Sunday, 29 January 2012

The Evolution of Money

Of necessity any short treatment of the history of money leaves out many nuances and happenings, in many parts of the world. My intent today is not to give an extended history of money, but rather to paint in broad strokes the functional changes that has happened over the whole of human history.

For this purpose I shall use one of the definitions of money in use today, that describes it's functions.

I present the monetary triangle :

U – Unit of account
W – Store of Wealth
M – Medium of exchange

Central to the history of transactional means in contemplating the whole of human history is the element known as gold. Let us proceed.

The Era's


Gold discovered by humans.

Gold is wealth.


Gold used as simply another item of barter. Used as one of many items for measuring wealth. Evolved to be primary measure over time.

Money as we know it does not exist. Barter rules the day.

620BC-1400AD -

Gold is money.

Gold first coined in 620BC. Gold defined as money. Lines between gold as wealth and gold as money is blurred by the coining thereof.

1400AD – 1913AD

Paper transforms into gold. Gold is money.

Bills of exchange (Real Bills) are invented. Real bills circulate alongside gold, and transforms into gold ( after a 91 period).

1913AD – 1971 AD

Paper is money.
Gold is money.

Real Bills are discarded. Gold Exchange Standard is enacted whereby a fixed amount of paper money is exchangeable for a fixed amount of gold.

1971 AD – Present day

Paper is money.

Fiat currency standard. Gold is demonetized.

201? AD - ???

Gold is store of value
Paper is medium of exchange.

Freegold is instituted. Functions of money are split. Gold serves as store of value, divorced from the monetary realm. Fiat currency remains in use as medium of exchange. Gold and paper are exchangeable at a market determined rate.


The Fool

Thursday, 26 January 2012


There are many ways to perceive balance of trade between countries. One perspective that can be useful is to consider the process of equilibrium. In biological systems the process of homeostasis, for example, denotes the continuous fine tuned adjustment around a desired point of equilibrium. This balance is achieved by constant monitoring and adjustment of the internal environment.

This process of finding balance is an useful perspective for considering economic action.

The fact is that value is based on perception on the individual level, and the aggregate of all such judgments in an area establishes the value of any one thing.

Balance of trade may be considered as the point at which the population groups in two clearly defined areas reach a common perception as to the value of all goods.

Note that I am not even bringing the monetary plane into this discussion; simply the aggregate value judgments of all players in the defined regions.

Once there is a general agreement on the value of any one good , i.e. when considering balance of trade between two zones, no party values the good more than the other, then flow of that good ceases, and value judgments are in sync.

It goes without saying that this perspective is not that relevant in our current economic paradigm. However once we enter a FreeGold paradigm, it is a useful view for understanding how balance of trade will occur.

Once agreement is reached on all possible goods flowing between zones, trade is balanced. It should be noted that such stasis is only a temporary condition, as the needs, wants and positions of the individuals involved continue to change, altering the point of equilibrium that needs to be reached, and is strived towards.


The Fool

Tuesday, 24 January 2012

The Balance of Trade


This exceeded the maximum comment length, so I added it as a new post.

“Anyway, I got another thesis: "The Euro has to be destroyed before the dollar, in order to have a chance of freegold evolving". The Euro is a bunch of crap: It does not allow Gold to flow to balance the currency flows inside the EU, or to have a currency adjustment like in the EMS before. The european bond markets are a minor problem, what FOFOA never looked at, is are the TARGET2 account (im)balances and with it is an self-accelaration imbalance, with the PIGS being driven more and more into depression (the economist Hans-Werner Sinn made some awesome presentations of that). “

I see no thesis, only a statement. Perhaps you would be kind enough to share your arguments supporting that statement.

Mayhap you think this is supporting of your position : “ The Euro is a bunch of crap: It does not allow Gold to flow to balance the currency flows inside the EU, or to have a currency adjustment like in the EMS before. “

Logically however that view does not support your 'thesis'. You see, the United States of America is similar to the United states of Europe in this regard. A group of clearly defined regions, each with their own set of books that share a currency.

Your suggestion is that within a shared currency zone, it is impossible to settle balance of trade between entities. If this were true then it would be impossible to settle balance of trade between the different states in the USA. At a finer grain it would also be impossible to settle trade imbalances between the different provinces in a country, or for that matter between different cities, or even different neighbourhoods. This is obviously not true. Prior to the current system balance of trade was settled, by the flow of gold; on the individual, community, city, province, state and international level. So we know it is possible. All that remains is to envision how this will occur under FreeGold.

Now. Under the current paradigm it is true that the balance of flows is emphatically not settled within the EU. All that happens is that trade imbalance heaps up in another country's central bank as debt. This is obviously not sustainable, and leads to the resentment and anger building up the the populace as you mentioned.

Of course, our position is that the current system is not sustainable and will not be sustained. Hence the transition to FreeGold. :P

Upon reflection it is clear that each currency zone will have a singular price for gold(within the margin of error of transport costs). When an individual acquires gold he will do so at the lowest possible price point, which means there will be no differential between the price in say France or Germany, for if it were cheaper the individual would simply order from another country.

This is akin to how the individual choice will be made on an international level. If it is cheaper for me to buy gold in China than Europe, being a European citizen, then I will buy gold from China (factoring in transportation costs).

Now. Let us return to the European union, and consider how balance of trade may be accomplished between the countries in a FreeGold paradigm.

Now it should be clear that in order to facilitate the equalization of the balance of trade (deficit in this country), gold must cross the border of my country. In this case gold must flow out of the country in order to balance the deficit.

Amazingly, and contrary to your claim, FOFOA covered this exact thing in his last post. I shall quote from   The Gold Must Flow  :

Imagine that Germany is shipping more goods to London than it is getting in return. So Germany is supporting London's trade deficit in the same way that China is supporting ours. Germany is letting London "borrow" extra goods and then consume them. In exchange, let's imagine that London pays for its trade deficit with paper gold, just like the US pays China with US Treasury debt. Germany will start stacking the paper gold in the same way that China stacks Treasuries. The debt will grow. The imbalance will grow. Nothing has actually flowed opposite Germany's goods and services except debt. (TF : Current system)

If, on the other hand, physical gold flowed from London into Germany and the price was high enough that it offset the trade deficit, then there would be no trade imbalance. There would be no accumulation of debt. Everything would essentially be settled on a cash basis with no international debt. But in order for this to work in reality, the price of gold will have to be much higher than it is today because there's simply not enough gold to flow at today's prices in order to fill the trade gaps that already exist. (TF : Under FreeGold)

And here's another interesting note. It won't matter if London is still using the pound or if they switch to the euro. The gold still balances trade as it flows. So no, it's not a flaw of sharing the same currency that the PIIGS can't balance trade with others in the euro's core. It's a flaw of the current system which existed long before the euro was even born. Within the current system, the euro does remove the possibility of local currency collapse as an alternative adjustment mechanism, but honestly, that's part of what they wanted with the euro. The current system is one of irreversible debt-buildup and gold-debt which sterilizes the flow and price of gold.

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.

(TF : In real terms, in Germany a ounce of gold will buy you less bread than in the UK...and so in terms of value it would make the Germans want to swop their gold for bread...thus spurring the flow of goods from the UK, which would settle the trade imbalance)

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.

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.

I hope that clarifies that for you.


The Fool

Sunday, 22 January 2012

The Turning of the Tides

There is often merit in considering our insignificance in the universe. Each individual life is but a speck of fleeting flame in the eternal slumber of the universe.

More relevantly one may also consider the insignificance of a single human life in the span of time that is and will be occupied by humanity. A greater share, to be sure, than that occupied in the vast universe, but again showing how small we are.

A final condensation of consideration occurs if one considers the weight of a single human life at a specific point in time, or perhaps a brief part of our span in life.

This last view is the most relevant in considering human action in the face of the world.

Now it must be pointed out that in this final contemplation that there are some men who have more influence on our little planet than others.

Most of us however in our individual capacity will have little effect on the tide of history, and only inasmuch as we as a larger group act in concert can we sway the tides.

I bring this up, not to belittle our worth, but to point out that the choices we make, as individuals are largely inconsequential excepting to our own fates.

In this respect, fortune favours those most who can glimpse which way the tide is flowing, by observing the choices of those few, those giants, whose actions hold much greater power than the average man, and act in anticipation thereof, or concert therein.

Today I wish to share with you that as regards the future of our economic system, the giants have already made a choice. Their choice was made a long time ago and they have acted upon the inevitability of the tides that change.

You see, gold is once again going to move to the center of our economic system. Most of it is already held in the hands of these giants and they are not letting go, until the tide turns. All they await at present is the inevitable shifting of the moon (the passage of time) which will herald a turn in the tides.

Know this, your choice in the regard does not matter. Whether you choose to buy some gold to protect your savings for the coming transition will not affect the coming of the tides.

It is my sincere wish that you also protect what little you have from the ravages of the super-storm that is coming, but, if you do not, do not think that the storm will not come.

Your choice makes little difference.

The point is a choice must be made. More wealth = more votes. Every dollar must choose, and the giants have chosen. Gold won.


The Fool

Wednesday, 18 January 2012

On reaching an eventual plateau

FOFOA's inverted waterfall graph gives a good overview of the way the price of gold will play out in our paradigm shift to FreeGold.

There remains however something consider(for us shrimps at least), being how much of an overshoot will occur, what the causes of such an overshoot will be, and if we can capitalize on it.

It is well known that all markets tend to overshoot during a strong upwards or downwards move due to sentiment. I think that is reflected in the above graph.

It is agreed that trying to time sentiment in that regard, in changing to other possible productive assets, is ill advised.

There is however another factor that could seriously impact the level of overshoot. I also think that this factor could have more serious staying power and that small holders would be able to benefit from it. I do not think this has been reflected in the above graph.

This play is not for the weak minded or spineless. There is however a way we will be able to gauge the impact of this factor, which would make it easier to consider.

The fact of the matter is that those who we refer to as giants tend to lurk in the shadows, and like keeping their cards close to their chests.

Now. The estimated amount of aboveground gold is around 170,000 metric tonnes. Of that approximately 30,000 tonnes is held by central banks officially, with perhaps as much as 50,000 unofficially. I would like to exclude, for now, the gold in ground estimates of about 50,000 metric tonnes, as this gold will be dealt with differently after Freegold, and will take a long while to extract either way. The rest can be said to be private holdings. Of this, around 30,000 tonnes is 'accounted' for. The remaining 60,000 tonnes whereabouts can only be speculated upon.

I think a conservative estimate would be that perhaps an additional 20,000 tonnes is in private holding of small holders, and that dark giants account for the remaining 40,000 tonnes.

This amounts to about a quarter of all known gold in existence.

So here comes the interesting part. I would propose that in the immediate months (and perhaps years) following FreeGold none of the giants would acknowledge their holding of gold (or perhaps only very small parts of their holdings).

This means the effective stock as publicly perceived would be reduced by about 40,000 metric tonnes.

Small holders would make some of their holdings known by contributing some to flow, and I would imagine that official holdings would be publicly acknowledged. Other currently publicly held gold would also remain publicly known.

I think that my estimate of 40,000 tonnes is likely very conservative; we may see as little as only 100,000 tonnes in the public realm initially.

This will of course impact the price of gold in order to establish sufficient flow to clear world trade (to the upside).

What this means is there should be a brief period during which gold is overvalued, relative to the final stable price under a FreeGold paradigm (not due to sentiment).

Our method for ascertaining the amount of hidden gold would be simply to check the amount of gold acknowledged publicly from either public or private holdings and comparing that to the estimate of total gold in existence.

What this means for shrimps, is that there would be a opportunity to exchange gold for other productive assets at a value higher than the final stable price.

Hope you enjoyed the latest Foolish Perspective.


The Fool