greets, AD

burningfiat said...

AD said:

Hitler once said: We dont need gold, our paper money is backed by the force of our nations labour.

Well, congrats Germans. Backing Hitlers money with your labour...

On the other hand these brave fine indian (gold) savers still dont have e.g. the infrastructure they would need for the benefit of the overall superorganism. Why? Its not a question of savings, its a question of social setup.

In my opinion the Indian people (and Easterners generally) is using the super-organism in a much more balanced and clever way than Germans (and other Westerners) have ever done.
Why slave on, busily backing your Governments paper and infrastructure, when you already have enough for a balanced everyday living?

Regarding pursuit of happiness. Does that always first come when the last Autobahn, Maglev or Public school has been built? Or can happiness come by choosing this path of thoughts: Yes, I have enough, I am content, no more greed. I don't need to consume anymore than I already am. This bike is good enough to sustain my current standard of living. I refuse to crave a BMW.

How do you separate savings and social setup? Some Peoples save (almost like a cultural thing), Others don't. The super-organism doesn't care for infrastructure a priori. The super-organism only values infrastructure in an area if the people in that area cares enough about infrastructure to forfeit some of their savings.

/Burning

Matt said...

"But I want to caution you against dismissing the Austrian School simply because most modern practitioners are misguided with respect to their monetary prescriptions. "

Please. Freegold is great because it is a natural rebalancing of certain of the system's current imbalances and can occur without direct intervention but it is in no way a broad solution to the whole economic issues inherent in our societies.

The Austrians depth of knowledge on monetary policy goes far beyond the "$IMF" issue your writing focuses on. FOFOA I think of you as an Austrian who is a fractional reserve banking apologist just as I am an Austrian who is a minimum wage apologist, but lets not kid
ourselves that we're not just picking and choosing the knowledge of the Austrians as it suits us.

You're right that Austrians don't read your blog though, why would they when the great economic thinkers have their works available?

"The Socialist part is because, even while they talk about limited government, they want the government to control the production of money "by locking gold into any official currency system to act as a gauge and controlling factor against socialist tendencies in government""

Again: Please. Just read this book to understand that the Austrian's position on fractional reserve banking and how it is not based on 'controlling the production of money' but on ending a fraud against society's foundational and universal legal principles, usually enabled by governments granting of exceptional legal privileges to private financiers in exchange for 'fiscal co-operation' from said financiers (and chapter 5 has a complete explanation of how saving helps an economy grow too).

http://mises.org/books/desoto.pdf

Motley Fool said...

Matt

I shall politely disagree. Allow me to point out one simple flaw in Austrian economics. Ignoring some of their own valid theories.

Let me ask, what do people want of a economic system? What is the consumer demand here? Is it the same for all people? Is it the same at all times?

I put it to you that their 'perfect' system may be perfect for some, but not so for others. It ignores the demands of the superorganism.

TF

Matt said...

Oh and for further discussion on the CENTRAL PLANNING of the Euro (although I haven't read it myself it's slowly moving up the list)

http://mises.org/document/6045/The-Tragedy-of-the-Euro

Matt said...

Hi MF - I would argue that the Austrian system is the greatest enabler of the Superorganism from an economic perspective but I think I agree with you that that isn't necessarily the aim of societal evolution.

Motley Fool said...

Matt

Unfortunately so.

In my opinion this is the fount of difference between the FreeGold hypothesis, and other schools of thought; that FreeGold recognizes reality. As absurd and unfortunate as that reality may be.

So to describe FOFOA as merely another Austrian and fractional reserve apologist, is to make a critical mistake in my opinion, the mistake of not recognizing this key difference.

The FreeGold hypothesis springs from this recognition. Both the Austrian and Keynesian schools ignore reality, in their own way.

TF

Matt said...

"In my opinion this is the fount of difference between the FreeGold hypothesis, and other schools of thought; that FreeGold recognizes reality. As absurd and unfortunate as that reality may be."

I have accepted that position from FOFOA previously, that he is concerned with what will happen and not what should happen, but as he has started to cross into the discussions of value and capital and how an economy SHOULD function rather than how it does, I find there is a little room for me to come back and challenge some of his positions.

The great benefit of the Austrian school (aside from the sheer depth of knowledge available from them) is that once you understand how an economy should function you can start to work on understanding what will happen when it is interfered with (just as Peter Schiff not only vocally supports Austrian principles for the economy but also correctly predicted the 2008 financial crisis).

PS: "So to describe FOFOA as merely another Austrian" not 'merely' though in my opinion!!

Nickelsaver said...

When the author of this blog himself takes the time to proffer a personal and detailed response , it deserves more than a curt reaction.

I would suggest a thorough and honest evaluation of what has been given to you. Such an evaluation should be an attempt, not just to understand what is being said on the surface, but also to grasp what is being asserted in aggregate.


When you make statements like,

I guess what I would suggest for the Zimbabweans is to stop digging for funny yellow stones, but rather starting to read from Charlie Munger, because you cant eat gold, although it will buy you at a very very bad performance ratio imported food, producing food for yourself is the best idea in the first place in that situation.

...it shows that you didn't take the time to review all of the materials.

Also, if you are going to appeal to Adolph Hitler, your credibility in most any forum will quickly approach zero.

Motley Fool said...

Matt

I see.

Would you agree that Austrian theory on how and economy should function assumes rational actors of a certain variety (benevolent producers who are open to rational reason, each within his own capacity)?

Would it be fair to say that humans are not all of that type (sadly), and that ANOTHER theory takes cognisance of this when considering how a economy should function?

Would you agree this changes the outcome? :P

TF

Edwardo said...

By one's quotes ye shall know them.

Contrary to the corporal's suggestion, he and his Nazi minions obviously held gold in very high regard since they pilfered so much of their domestic and foreign victim's gold holdings. As for "our nation's labor" I think it's worth noting that a substantial portion of "Germany's" productive labor, particularly when it was most needed, during WWII, was coerced.

burningfiat said...

Matt,

Thanks for the link to "The-Tragedy-of-the-Euro".
Can it be true that Phillipp Bagus treats this subject in 200 pages without just a footnote mentioning the MTM of ECB's gold? It seems so, although I haven't read it all yet.

Not talking about gold's role in the Eurosystem is just odd to me, being used to reading FOFOA/FOA/A's story. Maybe the Austrians could learn something from Another's story?

BTW, I think it is justified to criticize the current European bailout madness, but it should also be alright to dig a bit deeper and ask whether Europe actually has a plan for the future and is just buying time at the moment.

/Burning

Matt said...

Its good to be pragmatic, no?

Haha I absolutely agree with your points. But just to be clear I use '...economy SHOULD function' in terms of at optimal economic productivity rather than the way I want it to function, so from there we can work back to what does happen and how people do behave and try to work out the result!

The best part is that cherry picking from the AE school I can take all their knowledge on capital formation, saving, human action and chuck it right alongside the notion that a gold standard or full reserve banking is almost impossibly unlikely to occur and hence my support of freegold as a natural, partial, rebalancing that probably will occur.

By referring to FOFOA as an Austrian I am referencing his application of the superorganism concept and its association with the Austrian works on praxeology.

Matt said...

Hi Burning, I'm really not sure as I haven't read it yet myself. It's just another alternative opinion to put into the mix and I thought I'd drop the link for those that could be interested.

As for M2M, most central banks hold gold and mark to market is a normal accounting convention that many central banks apply, so I don't know if it's that significant in itself. We here are perhaps more interested in what it stands to represent as golds role evolves rather what it represents now. My understanding is that the EU CB's have to start settling their trade imbalances with their gold (ie Greece's gold going to Germany) to affect what we are all waiting on and yet there seems to be some pretty strong resistance to that happening.

Motley Fool said...

Matt

;)

...

"My understanding is that the EU CB's have to start settling their trade imbalances with their gold (ie Greece's gold going to Germany) to affect what we are all waiting on and yet there seems to be some pretty strong resistance to that happening."

Ahh well, no. I don't think any of us are expecting trade balances to be settled in gold unless and until gold has been revalued. Even then official stocks of gold will only be used in extremis, as naturally flowing gold owned by the population should fill the trade imbalance (while working to reverse the pricing mechanisms that has an imbalance as result).

TF

Matt said...

MF.

Well said, I was aware of that but had slowly gotten off-track with my thinking and was looking at the flow of physical to destroy the paper gold market.

Cheers mate!

Motley Fool said...

Matt

Yes, I think we are all waiting for the day (in anticipation or dread) when the (stopping) flow of physical destroys the paper gold market.

Peace

TF

AdvocatusDiaboli said...

BF,

"In my opinion the Indian people (and Easterners generally) is using the super-organism in a much more balanced and clever way than Germans (and other Westerners) have ever done.
Why slave on, busily backing your Governments paper and infrastructure, when you already have enough for a balanced everyday living?"

I am far from suggesting what is good for anybody else.
It is just that I think (clean) water and electricity is something essential for anybodies living, but your right, hell, what do I know anyway.
Greets, AD

P.S.
If in the early morning human cadavers are collected in trucks from the streets, to sometimes rott in open dumbs, just covered with sheets to be eaten by birds, hmmm, it is something difficult to comprehend, or at least to consider that "happiness", IMHO.

M said...

AD said:

"Hitler once said: We dont need gold, our paper money is backed by the force of our nations labour."

Yeah and people also say that about the USD and how its backed up by the military.

The Soviet Union had the big military too. How well did that work for them....?

M said...

Peter Schiff was finally starting to be suspect of metals manipulation, mainly in the stocks though. He has been rejecting the metals manipulation allegations for a long time.

He just said. Look at Kinross gold. If you decided to buy it 3 years ago because you thought gold would rise, you lost half of your money. It went from $23 to $9 while gold doubled.

If you shorted Kinross 3 years ago because you thought gold would fall, you made double your money even though you where wrong.

M said...

I actually wondered if any of the experts here had any theories to explain why gold stocks are the Worst stocks on earth™.

I know gold stocks are not the focus of this blog but they are somewhat relevant. If gold stocks cant even keep up with airline stocks then how are we going to get any gold out of the ground ?

Motley Fool said...

M

I'm no expert but I'll give you my opinion.

As far as we know, gold prices were forced down to production cost...and has in the meantime been kept there (of course in funny money this means a number increase to account for real value).

So I would think that people have better things to invest their capital in (for ROI) than gold mining where the price barely allows one to get it out of the ground.

But what do I know? :P

TF

JR said...

Hi Matt,

I agree you have no idea what you are talking about. Its absurd to suggest:

The Austrians know how to build a perfect economy, but what good is that?

One of the most significant contributions of the Austrian school is the economic calculation problem. Your claim is rubbish. Similarly, you assert:

The Austrians depth of knowledge on monetary policy goes far beyond the "$IMF" issue your writing focuses on.

Moron, FOFOA wrote monetary prescriptions, not "depth of knowledge on monetary policy" or what is more accurately monetary theory. AE is commonly known first and foremost for its modern practitioners strident belief in monetary reform, typically gold specie or gold standard or commodity competition. That why he posted Kirzner - a guy who studied under Mises, rejects the prevailing political nonsense that is post-Rothbardian AE and wants to talk about economics, subjectivism and the beauty of entrepreneurship, not the political hard money socialism of "monetary reform."

KIRZNER: Rothbard was unquestionably a genius. His History of Thought exemplifies his life-long ability to absorb an enormous amount of literature and write clearly. He played an important role in inspiring young scholars to take a careful look at the Austrian body of thought. Just as I have had disagreements with Lachmann, I've had them with Rothbard, in matters of style and in matters of substance. Some of his impact was deepened, and some of it qualified, by his ideological work in libertarian political theory.
link

JR said...

AEN: In those early years, did you have a goal of doing more macro-oriented work?

KIRZNER: No. I have never really seen myself as a macroeconomist. Of course I've taught macro for many years, yet I felt I never understood Keynesian economics. It assumes that decision making doesn't matter. All that matters are the relationships between totals. While I often pointed out what seemed to me gaping holes, I had no great desire to counter this with a separate macroeconomic theory of some sort.

AEN: You've never thought of providing a systematic critique of the Austrian business cycle theory, for instance?

KIRZNER: No, I've never had too much interest in the Austrian business cycle theory. I've never felt that the Hayekian business cycle theory was essentially Austrian. In fact, Mises, who was the originator of this whole idea in 1912, didn't see it as particularly Austrian either. There are passages where he notes that people call it the Austrian theory, but he says it's not really Austrian. It goes back to the Currency School and Knut Wicksell. It's certainly not historically Austrian. Further, I would claim that, as developed by Hayek, there are many aspects of it that are non-Austrian. I don't believe that to be an Austrian you have to buy into the Hayekian view of business cycles.

AEN: Are there any aspects of Hayek's business cycle theory that you regard as Austrian?

KIRZNER: I recently wrote a paper to accompany the facsimile German edition of Prices and Production. I identified what seemed to me to be elements of Hayek's later work on coordination, miscoordination, and knowledge. I argued that the germs of his later ideas can be traced to this volume, especially his description of the upswing stage of the cycle. This is a phase during which some decisions are out of sync with other decisions. Current investors are making decisions which anticipate the decisions of others down the road, which are in fact not there. Leaving the exact mechanism aside, that is the kind of thing Hayek taught us to look for in analyzing the market process. In that respect, it's Austrian.

AEN: And the rest of the theory?

KIRZNER: Otherwise, the Austrian theory of the business cycle is a macro theory. It's an equilibrium theory. And it treats capital in an objective sense rather than a subjective sense. It treats time as somehow embedded in the capital goods themselves. So I've always had a certain reserve about that particular theory, however brilliant it may be. I think the way Hayek developed it was not quite consistent with the way Mises laid it out in 1912.

AEN: Do you accept the idea that interest-rate manipulation by the central bank can cause distortions in the structure of production?

KIRZNER: Certainly the Austrian cycle theory showed brilliantly how this can happen. But it's one thing to develop a theory which could explain a downturn. It's quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no.

Mises used to poke fun at those who criticize the Austrian theory of the business cycle as being too simple. He said that still doesn't tell what's wrong with it. That's correct, as far as it goes. Perhaps many market aberrations are of this kind. But that can only be a question of historical understanding. We must be able to look at every case to see just what is happening.

AEN: Should Austrians insist that the scope of Austrian theory be limited to only praxeologically valid theorems?

KIRZNER: No, I'm not saying that Austrian economics should not deal with applications of praxeology. But it's one thing to explain what must necessarily follow under certain assumptions. It's another to take this and claim, without justification, that this therefore is the explanation for a particular empirical phenomenon. There's a danger in doing that.

Nickelsaver said...

http://bit.ly/xSwnPh

M said...

@ MF

Production costs have been around $400 to $700 for some time now. The miners did better during the gold bear market then they are doing now in the bull market. Now meaning the last 4 to 5 years.

When silver was peaking last year, gold in the ground was priced about the same as silver above ground in some cases, relative to the stock prices of these miners.

Kinross had some problems with one of its mines recently and the stock fell 20% in one day. At about the same time, that Carnival cruise ship capsized in Italy and a bunch of people died, yet Carnivals stock fell about 8%.

While the DOW kreeps toward its all time high of 14000, Kinross went below its 2008 low in the same year that gold made the all time high of $1900. And its not just Kinross. The HUI is below 500 right now.

Something is amiss

Motley Fool said...

Hum.

Do you think perhaps the big money is pricing in coming nationalizations?

Have you taken into account the fact that gold is almost universally hated? xD

I dunno eh. A promise to deliver gold is not one they can keep if they are nationalized or if we hit a SHTF scenario. On paper they may have gold in the ground, in practice it means little till extracted.

TF

Matt said...

JR, are you saying you don't want to be my friend anymore?

AdvocatusDiaboli said...

to save (money)

I just noticed something really amazing: The different meanings when you translate that in different languages. Although we use the words, we tend not to think deeply about their meanings, just taking it as an expression of what we mean, but not the meaning of the word themself. Let me show you, e.g. to put a coin into that porcellan pig:

English:
to save => moronic, completely distracting, you can save somebody from drowning, try that on a (monetary) token of exchange (or "store of value").

German:
to save money => Geld zu sparen
"sparen" is a word of its own. It is hard to translate it back really 1:1, without loosing anything. The best I can come up with: "not to spend".

And now voilà:
French:
économiser l´argent => AWESOME, does anybody see that FOFOA freegold island? (okay except in french it is made out of silver (=argent)) :)

All the other readers, in your native language do you have similair storries?
Greets, AD

Nickelsaver said...

Matt,

Maybe if you tell him you are Irish he will give you a kiss.

BTW, JR, I'm Irish ;)

Matt said...

Haha NS. I'm Irish heritage at least,, how 'bout Jack Russell?

Nickelsaver said...

AMERICAN: to save => donate to uncle sam

Nickelsaver said...

Everyone is Irish today right?

Matt said...

Yeah think so!

Nickelsaver said...

Speaking of Russell

One Bad Adder said...

M: -
Apart from all the finagling that goes on in the space, you've got a 'market-mentality" becoming increasingly averse to environment-impacting industries.
Gold-mining activities are regarded as environmentally "dirty".
Ultimately "overt" Gold-Mining ventures will succumb to environmental pressures which IMHO will benefit GOLD - in vault...in hand ...and in sock-drawer immensely.

Matt said...

NS - you got me on to watching Frankie Boyle clips from there...

Aquilus said...

From Moneyness :

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

From March 16, 2012: Executive Order -- National Defense Resources Preparedness

Extract (my emphasis):

PART III - EXPANSION OF PRODUCTIVE CAPACITY AND SUPPLY

Sec. 301. Loan Guarantees. (a) To reduce current or projected shortfalls of resources, critical technology items, or materials essential for the national defense, the head of each agency engaged in procurement for the national defense, as defined in section 801(h) of this order, is authorized pursuant to section 301 of the Act, 50 U.S.C. App. 2091, to guarantee loans by private institutions.

(b) Each guaranteeing agency is designated and authorized to: (1) act as fiscal agent in the making of its own guarantee contracts and in otherwise carrying out the purposes of section 301 of the Act; and (2) contract with any Federal Reserve Bank to assist the agency in serving as fiscal agent.

Edwardo said...

If Jessie spent some time here or reading the posts at the site that inspired FOFOA, ole Jess would've concluded his most recent post

http://jessescrossroadscafe.blogspot.com/2012/03/when-insider-information-grows-so-large.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JessesCafeAmericain+%28Jesse%27s+Caf%C3%A9+Am%C3%A9ricain%29

with Ari's advice, "Gold, get you some."

Nickelsaver said...

Speaking of Ari,

I was reading through his old posts and this concise section struck a harmonious chord.

"Due to inflation and deflation that naturally arise through variations in the rates of borrowing, payback, and growth of the economy, currency fluctuations lead to bank runs which are frankly too disruptive and are not to be tolerated. Fortunately, they are rendered completely meaningless under a fiat currency regime. National fiat currencies allow governments to manage their own national economies to the extent that that are able, and to take whatever efforts needed to avoid falling into those most destructive currency deflations that wreak havoc on economies.

Gold must be removed from these currencies so that governments are not tempted to manipulate its perceived value in order to give a boost to their own currency. The goal would be that sudden value shocks will be avoided because at all points in time the currencies will be fairly valued against Gold--there won't be an inevitable and recurring "day of reckoning" in which the pent-up false perceptions are unwound amid calamity and crisis of confidence. Gold must also be removed from any element of the monetary system that would seek to make loans using Gold because, as we've seen, these confound Gold's ability to reach its true physical-based fair market value. Gold derivatives must also be done away with for the same reason. Gold must remain a pure monetary asset, bought and sold and owned outright--nothing else would be allowable. National fiat currencies will ably serve the market's various needs to borrow funds...after all, that's how fiat currency is born in the first place.

Although I've seemingly cut Gold out of the monetary system, that is not the case at all. Gold qualifies as the only true money; being able to function as a unit of account, as a medium of exchange, and as a store of value. A fiat currency only meets the first two elements, but they fail as a store of value. Therefore, Gold will be be the money of savings, while national currencies will be the currency of commerce. They will all float relative to each other, and constantly seek out their proper value. Kept with special status as an independent and unlendable currency, Gold will be the ever-rising North Star of the monetary system. Central banks would be inclined to hold only Gold in reserves of any significant size--because Gold is not the liability of any other nation, and its real-world value would continue to grow over time. As said before, quantities held in other national currencies would be done only to the extent that they facilitate trade between active partners. Individuals across the Earth would also choose to hold Gold as their savings; their life's productivity forever protected from inflation and deflation, and from reliance upon another person's (or nation's) liability.

The beauty of reserving Gold as an unmanipulated monetary asset is that individual local currencies can still be "managed" by the government in whatever manner is seen befitting that specific country, without having an adverse effect on the meaningful wealth held in reserves (in the form of Gold savings) among other nations and local citizens alike. No single national currency need ever be held by another nation as a reserve currency (which "unfairly" allows the nation that issues the reserve currency to export its inflation.) However, a nation might choose to hold another's currency in a quantity simply because it makes for expedient trade."

Nickelsaver said...

A revelation...I think.

From the Ari post Gold qualifies as the only true money; being able to function as a unit of account, as a medium of exchange, and as a store of value.

I have previously been viewing gold as store of value only (and rightly so as it relates to currency). But as it relates to itself this makes perfect sense and clarifies to me the meaning of FOFOA's

Spur and Brake

Once gold is flowing at a high enough price to balance international trade, it will start accumulating in countries that run a trade surplus excluding gold (including gold, trade will balance). Likewise, it will start disappearing from those countries running a trade deficit ex-gold (excluding gold). This is how the spur and brake forces work on an economy in Freegold.

As the gold supply within a "deficit ex-gold" nation dwindles (think: USA), each piece remaining will become more and more dear in terms of other goods and services within that zone. In other words, the purchasing power of gold will rise in the "deficit ex-gold" zone vis-à-vis goods and services in that zone. Likewise, the purchasing power of gold will begin to fall in the "surplus ex-gold" zone (think Germany or China) versus goods and services in that zone because of the large and growing accumulation of gold.

At this point the large quantity of gold in the "surplus zone" will have a lower purchasing power against goods in its own zone, but a higher purchasing power abroad in the "deficit zone" and demand for imported goods will grow while exports will start to fall. This growing demand from abroad will be felt in the "deficit zone" and will be met with new supply. Likewise, the falling demand for imports from the zone with a declining volume of gold will be felt in the "surplus zone" and be met with decreasing supply. Incrementally, the "surplus zone" will slow production and increase consumption while the "deficit zone" experiences the opposite effect. Excluding gold, the balance of trade will shift back and gold will start to flow in the other direction.

Notice, please, that I'm not even talking about the flow of currency or price inflation/deflation in currency terms. Inflation or deflation in currency terms can be happening in either zone depending on how the monetary authority is managing the currency. But what matters in terms of the real trade flow will be the purchasing power of Freegold (not in currency terms, but) vis-à-vis the rest of the trade flow of goods and services.

Nickelsaver said...

cont...

If you have high currency inflation in the "deficit zone" because the government is printing like crazy, the price of gold will be rising even faster than the price of goods and services. On the contrary, if you have high inflation in the "surplus zone", the price of gold will be rising more slowly than the CPI, exerting its brake force on the economy because gold will still be found to have increasing purchasing power abroad and decreasing purchasing power on goods from its own zone. In other words, gold will be exported to other zones where its purchasing power is higher, spurring those other zones to produce more and putting the brakes on the overheated economy in the "surplus zone".

This flow will continue reversing back and forth forever, as it should be, because there is no such thing as a perfect equilibrium. And again, I want to draw your attention to the fact that I'm dealing only in the physical plane, ignoring the monetary plane. This is what Freegold does. And it doesn't matter if the "surplus ex-gold" and "deficit ex-gold" zones each have their own currencies or if they share a single currency. It still works the same way. Savers run the economy. Savers are the marginal surplus-producers and consumers. When the savers start saving more, it means the economy is producing more. When the savers start dishoarding and consuming, the economy is producing less vis-à-vis its balance of trade. This is the spur and brake force of Freegold, the international demand driven by the fluctuating purchasing power of gold as felt by the savers, regardless of any transactional currency effects with which the debtors may be tinkering.

ephemeral_reality said...

NS,

That whole essay is Tour De Force in terms of logical clarity. Looking back at history and setting the stage for Freegold.

Nickelsaver said...

Ding, Ding, Ding, Ding, Ding, Ding, Ding, Ding, Ding, Ding!!!

Physical Plane!

ephemeral_reality said...

Edwardo,

Jesse's recent piece on Hyperinflation is interesting, where he says:

the most likely cause of it would be an inappropriate response to a threat to the banks because of an event in the derivatives market which is a major credit bubble, intricately interlocking almost all financial institutions.

He doesn't talk one bit about the USG Trade deficit.

He also adds:
I have spent quite a bit of time trying to assess the probabilities, and in order to do that, one must understand the actual mechanism by which it would occur. I had been unable to find that described elsewhere, except in the most general of terms and the piling on of anecdotal evidence.


I sent him the Moneyness post hoping he would read and understand the mechanism as described by FOFOA.

Nickelsaver said...

Taking a moment to celebrate a Moment of Clarity

burningfiat said...

OBA,

To be frank. Right now my eyes and thoughts are centering on Thailand for a nice place to retire. But hearing your account and seeing pics from Tonga, that could definitely be my plan B now :-)

Nickelsaver said...

In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of.

Confucius

JR said...

MF,

Would you agree that Austrian theory on how and economy should function assumes rational actors of a certain variety (benevolent producers who are open to rational reason, each within his own capacity)?

Please stop, you have no idea what you are talking about and its embarrassing. Rationality is a common neoclassical underpinning, which is expressly rejected by the Austrian School in favor of praxeology. Indeed, you may have noticed FOFOA wrote:

The Austrian School is primarily a school of Economics (focused on subjectivism and a deductive approach to economics called praxeology)

Matt has no idea what he is talking about. There is no need to expand those ranks.

Motley Fool said...

JR

Fortunately for me I do not mind admitting my own ignorance.

I read your wiki link. I fail to see how what is described differs in meaning from what I said.

From your wiki link Praxeology is the study of human action. Such action is not random.

"Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life."

- Mises

Which simply stated means that people act according to their judgment of their own best interest in any given situation....which I call rational in their respective capacity.

A judgment on what action to take by another may seem irrational to me, but whoever is doing it would believe it to be the best course of action to satisfy their current needs, whatever those may be.

Please enlighten me where I go astray (excepting that I am not using AE terminology to describe the concepts).

Thanks

TF

RJPadavona said...

Hello Friends,

First of all, great discussion on the Austrian school in the comments today.

Like several others who've reached this destination, I found this blog via the Austrian school. I agree with what I've heard Aquilus say before: I don't see anything written by A/FOA/FOFOA that is not compatible with my personal interpretation of Austrian economics. I'm just of the opinion that the official spokesmen for the Austrian school have not evolved along with the modern era. They stagnated in the 70's and are so stuck in the dogma of the past that they can't see the forest for the trees.

IMO, (and as Kirzner said in the video), the revelation that human action plays the most important role in deciding how the economy functions is what sets Austrian economics apart from other schools of economic thought. As MF spoke of earlier, the concept of human action is contradictory to what most Austrian scholars believe in regards to fractional reserve banking and fixed gold standards. After all, what is more human than to have the desire to receive the most output with the least amount of input? This human desire is at the heart of fractional reserve banking. And what is more human than entrusting fallible men with positions of power only to have those men abuse that power? This is why expecting a government to stick to a fixed gold standard doesn't work.

So, why did the Austrian school stagnate? I think the blame lies squarely on the shoulders of Murray Rothbard. Now don't get me wrong, Rothbard contributed many great ideas to Austrian economics, but he got sidetracked in a major way. Earlier, JR mentioned the "prevailing political nonsense" of post-Rothbardian AE. As usual, JR hits the nail on the head. Rothbard wrote as much about libertarian political philosophy as he wrote about economics. Especially in the latter part of his life. He was one of the forefathers of the Libertarian Party. He even worked with Pat Buchanan's Presidential campaign in the 80's.

Rothbard was such a well-liked and iconic figure within the Austrian school, the rest of the Austrian scholars followed his lead and got wrapped up in an obsession with a utopian political philosophy as well. I think over the last 40 years this has been the primary reason the Austrian school has stagnated. They forgot about one of the most elementary rules of economics: Specialization and the division of labor. They had too many irons in the fire and it caused their economic philosophy to suffer by not evolving with the modern era of "money".

So, I guess we shouldn't refer to FOFOA as an Austrian since most Austrians would consider him a heretic. And Fekete has already laid claim to the moniker "The New Austrian School". So how about "post-Austrian"? God, I know that sounds elitist, but so what? We ARE elite. We may not be elite like the Giants, but we're definitely mental Giants. So I guess that makes us elitists, right?

I believe that not only are we frontrunning central banks and frontrunning the next Renaissance/Enlightenment, I also think we're frontrunning the direction in which the Austrian school will eventually arrive. They will either evolve or they will become extinct.

Feels good to know you're a pioneer, eh?

http://www.youtube.com/watch?v=WDtCa8ZgAk4&feature=related

RJP

JR said...

Its not the currency that acts as final settlement, but the reserve

What it all boils down to is the final settlement of trade imbalances. Right now, the producing countries export more goods than they receive. And the imbalance is settled with printed paper representing future debt. They don't want that anymore. That's where gold comes into play. Gold is a final settlement that represents no one's debt. Gold cannot be defaulted on. Once you hold it, you have been "paid in full".
Bankrupt Economics

================================================

One of the byproducts of this system of barter will be FreeGold. Gold, as the ultimate extinguisher of debt will be the final trade settlement of any trade imbalance. This will ultimately be true on all scales of the fractal curve. Reserves of gold will be held by nations, private companies, and individuals. And these reserves will lend credibility to each of these market participants under the new barter system. For if at "the end of the day", any imbalance of trade exists, it can be settled with the ultimate extinguisher.

As a trade partner, you will be willing to ship your goods for the goods of another country, but only if you are confident that any imbalance can be settled by something other than the printing press. This is the function of FreeGold.

Fiat Guarantees and Real World Barter Deals

===============================================

Those that had not saved in scrip, but instead had cleared with gold at the end of each fair, simply carried on trading at the new, lower value of the scrip. You see, the fair operator, we'll call him the ECB, did not participate in the fair itself, primarily because he had severed his link to any specific booth operator. His only job was providing scrip, announcing its value, and maintaining the system, I mean the fair, even if it came at the cost of debasing the scrip money.
Euro Gold

JR said...

Which simply stated means that people act according to their judgment of their own best interest in any given situation....which I call rational in their respective capacity.

does not mean this:

assumes rational actors

This is not hard if you are willing to be honest:

Human action is necessarily always rational. The term "rational action" is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man. Since nobody is in a position to substitute his own value judgments for those of the acting individual, it is vain to pass judgment on other people's aims and volitions. No man is qualified to declare what would make another man happier or less discontented. The critic either tells us what he believes he would aim at if he were in the place of his fellow; or, in dictatorial arrogance blithely disposing of his fellow's will and aspirations, declares what condition of this other man would better suit himself, the critic.
link

RJPadavona said...

Oh, and I almost forgot. Several of you have asked for pics of my newborn baby girl. She's been a little jaundiced, so I'm just now getting around to posting some pics now that she doesn't look so yellow.

From the depths of my loins, I've brought another PGA to this planet. Ladies and Gentleman, I present to you Rose Marie Padavona:

http://www.flickr.com/photos/rjpadavona/6990538429/

http://www.flickr.com/photos/rjpadavona/6844417582/

As you can see, she likes to eat. Good thing her daddy owns gold. It increases her chances of staying well fed:

http://www.youtube.com/watch?v=Q8fZeaUHsjw

Thanks for all the congrats!

RJP

AdvocatusDiaboli said...

RJP,
"We may not be elite like the Giants, but we're definitely mental Giants. So I guess that makes us elitists, right?"

get a life. thats the biggest dumbshit i ever read here on fofoa.
And when you searching for that, take JR and NS with you.
no greets, AD

Nickelsaver said...

*shit eating grin*

Motley Fool said...

JR

Well, that is what I meant initially.

I'm sorry, I don't have the AE credentials and uses of phrase.

I will concede that your phrasing is better to avoid confusion.

As you may (should) know I quite like the objectivist view. From that school human choice is said to be rational (if only to that human in their own twisted mind). Rational action meaning a interpretation of the circumstances and your own knowledge in the context of the situation and basing your choice thereupon for each individual.Even if I may not understand others' choices I view the process as rational. This was my meaning.

I shall try to choose my wording more carefully in future, to avoid misunderstanding.

TF

Ps. I am still busy with the book on IP you linked. It is a compelling read thus far.

ephemeral_reality said...

RJP,

Spot-on about the dogma that surrounds the Austrian Circles of Rothbard disciples.

JR,

This statement: Human action is necessarily always rational. had me LOL. Are you serious?

Are corporate psychopaths considered rational?

That statement sounds like a canard to me, just like how the Free market is.

Motley Fool said...

JR

I reread my earlier comments. You are correct it did not mean the same thing.

Oft times the memory of a thing is not the thing itself. :P

I wanted to make clear earlier that the debtors vs savers distinction does not exist (afaik) in the Austrian school. This would mean that they likely assume all people to be honest hardworking producers, and the system to be at fault, hence the argument towards hard money. Which is of course a mistake.

Anyhow. The chasms in my knowledge are deep and wide. I don't mind admitting it, or showing my ignorance. I find it a good way to learn. :P

TF

RJPadavona said...

AD,

I'm too stupid to debate you. You are correct and I am wrong. Always and in all ways.

However, I would like to make you aware of a brand new dance craze that's taking the world by storm. I don't know if it's reached Germany yet, but I hope it gets there soon because I think you were born to boogie, baby!

http://www.youtube.com/watch?v=_xns6R0g6zo

Love,

RJP

Matt said...

Don't worry MF, even lowly ol' me managed to deduce the meaning of your words,, not really that hard once one actually 'wants' to understand,,

JR perpetually struggles with it but that's his beef at the end of the day.

Motley Fool said...

JR

I will add Mises' Human Action on my to-do list though.

TF

Ps. I still 'wish' at times you were not such an arrogant bastard. As it stands interaction with you is mostly unpleasant. s'Truth.

Nickelsaver said...

TF,

Perhaps if you came around to agreeing with him it would not be so unpleasant!

Conforming to the truth (wicked laugh)

AdvocatusDiaboli said...

MF,

about that austrian human action modell (in fact I also still have to read that book), but there are certain issues maybe to be pointed out:

IMHO, AE assumes that these win-win-action focus on the ((short term?) future) physical plane (expectations). Nice approach, but if you carefully watch humans, that is not the case, absolutely not.
From my life experience I say that at least 50% of actions are driven by feeling of self-worth (e.g. I GOT THAT NEWWWW IPAD!!!!).
Or lots of employees consider it more valuable if you give them a new business card with "lalala-you-are-now-an-admirable-VIP". Really cheap way to make dumb suckers happy.
Or why do so many people want be beautiful, admireable... Why do you get a better deal if you brown nose the other party?
Sex? Or didnt mommy love you?
Who knows, but that is a very very big factor of todays humans interaction and AE is completely ignoring those social factors. True, how can you "calculate" those, impossible, but those screw up the whole modell.
Greets, AD

Matt said...

Ephemeral Reality

Good link on the 'free market' by the way. I don't always read Jesse's blog but often learn to regret it!

This is an area I really struggle with in regards to the Austrian School, that tearing down government intervention will provide a net benefit to humanity. I can readily conceptualise it in regards to economic productivity and can see the need for the pendulum to be 'pushed back the other way' at the present moment but cannot yet commit my full faith to this as an overarching belief system, I'll be sure to keep an open mind though.

Government - representation for the people by the people - just like credit money!! /SARC/

Another canard for your list: deflation [equals] bad

M said...

@ One bad adder

"Ultimately "overt" Gold-Mining ventures will succumb to environmental pressures which IMHO will benefit GOLD - in vault...in hand ...and in sock-drawer immensely. "

I don't necessarily agree that environmental issues is what is killing the gold mining industry but I do agree that the killing of the industry is definitely bullish for physical gold in hand. If the industry is starved of capital long enough, obviously supply will be cut. Ide guess its being cut right now. Imagine a company like ConnocoPhilips being at its 2008 low while oil hit $160 a barrel. The market cap of all gold producing stocks combined is less then half the market cap of Apple.

Matt said...

AD - as JR very rightly pointed out 'Human ACTION is necessarily always rational' it's just that he forgot to clarify that human MOTIVATIONS that underly the actions are not. So if you ask an irrational person why they do what they do, no doubt they will be able to give you an answer that made sense to them at the time.

To be sure most economic theories are just idealised concepts that help provide a reference point for where one lays on a map and in which direction you will go after taking a particular action,, which is to say their value isn't always in their prescriptive administration but at least as much in their use for deductive analysis.

Just my 2cents.

ephemeral_reality said...

Matt -

The free market canard is the reason why I don't have absolute faith in the Superorganism, so to speak.

Human systems do not maintain themselves, and are almost never self-improving, but rather given to entropy, manipulation, and deterioration . Merit works, but Privilege pays. And so the one continually undermines the other unless some restraint is applied. And that is the purpose of society and the law in the service of freedom.


I think distributed governance is a great idea, where in power is not concentrated in too few hands, rather it is distributed as widely as possible.

costata said...

RJPadavona,

Congratulations on the birth of your daughter.

matrixsentry said...

RJP,

Now you have a future Sexy Beast of your own! My daughter is 21 and she drives me crazy.

She's a beauty

Aquilus said...

For any that missed his Twitter feed, Victor is on fire nowadays IMHO. His latest:

How Credit Suppresses the Gold Price (with Alice and Bob)

Beautiful, step by step walk-through on how credit denominated in any unit (ex: gold) suppresses the price of that unit.

victorthecleaner said...

Don't want to interrupt the productive discussion on the Austrians - but nevertheless am doing this right now.

Since island economies are presently in fashion, here is one that shows how credit denominated in a weight of gold lowers the gold price: http://wp.me/p1nZns-d5 (no sushi though).

Regards,

Victor

costata said...

Hi VTC,

Reading your post now. I like the concept and the clarity of your explanation but there's an issue I want to draw your attention to. In 4.3 Real Bills you make this statement (my emphasis):

For the last ton that is on auction, it does not matter to them whether they receive $x in cash or a real bill for $x from which they would receive interest.

Fekete and the real bill proponents would argue that there is no interest payable on a real bill. It operates on a discount to face value which diminishes the closer the real bill is to maturity.

You might want to examine the impact on your scenario.

Cheers

victorthecleaner said...

costata,

thanks, yes, I know how the discount works. Of course, in order to have a cash value of $12, the bill would need to have a discounted value of $12 when presented, i.e. it would mature at something above $12 at a later time. That would be equivalent to what I called 'interest'.

I just wanted to keep the example simple, and so I wrote it down involving interest rather than discount, but in a way that is equivalent.

Let's see whether it confuses people and what sorts of comments I get from Fekete's friends. Perhaps I need to explain it.

Thanks for reading so carefully!

Victor

Motley Fool said...

VtC

In addition to costata's objection, I would note that Fekete is adamant that Real Bills only be used for consumer goods that will be bought in less than three months.

Not so sure your steel and tools necessarily conforms to this prerequisite, given the small economy. Perhaps grain is a better use, since it is consumed?

The logical equivalence you used with regard to discount versus interest is fine for this example, as long as we keep in mind that in reality these instruments operates differently and occasions different motivations.

TF

Motley Fool said...

VtC

I retract my previous, having now read your whole example.

The extension of credit by Alice is not a loan. She would not receive interest. If she wanted immediate payment in the form of a Real Bill than she would need to accept a discounted value on $10, say $8.

This better describes the dynamics at play.

Just saying, as I am likely the closest you will find to a 'student' of Fekete here. :P

TF

FOFOA said...

Another excellent post, Victor!! Once again you have slayed prominent fallacies with the meticulous precision of a true Cleaner!

I just hope that people don't walk away thinking credit is somehow the modern monetary flaw. Credit is, and always has been, the "money" of the people, even during the gold coin standard before the Fed. Credit, by its very nature, requires a base, a reliable unit of account that can be referenced in the communication of relative values and trade arrangements. From Moneyness:

Well, there you have it! The pure concept of money is our shared *use* of some thing as a reference point for expressing the relative value of all other things. Money is the *referencing* of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" **Money is not something you save**. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

And from Unambiguous Wealth:

The majority of exchanges up until the invention of paper money were largely on the basis of credit and trust, with accounts later cleared and imbalances settled in metal. In this way, a relatively small and stable monetary base serves a much larger economy.

But as you point out so precisely, this activity we call lending/credit automatically reduces the purchasing power of the referenced base unit below where it would otherwise be in a physical-only (barter-only) marketplace. And, of course, it is foolish to even consider eliminating credit, as private or fully reserved credit/lending has the same effect on the base.

So what to do? I suppose maybe it's best to use a token base with a quantity that is limited under normal circumstances, but potentially unlimited in extremis, to eliminate the "smart money advantage" of hoarding the base and collapsing the monetary system and, with it, the economy. I realize that this is OT VIII-level information in the Freegold School of Currency Theory and Economic Thought, but this is where putting all these concepts together leads. Here's something I wrote to JR in a recent email exchange:

"What we have today with fiat base money managed by Central Banks is the most efficient and elegant credit/monetary system ever devised. Its *only* problem is that we savers are also using it as a store of value. There are no other problems with it. None. Everything else that people don’t like and want to change is merely a symptom of this one problem.

So why even waste the time trying to End the Fed or neuter the bankers or whatever the latest HMS prescription is? Why spin our wheels on something that will solve nothing? Unless and until we get rid of the primary flaw, which is the savers using the same thing as a currency and as a store of value, the problems will remain or at least return. And that’s the danger with the Hard Money Socialists. They want to enact changes that will actually set us back in the evolutionary process."


Matt, FRB with fiat is not fraud against society's foundational whatever. But thinking that fiat should be a good store of value might just be fraud against yourself. With a bifurcated money system like Freegold, you'll get your deflation in the savings medium while credit inflates prices. Ari: "I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free..." And that means paper currency as the credit base in case you thought otherwise.

Sincerely,
FOFOA

costata said...

VTC,

I know how the discount works. Of course,

Sorry, your writing does not support this claim. What you describe are not discounts.

in order to have a cash value of $12, the bill would need to have a discounted value of $12 when presented, i.e. it would mature at something above $12 at a later time. That would be equivalent to what I called 'interest'.

Dangerously delusional

Matt said...

FOFOA - lets just say that you and I have a foundational disagreement on, well, much of what you just wrote. If money is a reference point, then why insist on it being a credit based reference point? I agree that credit forms a foundation of human exchange (the apple I take to the counter I owe payment for until I hand over my coins, or vice versa if I hand over the coin before I pick up the apple the grocer is indebt to me!) but that's not the same as saying the 15second debt I have for the apple should be the basis of our money supply, the debt needs to be cleared at the transaction level just as you suggest gold should do for the giants.

"What we have today with fiat base money managed by Central Banks is the most efficient and elegant credit/monetary system ever devised" Uhm with all due respect, a system that is devised to not allow the clearing of bad decision-making may be the perfect credit money system but, as you point out that credit is the money of the people, its kind of crap for everyone who lives with it.

I think one of our foundational disagreements is that freegold is enough to settle the debt imbalances through society but for me, most people are simply not going to separate their savings and transaction mediums because the timeline they use their money for is too short to warrant it. Fine, they aren't sophisticated savers but that doesn't mean they aren't in need of a 'clean' reference point without having to go back and work it to a secondary medium. If credit is the money of the people then just as much, money is the savings AND reference point of the people. While money doesn't have to be a store of value, it ALWAYS will be for a vast section of the people - and so it should when possible!

"Matt, FRB with fiat is not fraud against society's foundational whatever." Uhm actually it is, but whatever you put forward a good attempt of an argument too. It is misrepresentation of a deposit agreement for safe keeping as a loan agreement to yourself because it suits you're profit motives, the principles of both were set out as social institutions going back to the jurists of Phoenicia. (Ulpian “To loan is one thing and to deposit is another”)From there, I think we all aware of the story how the metalsmiths would use the funds of the depositors for their own gain. This misrepresentation happened repeatedly throughout history but has traditionally always fraud (until the state realises the benefits it could attain by allowing it!).

Matt said...

Cont'd

Moving on - Another point of difference between us is that you believe that money is validated by the efforts to repay it, although only a slight difference, I believe that money is validated by the expansion of the economy it enables. Ie, its not the labour that goes into repaying (by the borrower) but the labour it enacts (from the seller)that gives it it's primary validity, the repayment is then the secondary controlling mechanism (that anchors the monetary 'kite'). From there you can see that expanding the credit system without allowing contraction (as central banks enable) allows for imbalances to ratchet higher and higher - the money is leant into existence and flies around getting all manner of things done UPFRONT, but those things aren't always productive (hardly every) and so they must collapse or expire 'un-renewed' inorder for the system to realign and the money must disappear for the monetary unit to send the right signals to the superorganism. Although I readily admit, the giants and those in the know will always have gold for that. Poor fools elsewhere though!

"with a bifurcated money system like Freegold, you'll get your deflation in the savings medium while credit inflates prices" yes yes, sounds perfect right! I get it, you get it and the giants get it. For everyone else its just another slippery misleading misdirection in their attempt to negotiate the exchange of value. You will never see the average person successfully separate their savings and transaction medium over the longterm, in the end the paper will be worthless and people will hoard gold - and in the interim a fantastic theft from the common person would have occurred.

"But thinking that fiat should be a good store of value might just be fraud against yourself." I agree with that and believe me, I don't trust fiat money as a store of value but personally I also don't laud the systems that make it so.

Woland said...

"Unless and until we get rid of the primary flaw. which
is the savers using the same thing as currency and a
store of value, the problems will remain or at least
return"
Exactly. But there is a "political bug" which will not sit
well with many "of western thought". That is, that many
of "eastern thought" , both the Giants and "noones" have
cornered this new savings medium, and with it a new
political and economic power when the change to a new
globally recognized savings store of value is realized.

It will be the political backlash to this new re-ordering
of power, and the struggle to prevent its' arrival, which
we are now in the process of observing, IMHO.

Matt said...

Now all we need is JR to misread the INTENTION of something written and rather than ask for clarity, give himself an aneurysm before data dumping a whole pile of irrelevant crud and the cycle will be complete!

AdvocatusDiaboli said...

Matt,
perfectly written, where I also have major doubts in FOFOAs thesis.
Greets, AD

Woland said...

Matt:
-"You will never see the average person successfully separate
their saving and transaction medium..."

Please tell that to the 1.1 billion rupee toting gold saving "noones"
of "simple thought". "They have won a great victory and know it not."
Thank you, (smile)

Matt said...

How rich are they Woland - where is their net benefit compared to having a stable currency?? They hoard gold and their paper is worthless. Why? because they cannot reliably measure value with their exchange mediums. I'd but it to you that that 1.1 billion rupee toting gold saving Indians are actually more like 50million rupee toting gold saving Indians along with 1.05 dirt poor rupee holding Indians (DISCLAIMER: I haven't been to India an am not in any way knowledgeable on their internal economic stratification or exchange system - & JR that means yes, you can use that statement against me later).

Nickelsaver said...

FOFOA,

Thank you for keeping things clear.

Nickelsaver

Alien said...

There, you have it, FOFOA et al.
Maybe, but only maybe, you are able now to understand why we, Europeans have our doubts about the euro.
Get off of your euro dogma and switch to reality. Another, FOA and you FOFOA are caught up in the euro meme but I suggest you better read some Bagus in case you are not too consumed of your own projections. Gold should become a point of reference but not due to the euro and his architecture. Think Duisberg.

"From the beginning there were doubts about the independence of the ECB. Its first president, Wim Duisenberg, “voluntarily” stepped down halfway through his term in order to pass the presidency on to his French successor, Jean-Claude Trichet.
Before the introduction of the Euro, Trichet, an engineer by training and a statist by mentality had strongly opposed the“independence” of the ECB. From the French government’s point of view, the formal “independence” of the ECB was only the means necessary to get the German government to agree to a monetary union.21 If necessary, the ECB could be put into the service of politics. In fact, this was the intention of French politicians. Mitterrand announced, before France’s Maastricht referendum, that European monetary policy would not be dictated by the ECB. France imagined the ECB would ultimately be dependent on orders from the political sphere."

Sure as long as you accept or favorise the Eu-govs you could as well agree to their policies and go on thinking that the freegold agenda would be instituted some day by someone in Europe. No, it won`t it will remain the job of the superorganism and it could take some time. How long did it take those ants to build their city?

Actually I don`t even expect you to read or anlyse this subject cause it doesn`t suit so well to the business modell of this blog and neither to your passion for t-shirts.

Nickelsaver said...

Alien,

Get off of your euro dogma and switch to reality

Reality is argumentative. If you can empirically define it, I'm all ears.

Matt said...

Hey NS - true reality can only ever exist in an individuals conscience, but then there is the shared physical reality our consciences draw from.

I think its the second one Alien is referring to by the way.

Nickelsaver said...

Matt,

I'm not referring philosophical reality, but actual reality.

Give it a shot. Define it.

Matt said...

haha well reality is things as they actually exist of course! Interpretations of those things are another matter though!!!

Nickelsaver said...

Thank you for making my point!

Matt said...

... or thank you for making mine!?

Nickelsaver said...

here's a t-shirt for you

http://www.ooshirts.com/d/27786407

Alien said...

NS
you seem to have plenty of time to spend at FOFOA so maybe you could read some Bagus or learn some foreign languages just in order to facilitate your contact to something else then American/English blogs. It would enrich you and bring you from virtuality to reality without my help.

Woland said...

Matt; Of the 7 billion teeming present members of humanity, or
going back to the industrial revolution, please tell me what portion
humanity has had a "stable currency". Certainly not the US, where
from 1913 to 2013 the current dollar buys 3 cents of 1913 goods.
That's a halving every 20 years. But guess what? It works fine, if
you get a paycheck every 2 weeks, because, via the rule of 72, a
halving every 20 years is equal to an annual loss of 3.6%. yes, it's
a rubber ruler, but it doesn't impede commerce, and can be
adequately planned for in capital projects as well.
Regarding India, and how rich its' citizens are, we won't know
until gold is freely traded in a cash only, non derivatives controlled
free market. I cannot speak accurately regarding the absolute
distribution of that gold among the citizenry, but they have 10M
weddings a year and virtually all of them involve a dowry including
Gold. You might have a look at the price of gold in rupees. It tells
a lot about why they have saved gold, yet continued to spend their
currency.
A stable currency and a stable society are mutually supportive, but
it is more often the instability of society, via wars or internal shifts of power, which destabilizes the currency, again, IMHO.

JR said...

Now all we need is JR to misread the INTENTION of something written

No fear Matt, its obvious enough from your written prose that you have no clue what you are talking about, irrespective of whatever your intentions may be.

JR said...

Alien,

All the HMS-bots with the secret Rothbard decoder rings love Bagus.

Nickelsaver said...

Alien,

Sorry. I'm comfortably numb right here. (sarcasm, in case you are too daft to have picked that up)

Thanks

Nickelsaver said...

Reality: "time will prove all things" - Another

Matt said...

So still not besties JR?

pity.

Matt said...

Hi Woland, thanks for the response - very quickly I certainly don't see the USD as a bastion of stability but like most hard money socialists (which I really don't know if I am) I usually point the accumulated wealth redistribution of the US over the last 40 years to highlight the problems with an unstable currency. Normal issue stuff, and I'm sure you've heard the argument before.

My point was with India that I don't really know if the bifurcation of money for savings and transacting has really benefited them in the same way that a stable currency would have.

I am not against freegold at all, I just don't think it is an overarching solution and so stand on that point.

Alien, don't worry - some people prefer to take their economic advice from anonymous gold forum commentators from a decade ago rather than those who put their position out to scrutiny and you know, use citations.

Alien said...

Numb nuts feel comfortable everywhere.

Nickelsaver said...

Well, since you're appealing to "everywhere", you would know.

Aquilus said...

Credit being replaced by base money injections. Looks familiar?

BANK OF GREECE ‘PRINTING ITS OWN EUROS’ SAYS BELGIAN ECONOMIST

Alien said...

Stabeeletee, as ZH so nice sez.2% inflation, yeah, a toast for the euro, the best currensea!

Nickelsaver said...

Here's an equation for you Alien.

Euro - Dollar =

Alien said...

Aquilus,
I see you follow the Slog.
He is really very brilliant in his investigations only a bit to English centered but I absolutely share his opinion on the euro. It`s a pity he seems to know next to nothing about physAu.

Alien said...

NS

...=SHIT - shit

Nickelsaver said...

fair enough

now lets look at it another way

(Euro/Gold) - (Dollar/Gold)

AdvocatusDiaboli said...

to explain some dumbheads the difference between the dollar and the euro:

There's a $-Sushi-Restaurant. Customers are paying with counterfeited money. The bill is paid with that, the restaurant owener is paid with that, was well as the chief and the serfs.

Now the €-Sushi-Restaurant. Here the customer is the highest priority. Since customer, the chief and the owner have no money, they force the serfs to pay for the customer. When asking why: because it is good for you, otherwise you would not have a job, so be gracefull, that we allow you to lend to the customer, so that we get paid.

Now you dumbheads, you prefer to work in the €-restaurant?

Greets, AD

Nickelsaver said...

your wrong, the €-Sushi-Restaurant currently accepts dollars. When the the dollars no longer exist, the euros will have a different value.

AdvocatusDiaboli said...

NS,
there was a Sushi restaurant that was just about to sign the prices in Euro. Upps, got burnt down and the chief got hung. That should tell you what is backing a currency.
Greets, AD

Nickelsaver said...

lol, it would be a lie for me to say I understood that.

Nickelsaver said...

http://youtu.be/Ik0NJF3PgaI

http://youtu.be/oPD00kUHIwE

/SleepingVillage/ said...

Congrats on your brand new cute little Elf, RJP.

ephemeral_reality said...

Vtc,

In your post on how credit suppresses gold price, you totally lost me when it came to Real Bills.

I agree with Costata that you are making the discount rate and interest rate sound the exact same thing, when clearly Fekete has illustrated it is not.

Interest rate is set by fixed capital whereas discount rate is set by circulating capital.

Here's a relevant excerpt from Fekete's paper:

According to Adam Smith “there are two different ways in which capital may be employed so as to yield a revenue…to its employer…: circulating capital… and fixed capital.” As a first approximation may we just say that one source of credit has to do with fixed capital and its scarcity is measured by the rate of interest, while the other has to do with circulating capital and its scarcity is measured by the discount rate. Both rates are a market phenomenon: the former is regulated by the bond market, and the latter by the bill market. The rate of interest varies inversely with the propensity to save, and the discount rate varies inversely with the propensity to consume. A common mistake is to assume that the two propensities are antithetical, that is, when people save more they must consume less, and vice versa. This simplistic view ignores the propensity to hoard. In monetary economics hoarding is not a subset of saving. Hoarding is more like the opposite of saving: it originates in protest against low interest rates. I shall not go into the problem of hoarding here which is a topic for another occasion. Suffice it to say that it is possible for both the propensity to save and the propensity to consume to fall at the same time. The paradox finds its explanation in the simultaneous rise in the propensity to hoard.

I think you are making the common mistake that Fekete refers to above.

In your own example, Alice has the choice to take the real bill from Dave or the cash from Steve. Based on Fekete's thoughts, Alice will make a choice based on the market's propensity to consume. If the market's propensity to consume goods (not just steel, but other things) is more, then Alice will take the cash itself since the discount rate will be close to zero at that point.

If the market's propensity to consume declines, then Alice can take the real bill which can then be exchanged for capital goods when the market's consumption propensity increases or the real bill will simply mature upon its maturity date, therefore can be redeemed as cash.

Real bill is not like a bond at all, based on my understanding of what Fekete says. Real bills mature much quicker and they self-liquidate.

RJPadavona said...

Sleeping Village,

Thank you so much for posting that link!

I hadn't heard that song in so long I had completely forgotten about it. What a coincidence I named my child the same as a former Elf song.

Almost like it was meant to be. And to think, I may not have realized it if not for my Friends at this blog.

Thanks again,

RJP

ephemeral_reality said...

Contd:

To take your analogy further, we'll have to see if Dave & Co. can even issue a real bill. Since real bills mature quicker, they are drawn on consumer goods which will leave the shopkeeper's shelf within 90 days or so. If Dave cannot come up with the cash in 90 days term (which means that whatever he produces with the steel has to be done within the time frame and sold to the customer - since he has only $1 in cash), then he cannot really issue a real bill in the market.

If Dave were to be working in the super market and he was trying to replenish his shelf with fruits, vegetables and/or other consumer staples which will get sold quickly, he can. Otherwise he can't come up with the cash.

Alien said...

Another nudget re ECB for Euro-lovers and those who hope our dirty socialist pols will come to the right path some day, some night:

Mitterrrand said literally:

“One hears it said that the European Central Bank will be the master of the decisions. It´s not true! Economic policy belongs to the European Council and the application of monetary policy is the task of the [European] Central Bank, in the framework of the decisions of the European Council . . .The people who decide economic policy, of which monetary policy is no more than a means of implementation, are the politicians.”

Quoted in Connolly, The Rotten Heart of Europe

These are things Euro "bashers" long ago knew.
European pols are in bed with their boss from overseas and have been since WWII. With some exceptions (where assassinations took place) the rest was noise. There is no abstract money policy without international geostrategy.

RJPadavona said...

Hello Friends,

To accompany the 'Bank of Greece Printing Euros' story Aquilus posted earlier, I ran across this in the Guardian today:

Greece on the breadline: cashless currency takes off:

http://www.guardian.co.uk/world/2012/mar/16/greece-on-breadline-cashless-currency?newsfeed=true

The way the article describes it, it's a lot like Fekete's fair except there are no physical tokens. Just labor credits that are stored online called Tems.

I think these local currency schemes will be very beneficial in smoothing out the transition into the new monetary system. After all, central bankers can create as much currency as they want, but in areas where unemployment is so high, there's still not enough "money".

One of my customers is the Chairman of my local Board of County Commissioners. I've talked to him some about our monetary system and how fragile it is. He's a politician who wants my vote, so he may just be being nice, but he seems to share my concerns to a certain degree.

As much as I abhor politics and am reluctant to get involved in any of that crap, I've thought about approaching the Chairman about setting up some kind of local currency contingency plan that could be implemented during a transition period.

Mainly because as an owner of gold, I don't want to hear this chant in the streets of my local community:

http://www.youtube.com/watch?v=9fhxiAHeYs8

Anyway, does anyone have any suggested links or personal recommendations on how something like this would be set up? I know some central bankers in the US are probably going to be out of a job pretty soon, but I have more faith in the knowledge and technical prowess of my Friends here on this blog.

Thanks,

RJP

Matt said...

Hey RJP the UK has loads of them but the latest one to be set up i've heard of is the bristolpound which you can use to pay local taxes

http://bristolpound.org/

Which I think these guys have a lot to do with:

http://www.neweconomics.org/programmes/connected-economies

Cheimgauer in Germany has been around for nearly a decade apparently
http://en.wikipedia.org/wiki/Chiemgauer

And I believe there is one in Switzerland that has been running for about 50 years but you'd have to look into that.

Matt said...

RJP - just read your article, which is more do to with monetarising peoples labour/contributions than local currency systems so sorry about that.

I think you are looking for the LETS system which I believe is pretty much available anywhere someone wants to put the work into setting it up.

victorthecleaner said...

costata and ephemeral_reality,

Alice has a bid from Steve for $10. The next higher bid that would make a change to the auction is $12. The auction is for cash, i.e. Alice wants $12 that she can use immediately for whatever she likes.

So a valid bid is only one that has a present value of $12. A cash bid from Charlie would do, for example. If Dave wants to bid something that is equivalent to $12 in cash, he needs to provide a bill whose present (i.e. discounted) value is $12. If the bid still has some time to maturity left, the nominal value at maturity would have to be $12+x.

What this says is just that the bill is equivalent to a zero-coupon bond. No surprise, or is it?

Just to make clear why these are equivalent. Assume Alice took a bill from Dave. The bill has a present value (discounted) of $12 and matures within 60 days at $13. But Alice wants cash immediately. She has two options:
1) Go to the clearing house and present the bill. She will receive $12 in cash, i.e. the present value of the bill (discounted).
2) Ask Charlie for a cash loan. Charlie will give her $12 in cash. If the term of the loan is 60 days, Charlie will ask for $1 in interest.

These two are equivalent because if Alice had kept the bill until maturity, she would have received $13 when the bill matures. In option (2) Charlie basically acted as the clearing house. Any well capitalized agent can perform the function of the clearing house (it is obviously helpful if he understands the credit risks involved).

What Fekete hopes (!) is that Charlie will extend loans to businesses at a lower interest rate than he would to consumers. I agree that, in aggregate, this is probably prudent. The main problem is that there are plenty of cases in which the loan to Dave (with his high salary at the law firm) is less risky than the loan to Dave & Co (who might go out of business much more easily).

What's truly missing about real bills in my post is actually something different. It will take a day or two to fix it, and I will explain it here once done.

Victor

Winters said...

@RJP - Interesting article on the tems.

This quote was funny "It's very liberating, not using money." since it seems to me they are using money just not Euro! On my initial read I was wondering why they would use tems instead of Euro as a medium of exchange however on a closer read it mentions they don't have to pay tax. Wouldn't the local tax collector take a dim view of these transactions?
I guess the other advantage is that it keeps the money local and people spending locally - good for yoghurt and cake. No so good for taiwan produced electronics. Is this similar to FOA's story of (paraphrasing) save your most valuable tokens for trade on the road :
euro for imports, tems for local produce

@RJP - If I may - you are one well read barber!

Winters said...

maybe I should clarify - My barber runs movies like Rambo, Fast and Furious 5 and other such nonsense. I can't imagine having a discussion on Mediums of Exchange and Austrian theory. Maybe I should try :D

ephemeral_reality said...

Vtc,

You say: What this says is just that the bill is equivalent to a zero-coupon bond. No surprise, or is it?

It is a surprise because a real bill is a means of payment, it is not a bond. A bond is a promise to pay.

From Fekete's Real Bills revisited paper:

It is a grave error to think that the bill represents a loan transaction. The wholesaler is not lending and the retailer is not borrowing. The credit is an inseparable part of the transaction, as confirmed by centuries and centuries of merchant custom. The quoted price is never ever cash: it is “91 days net”. The goods are more valuable and more liquid in the hands of the retailer than in the
hands of the wholesaler by virtue of the former’s greater proximity to the gold coin. Who is the
wholesaler to extend a loan to the retailer?


You say: The bill has a present value (discounted) of $12 and matures within 60 days at $13. But Alice wants cash immediately. She has two options.

Hold on there, since real bills are a means of payment -- they can be used for transactions just like cash. There is no need to exchange it for cash, unless we are in SHTF scenario where no merchants will accept for cash.

You say: What Fekete hopes (!) is that Charlie will extend loans to businesses at a lower interest rate than he would to consumers.

Since a real bill is not a loan per se, I don't think the statement above is true.

Will wait for whatever's truly missing in your post, but there are fallacies in your understanding of Real Bills as evidenced by your statements.

ephemeral_reality said...

Contd:

From Fekete's Real Bills and Gold paper:

A note is evidence of debt. A bill is evidence of value to be added. There is no loan, no lending and no borrowing involved in Joe’s purchase and Bob’s sale of the flour. None whatsoever. The transaction cannot be understood except in the context of merchandise maturing into the gold coin that only the ultimate consumer can release — a process that makes the relationship between Joe and Bob one of coordination rather than one of subordination . If anything, Bob could be considered the subordinate.

Joe is one step closer to the boss, the consumer, and he is the one to get the gold coin first . He dispenses bread that is in general demand. Everybody eats bread. Flour that Bob dispenses is only in special demand. It is not as “liquid” as bread, if liquidity of (finished or semifinished) products is defined by how far removed from the consumer’s gold coin they are.

It is preposterous to suggest that Bob is the lender and Joe is the borrower. The two men are partners in a joint enterprise, made ad hoc, in order to provide the consumer with bread. Their role is like that of the two blades of a pair of scissors: neither can do the job by itself. This is not to deny that Bob extends credit to Joe. But extending credit is not the same as lending. To suggest that Joe is in debt to Bob as a result of borrowing is entirely fallacious. Joe is in a very strong position: the bill he has accepted can circulate as money for 90 days. The note of a mere borrower cannot.

RJPadavona said...

Matt and Winters,

Thanks for the input.

I'm actually not looking to start a local currency system right now. I'm just looking to help establish an "In Case of Fire, Break Glass" plan. Just something that will help to lubricate the local wheels of trade in a USD collapse scenario. I don't care if it's a system like the Tems or just good old fashioned Monopoly coupons. Just something to get us through the transition to the new monetary system and maybe help to prevent violence and rioting.

Personally, I think local currencies are kind of silly as long as the current monetary system is still functioning. I guess its a noble movement, but at this point in time, local currencies are mainly just something to make hippies feel good about themselves by keeping everything "in the COMMUN-ity".

Concerning Winters' question on how the local tax collector would feel about some of these transactions: The purpose I'm wanting to use the local currencies for would only be immediately after a USD collapse. I think at that point in time, local officials would be more concerned with keeping the town from being burned to the ground by an angry mob than they would be concerned with tax revenue.

So I guess I'm just looking for some answers on how much currency would be needed based on the local population. How to know when to increase or decrease the money supply, etc.

Like I said, maybe we'd need a former central banker. Where I live is not too far from Bernanke's hometown. So when the $IMFS is a heaping pile of ash and The Bernank is ran out of DC, I'd recommend him for the job. He'd probably feel right at home :-)

And Winters, thanks for the compliment. One good thing about my profession is that when you don't have anything to do, you don't have to look busy like you do with most jobs. So if I don't have a customer I either take a power nap or read something pertaining to money and markets.

Although lately I find myself spending my free time crackin' jokes with DP on Twitter. So if you start to see me mentally devolving, don't blame me. It's that limey bastard DP's fault :-)

RJP

Biju said...

AD

Your knowledge of present Indian condition is wrong.
- 99% of dead are properly buried or cremated in my state.
- 99% of area in our state is covered by electricity. Of course
Due to recent population boom and growth of industries and
inadequate planning has led to electricity power cuts of about
4 hrs everyday.
- I agree with burning fiat that Indian Ant colony behaves differently from
western one's in that their threshold of pain and convenience is much higher
When matched against their propensity to save in Gold.

Things happen much slower in Indian Ant colony and it always has been the
Big Black hole where all the world's Gold had disappeared for a long time (British colonial times of approx 200 years were an exception )

costata said...

Hi VTC,

What's truly missing about real bills in my post is actually something different. It will take a day or two to fix it, and I will explain it here once done.

I'm looking forward to seeing it. I hope it involves the discounting of the bill below a face value of $10 and self liquidation after 90 days with no inflationary or deflationary impact on the value of the gold currency beyond a temporary increase in the money supply that is "settled" by the supply of goods and services or currency in the event of failure to supply.

If you dropped the Real Bills scenario then your other scenarios are sound (within the limited context of your simplified model). I'm not sure that Fekete has made it completely clear in his writings that Real Bills function like an additional (temporary) supply of currency tied to the marginal increase in production.

If the supply (price) of gold, used as currency, equals all goods and services (one ferrari) transacted in your simplified market model then the introduction of credit notionally devalues the currency as you describe.

By introducing production of additional goods (the tonne of steel) you alter the model from a transaction involving an existing asset to something quite different. You introduce a new factor that needs to be incorporated into all of your scenarios ie. the incremental increase in goods and services in the economy relative to the increase in fiduciary media. You might be able to overcome this problem by manufacturing the ferrari as part of your scenarios and demonstrating how that factors into them. Alternatively you might introduce a supply chain along the lines that ephemeral-reality is describing in those extracts from Fekete's papers.

Nice work BTW ephemeral. Cheers.

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RJPadavona said...

Hello Friends,

Some thoughts I'd also like to add to this post-$IMFS transition period:

In the US, we have something called the EBT card. Electronic Benefits Transfer:

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

In the media, these cards are usually referred to as food stamps. These are not your granny's multi-colored food coupons of old. They can be used for any government approved purchase (not just food) and they look just like any other debit card. In fact, most of them look quite patriotic:

http://www.flickr.com/photos/rjpadavona/6995007399/

The funds for the EBT program are distributed by the federal government to the states. The states and counties then dole them out to whoever they deem to qualify for this program. In the county where I reside, 1 in 5 people are already on this program.

To top it all off, the banks administer these cards in each individual state. In fact, JP Morgan Chase administer these cards in 25 of the 50 states. That's right, the banks get a percentage of every EBT transaction, just like they do with any other credit or debit card transaction. Public welfare and corporate welfare have merged. So as you can imagine, this is a very popular program and the higher the unemployment and poverty rates climb in the US, the more popular this program becomes.

As others have mentioned here before, I'm also of the belief that an agreement has been reached between the Euro faction and the USD faction to try and provide as soft of a landing as possible into the new monetary system. If only for the sole purpose of maintaining as much order as possible. They don't want another French Revolution. Whether they'll be able to hold the $IMFS together that long and succeed in providing a softer landing is another story.

As much as the conspiretards would like us to believe the "elites" want to lock us all up in FEMA Camps and plant microchips in our brains, I don't think that's the motivation. At the end of the day, the "elites" who call the shots want us to be able to buy all the shit products they produce. We can't do this without a functioning MoE. I think it's more about One World Company than One World Government.

After the Big RPG Reset, if enough people have these EBT cards, it will greatly decrease the likelihood of mayhem in the streets of America. Once the US Treasury revalues their gold to the new Freegold price, adding zeros to everyones EBT card will be a fairly speedy process. The chances of order being restored will be much greater.

So if we are to believe the two factions are colluding to provide an easier transition, I think an important statistic to watch is the percentage of Americans on food stamps (EBT). Currently, this percentage is 15%:

http://www.huffingtonpost.com/2011/11/03/number-of-americans-on-snap_n_1074344.html

I don't know what the percentage will be where TPTB will feel comfortable that the poor people of America won't be taking to the streets if they can't get their Mountain Dew, pork rinds, and gasoline, but I'd say it would have to be significantly higher than it is today.

So as much as I hate the welfare state, I have to admit, I'll be embracing it when shit hits the fan. Mainly because I would prefer not to have to shoot anyone trying to steal what little wealth I've worked hard to acquire.

If they can live with it, I can live without it:

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

RJP

FOFOA said...

Hello RJP,

You wrote: "I'm actually not looking to start a local currency system right now. I'm just looking to help establish an "In Case of Fire, Break Glass" plan. Just something that will help to lubricate the local wheels of trade in a USD collapse scenario. I don't care if it's a system like the Tems or just good old fashioned Monopoly coupons. Just something to get us through the transition to the new monetary system and maybe help to prevent violence and rioting."

So you're looking for a good backup currency system? Here's something I wrote in the Savings and Capital Theory Open Forum:

"The monetary plane only exists to assist the Superorganism by transmitting information through prices and lubricating the flow."

These are two separate functions: 1. lubrication and 2. economic communication.

In terms of lubrication, when a currency collapses there's not enough of it no matter how much they print. The engine has seized. A little brute force through outright barter can help our economic machine eke out some motion to provide for basic productivity, but it is the loss of money's role in effective economic communication that causes the greatest disruptions.

The reason there's not enough currency when it collapses is because the credit system seizes while everyone's net worth denominated in the currency base is rising faster than the base printers can print. For example, if all you have in the whole world is two loaves of bread, your net worth may be $2T and rising while they are still busy printing the old $1B notes. So money becomes a poor lubricant, especially without wheelbarrows.

But you still have all your stuff. What do you have? Each thing you have will have a dollar value higher than the supply of dollars out there, so don't count on selling your stuff for dollars. Say your neighbor wants to buy your $14 Quadrillion dollar piano off of you. By the time he gets those 140 $100T notes together, your piano price will be up in the Quintillions. See how it works?

So you want to print up your own local currency, let's call them Dios, where 1 Dio might be worth a loaf of bread no matter what the dollar is doing. And this price stability you're presuming will be solely based on your control of the quantity of the base:

"So I guess I'm just looking for some answers on how much currency would be needed based on the local population. How to know when to increase or decrease the money supply"

But who is going to set the value of your Dio? Are you? If so, you'll need to make it redeemable and back it with something in order to project that value to the people. People haven't been using Dios for generations so there's no regressive link with the physical plane. Do you think they'll just have spontaneous value?

Cont…

FOFOA said...

2/2

A few days ago, Motley Fool asked me a similar question by email. Here was his question:

"I was wondering what one could use as a measure of value before and then during the transition, assuming it to be of the hyper-inflationary type.

As you know hyperinflation are known for shortages of essential goods, which make using those as a measure somewhat difficult. So what can be used?

Now, before and after should be okay. At present goods are readily available and after the dust settles the same should apply, which means a comparison could be made against other things.

Ideally it should be something the use of which would not change much, despite circumstances.

Obviously one cannot use gold...or oil for that matter; or food, or perhaps even water.

Thoughts?"


Here was my reply:

"What is needed is not an item benchmark, but simply the communication of the relative values of all the real stuff that still exists so that existing value can be mobilized. Historically another functioning currency has worked well in this situation. So you can thank the euro architects when the time comes."

In a currency collapse, the credit system seizes up and the entire money supply becomes base money. What you are looking for is something of a stable, known value in order to jump-start your local credit and get things moving again without facing the intractable double coincidence of wants. But whatever base you use, you'll want a few of them for clearing purposes. So perhaps you could suggest to your County Commissioner Chairman, the next time you're feathering his mullet, that the county would do well to build up a reserve of euros as a kind of rainy day "In Case of Fire, Break Glass" credit clearing fund. Just a thought. ;)

Sincerely,
FOFOA

costata said...

Can you go broke when you have a trade surplus in goods and services?

(In other words you produce more than you consume.) The answer is Yes!

http://www.macrobusiness.com.au/2012/03/balance-of-payments-economy/

A few extracts for the slow learners:

If you have a look at the current account breakdown it is easy to see that the terms of trade are having a positive influence on the account. That is, in dollar terms, we are exporting more goods and services than we are importing.

However, what you will also notice is that our primary income is negative and of a greater magnitude than our balance of trade is positive. In other words, even though we are in the midst of a commodities boom money is still flowing out of the local economy via the external sector:

So where is it all going ? Well if we breakdown primary income into its component parts we get the result below. This tells us that the major components of our primary income deficit are from direct investment income and portfolio interest payments to the rest of the world:

Which basically means that in aggregate Australia sends massive amounts of dividends and interest payments to the rest of the world. In fact it is so large that it is dwarves our trade in goods and services, resulting in a net loss to the external sector even during the historically high terms of trade.

The most important thing to note is that these are payments stemming from previous foreign investments meaning Australia is continuously making payments to rest of the world somewhat independently of the balance of trade.


At the same time, through compulsory superannuation, Australia has built up a bank of savings in excess of $1.3 trillion which is totally unleveraged. In other words consumption that was foregone. Despite this reduced consumption it has not helped to reduce the debt or establish an enduring current account surplus.

Clearly there are systemic problems here that cannot be explained in terms of consumption and productivity.

Anyone care to have a stab at explaining:

1. How this happened? (Process)
2. What "forces" made this happen? (Causation)
3. How these imbalances can be corrected? (Solution)

PS. This is what an economic colony looks like. You produce more "real stuff" than you consume but you never get out of debt.

JR said...

We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nations identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Usually, they function along side whatever major reserve currency is in vogue. Today, the dollar, tomorrow the Euro. Make no mistake, the entire internal US sector can and will function as it's currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly and adopting the Euro as our second money.

[...]

NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not it's currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work.

FOA

victorthecleaner said...

Alien,

Mitterrrand said literally:
“One hears it said that the European Central Bank will be the master of the decisions. It´s not true!"


Isn't this fun? He is totally clueless as to which game is being played. As clueless as the Greek government. The following one was not clueless at all:

"Let me issue and control a nation's money and I care not who writes the laws."
(Mayer Amschel Rothschild, 1790)

I do find this quote by Mitterand somewhat reassuring.

Victor

costata said...

A postscript to my last comment.

The author of the post I linked is a Chartalist/MMT advocate so his solutions to the problems he describes are guided by their dopey ideas about government spending leading us all to prosperity.

I mention this to distance myself from his perspective. The raw facts he presents are the reason I linked to his post.

RJPadavona said...

FOFOA,

Thanks for your reply. I was creating a more complex problem when there is a much simpler solution. I'll try and suggest to my Commish that the County should store some euros as a reserve.

The only problem I foresee with that is with all the negative euro news lately, that will probably be a hard sell.

In order for me to convince him of the potential for the future of the euro, I would probably have to explain Freegold to him in detail. And his mullet isn't that long, so I don't know if I'd have the time :-)

Thanks again,

RJ

victorthecleaner said...

ephemeral_reality,

From Fekete's Real Bills revisited paper:

It is a grave error to think that the bill represents a loan transaction. The wholesaler is not lending and the retailer is not borrowing.


I didn't know he was that good at bullshitting. Of course, this is garbage. The wholesaler could sell for cash if some well-capitalized buyer comes along. This is why people who pay cash get a 'discount' (=rebate) on the price.

Note: In a world in which people pay with bills, the posted price is for 91-day-maturity money. If someone comes along who has cash, he needs to pay less.

In the example of my auction, the posted price was a cash price, a zero-maturity price. So he who has cash, pays the stated price whereas everyone who has only a bill, pays cash price plus interest, i.e. he pays with a bill whose discounted current price agrees with the cash price.

Of course the two are equivalent (if you make the cash price in the second example equal to the rebate price in the first), simply because anyone who has cash at hand, can play clearing house and accept bills at a discount, wait until full payment (not discounted) at maturity and book the difference as interest income. Alternatively, he could lend short-term money for interest.

Finally, costata, you are right that the missing point is the fact that Dave & Co and Steve Plc use the loan to manufacture goods which increase GDP. So the temporary increase in currency supply is (partly??) offset by an increase in the number of goods and services available some 91 days down the line (could be way longer because there could be the supplier of the supplier of the supplier of the producer of the product).

It seems the Real Bill followers claim that the increase in available goods and services would precisely compensate the temporary increase of the price level. Does anyone know how they justify the 'precisely'?

Victor

Nickelsaver said...

RJP,

I think you're right that the Euro would be a hard sell as alternative currency.

We know that gold will go into hiding during the transition, or very soon into it.

But probably not silver.

http://joecobb.com/2012/02/18/states-seek-currencies-made-of-silver-and-gold/

Aristotle said...

Hi to victorthecleaner
@ March 17, 2012 11:09 PM
RE: How Credit Suppresses the Gold Price (with Alice and Bob)

No worries... no nitpicking from me, but rather only one firm suggestion for an amendment that will in all likelihood greatly help to strengthen the message of your article as specifically intended for your target audience.

It is simply this, regarding Scenario 2.3 [Economy with Banks and FRB].

Given that Balance Sheet No. 2 (wherein Steve's $10 gold deposit provides the bank its main source of currently lendable funds) is the antecedent to the credit-inflated condition of Balance Sheet No. 4 (through which Dave now has ample current funds), you should add an additional summary remark to your concluding list that simply calls attention to the BITTER IRONY that it was Steve the Saver's OWN SAVINGS (as held in the bank) that worked against him.

That is to say, by the seemingly innocent act of placing his $10 gold as a deposit within the banking system (with or without a hope to earn interest, it matters not), they not only contributed to the aggregate condition by which they lost a useful portion of their own immediate purchasing power (as measured in a costlier Farrari) at the current margin of the economy, but also facilitated the only condition by which otherwise wealthy Steve could be outbid for the Ferrari... by Dave the Debtor. Using Steve's "own" money -- oh, the irony!

Call him Steve the Silly.

Gold. If you can't hold it, it's really not for you. --- Aristotle

victorthecleaner said...

Aristotle,

thanks, that's a very cute observation. This was an unintended feature of the article.

The other one that was intended (but which I forgot to comment on) was Charlie's role in 4.1. Just the fact that he has so much unused cash lying around that he is willing to 'invest' is a rather dangerous situation.

If he **invests** it (in a business), then the objection that we know from the real bills scenario, applies, i.e. the business will create additional goods whose sale will counteract the price inflation. But if Charlie lends it to the consumers, he undermines the real value of his own savings.

Again, the responsibility is with the saver. Somehow, whenever you think about the financial system, you end up complaining about irresponsible savers.

Victor

costata said...

VTC,

Re: Your comment above to ephemeral_reality

My emphasis.

I didn't know he was that good at bullshitting. Of course, this is garbage. The wholesaler could sell for cash if some well-capitalized buyer comes along. This is why people who pay cash get a 'discount' (=rebate) on the price.

Note: In a world in which people pay with bills, the posted price is for 91-day-maturity money. If someone comes along who has cash, he needs to pay less.


This whole comment is garbage right down to the straw man in the final paragraph.

FOFOA said...

Hey there Nick,

I find it hard to believe that precious metals would be an easier sell than a little foreign currency diversification with public funds, even to a Commish with a mini-mullet beautification time limitation. But if you're right, then why buy silver? Have him get the county some of the real stuff, bars of pure gold and store them at VIAMAT (#NotABank) in Zurich. I can help him make that happen. Just give the Commish my email and tell him to say that the guy with the adorable baby in an FOFOA hat sent him. The euro will be the ldo (go-to) currency when the time comes and you'll get a honeywagon-load of them, likely straight from the ECB, just for having your county's name on some allocated bars with unambiguous numbers stamped on top. Won't even have to sell the gold!

Sincerely,
FOFOA

PS. For individuals, of course it's best to hold your own gold as close to you as possible. But in this case, where we are substituting gold for euros, a substitution that will not only fit the barber shop time-constraint but also pay BIG dividends, keeping it "over there" might just make perfect sense.

Nickelsaver said...

:)

I knew I'd catch some flack for mentioning the "S" word.

It's just that I have so much of it. And since it ain't going to shine like gold in the after-world. Well you know, maybe I can figure out how to exchange some of those mercury dimes for some Euro's

I'm all about the boyscouts...be prepared.

Motley Fool said...

VtC

Hmm, your knowledge of Real Bills seems lacking.

Suffice to say that the person who accepts a bill in payment is not entitled to cash immediately.

Consider a miller. His product can only be paid for once the baker has baked it it sold it. All know that the bread will be eaten. Hence he is billed, and will receive payment in 91 days.

The baker can make the concession however of giving him a cash-equivalent instrument, but in that case he would have to accept less immediate purchasing power for his goods, the discount, which would only be equivalent to his final payment after 91 days.

The matching values of bill and goods is precisely because bills are issued on consumer goods, the price of which is 'known' to within a 3 month period.

At the end of the 3 months both the goods and the bill go out of circulation, hence no inflation.

I don't really think we should get into RB theory here. Perhaps spend more time reading up on his work. Or create a post on your blog for the purpose of discussion.

Peace

TF

victorthecleaner said...

Costata, MF,

I find this rather sad. Fekete had indeed a number of very original and valuable ideas, for example, his work on the gold basis, or indeed his work on real bills.

It is just that he writes his articles with 50% extra philosophical stuff added - lots of red herring - and then many people nit-pick on exactly the wrong points.

Please (!) take a few minutes to think through the arbitrage argument I explained above. To the actual cash-flow it does not matter whether you call it principal and interest or whether you call it discounted and face value of the bill. Both worlds are identical.

The good feature of real bills is that the loan is made only for additional production of an existing productive business and that it is short-term only.

Did you know that Treasury debt is issued as follows: Everything with maturity of one year or less is called T Bills. They do not pay interest and trade at a discount before maturity. Everything with maturity of more than one year is called T Note or T Bond, and they pay an interest coupon. Their market price changes only according to credit and interest rate risk, but do not contain the interest payment as part of a bill like discount.

The point is, this is for convenience only and does not make any material difference. It is a red herring. All this is old (ancient, really) and well known and well understood.

What matters with the real bill concept is that loans are extended only for additional production and so although they temporarily contribute to inflation as my toy model shows, they also contribute to deflation later on when the new products hit the market.

Victor

costata said...

VTC,

That last comment (March 19, 2012 12:05 AM) was more like the thinker whose work we greatly appreciate.

Now incorporate the issue of settlement and we should be a lot closer to delineating the crucial difference between T Bills and Real Bills.

costata said...

http://mises.org/journals/aen/aen17_1_1.asp

From an interview with Israel M. Kirzner that JR linked in an earlier comment:

AEN: Is it right to say you have adopted a Misesian rather than Rothbardian view of monopoly?

KIRZNER: That is correct. Mises had a view of monopoly in which he said that under certain exceptional circumstances, the pattern of resource ownership may fly in the face of the interest of consumers.

Ordinarily, the ownership of a resource provides value to its owner only to the extent he is prepared to put that resource to use in the service of the consuming public. The only possible exception is where the entire supply of a scarce resource, for which there are no substitutes, happens to be in the hands of a single seller. It may indeed be the case that the interests of the resource owner may be counter to that of consumers. In other words, the resource owner may discover an advantage in producing less of a product for consumers than consumers themselves desire.

This is a possible conflict of interest, and, for Mises, an extraordinary phenomenon. Here we see Mises's integrity. He was willing to recognize that it's not always true that a private-property system conduces to the well-being of the consuming public. He didn't think it was an important case, but he did draw attention to it. He did not use this exceptional case to argue for controls over monopolies.

I too think this point is interesting. I don't believe it is empirically important. It doesn't provide justification for monopoly regulation, or breaking companies, or anything like that. It simply points to a theoretical implication of certain patterns of resource ownership.

Others have disagreed. Rothbard used to say you can never really know if a producer is storing up resources in order to gain more profits or whether his doing so is even contrary to the interest of consumers. That's true. You never will know. But the theoretical possibility is still there.


I think this assumption may be the flaw in this argument (my emphasis):

The only possible exception is where the entire supply of a scarce resource, for which there are no substitutes, happens to be in the hands of a single seller.

Why not "in the hands of" a sector (or interest group) with undue influence on a government which has the ability to grant privileges?

Motley Fool said...

VtC

I see you insist on continuing this conversation here. Fine.

It is exactly this sort of half understanding of the subtleties that had a large hand in the demise of the Real Bills system.

It is true that to a external observer there might not seem to be a difference between interest rate and discount. Further more it is a interesting coincidence that these two rates were nearly the same most of the time (during times of relative stability and little flux).

The causal factors for these rates are different however as pointed out by ephemeral_reality. Conflating them was a historical mistake, based on the same kind of logic you are using.

These rates showed their different colours when the market was in a state of flux, or new products were added, which lets be honest didn't happen all that often in the middle ages. As such one can be forgiven for thinking these are the same things.

The causal factors and effects these rates had on the markets were different however, and for this reason it is important to distinguish between them.

Historically at some point your argument led to a assumption that the discount rate was equivalent to the interest rate, and it was replaced by the interest rate in commercial transactions, which altered the structure of the markets (negatively).

...

You example is a bad/false one to use.

If you had stated that Dave was in possession of some baker-on-miller bills and had used that to bid with, then your example would have been better. Nevertheless goods to the face-value of the bill would be in circulation, and there would be no mismatch between real goods and paper mediums (over 91 days, though there would be a temporary deflationary impact).

TF

Woland said...

Costata" Can you go broke when you have a trade surplus in goods and
services".
It is easy to be a share cropper, and with a little "help" a sharecropper
nation. An old colonial master is always ready to "help". Savings are
only savings when the forgone consumption is "voluntary".

costata said...

Woland,

Savings are only savings when the forgone consumption is "voluntary".

Nope

Woland said...

What WORD would you use, then, to describe savings not originated
by the will of the saver? Tax, tribute rent, or some other. I am sure
you have one in mind, I just don't know which one. Thanks

AdvocatusDiaboli said...

This get's interesting:
What are my savings worth?

Let's say I arrive at Sushi Island. I am a really great musician, so I make an great concert: 1000Sushi admission. Since the inhabitants (the families of Ben&Chen) of Sushi Island do not have that, because each day they eat their sushi anyway, but are really crazy about my lalala, they go to their Sushi-Citibank and have some Sushi-bills printed for them (I dont accept lines in the sand, but the bank accepts the lines in the sand as collateral from Ben&Chen), paying me at the concert.
After the concert my "savings" I put asside are 1million sushi, paid in sushi bills.
How much are my savings worth?
Greets, AD

costata said...

Woland,

Very late at night where I live. I will reply later.

AD,

You should consider alternatives to speaking.

JR said...

Why not "in the hands of" a sector (or interest group) with undue influence on a government which has the ability to grant privileges?

Uhh, because he is talking about an exception where the ownership of a resource does not "provides value to its owner only to the extent he is prepared to put that resource to use in the service of the consuming public." If its in the hands of a sector the sector is competing against itself. If you wanna stipulate they are colluding or a homogeneous interest group, that is his point.

JR said...

What WORD would you use, then, to describe savings not originated by the will of the saver? Tax, tribute rent, or some other. I am sure
you have one in mind, I just don't know which one.


The word you are looking for is consumption, as that is what government's do. They *spend* there tax revenue, not save it. If they save (think like the old king who has a stash of gold), then its savings - its something produced that is not consumed.

DP said...

How much are my savings worth?

Guess you'll need to ask Ben & Chen and their Superprocreating families. Because they're the ones that will have to exchange something for your hoarded Sushibites one day when you choose to dishoard them for consumption/investment purposes.

Given by then they'll nearly all be passing them around on those EBT cards like RJP's many girlfriends, they'll probably not even give a f*%k for them any more.

costata said...

JR,

Why not "in the hands of" a sector (or interest group) with undue influence on a government which has the ability to grant privileges?

Uhh, because he is talking about an exception where the ownership of a resource does not "provides value to its owner only to the extent he is prepared to put that resource to use in the service of the consuming public." If its in the hands of a sector the sector is competing against itself. If you wanna stipulate they are colluding or a homogeneous interest group, that is his point.


You are kidding I hope. I pray you don't actually believe this crap you are talking.

JR said...

Yes, I'm dead serious. You are being a nit, just like MF, trying to prove someone wrong without bothering to understand them. Its incredibly frustrating to see you ignore his point.

JR said...

FYI monopoly and oligopoly are not the same thing. Seriously.

costata said...

JR,

If its in the hands of a sector the sector is competing against itself. If you wanna stipulate they are colluding or a homogeneous interest group, that is his point.

FYI monopoly and oligopoly are not the same thing. Seriously.

Obviously.

Sorry, it's war. All three front up, I'm sick of the self serving crap.

And Y said...

Off Topic! Found this little bit interesting:

"Even more surprisingly, reports have suggested that India is even considering paying for its oil in gold bullion."

From this article: http://www.telegraph.co.uk/finance/commodities/9077600/Iran-presses-ahead-with-dollar-attack.html.

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