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


  1. to add to this:
    You remember the great parable of FOFOA about Ben and Chen ("Focal Point Gold")? If Ben is a fucking lazy moron he will not go fishing, no matter how much gold he will loose. And if Chen is a moron still continue fishing for Ben no matter how much tokens from Ben he accumulated, the accounting is useless.


    1. A gun is not an argument. People who are forced to work do not produce much. They produce the absolute minimum, to not die. They also contribute nothing intellectually ( the great font of production).

      And just for the record I figure Germany can outgun Greece.

      Under FreeGold, if Ben does not work, he will starve. Tough titties to him.

    2. a gun has been an argument since mankind existed, not necessarily to use it, but just to have it. And although the use of a gun never was productive, still it has been used over and over again. If you rejct that, both of us live on different planets. Also note: That parable was not focused on Germany/Greece, but US$/non US$/Oil and to complete the Ben&Chen-Story.
      And to finish the parable, before further discussion: The taser are political forces, extortion and propaganda.

    3. Perhaps I can try another approach.

      Would you broadly agree that at present Germany supports Greece?

      If yes, do you know how this is achieved?

      It has to do with people leaving their value inside the system to be stolen.

    4. I agree. And today it is NOT achived by the Euro and even WITH Freegold it will NOT achived, since a) the deficit countries will not start to work b) inside the Euro the currency of the deficit countries can not be devalued c) a default is not a political option and never will be

      You know how the support is achieved today? Yes I know, by theft and fraud, as you say, I completely agree. And as I said, this is the political desire, because the EU is ruled by socialist dreamers, the can will be kicked down the road no matter what the collateral damages will be. In that way the Euro is absolutely no different from the dollar.
      Everybody not willing to see it is a) stupid or b) a religiously diluted by some doctrine (shall it either be waiting for godot or driven by socialist necessity). Both ways, FOFOA is absolutely perfect right on the spot with "Life on the Ant Farm": The superorganism is by now braindead.

      When will it end? Sure, as Christine Lagard said, its the germans fault. This will change sure, I agree, socially dumbing down the masses is done here also quite well here (thats why I only said 5-10 years leadership). We will end in a society that we had in the dark age: serfs and political mastery in an idiocracy, and than there will be no need for freegold :P

    5. Well, let me ask. How much of your wealth/savings is negatively affected by the bailouts given?

      How about if everyone got out of the paper fraud and put their savings into gold? Would that change the welfare equation?

    6. see, thats the right questions you are finally posing!!!
      Question 1.)
      Its a question of VALUE!
      My car is not affected, it is still a car, nice piece of german ingenuity, giving me the 3.8s to get to 100km/h :)
      My house is not affected, it is still a house, nice solid shelter :)
      My bluechips? well, they are still a nice vacuum cleaner for paper trash :)
      My stack of wiskey, coffee, fuel, tools... no, those are also still the same :)
      My silver? well, still shinny, I trade it to someone who wants to make a mirror :)

      About my gold? Hell, I dont know, yellow stones, digged out somewhere, burried by me somewhere else (because I will not be able to eat them or drive around with them, actually good for nothing, but at least tax-free) ;)

      2.) I have an assumption, that when everyone wants to get paid or when the serfs are even to dumb to build my next car, it will not be a pretty picture people stumble over each other to death, hell I dont care, f*ck'm. BUT: I wouldnt get my fuel any longer and also no spareparts for my nice car. And since I know when two wolves vote over a sheep whats for diner, it might be me.

      Was that clear enough?
      Greets, AD

    7. Yes AD

      It has been clear for quite a while that you do not come to change (of perceptions) with ease.

      My second and third questions still stand. Seeing as we, perhaps, agree that you will not be affected much, what happens when we expand the group of people who get out of the paper illusion?

      You are aware what gives paper currency value yes?

    8. sorry for being unprecise about your other questions: I dont see that happening, since as long as there is paper expansion at will functioning, you can put the price of gold whereever you want.

      A very important issue is also the law: If people are forced into social security/retirement, they are unable to save somewhere else. You dont have to outlaw gold, just make sure that the serfs are forced to put it somewhere else (or tell them about Keynes, "it is good for them to consume").

      There are different opinions about what gives paper value. AFAIR, Another said it's the receiver that gives it value. I say, there are additional players that determine its value, just the onces I think of spontanously: (fixed) Property taxes, (minimum) wages and all sorts of (long term) contracts denominated in paper.
      Greets, AD

      P.S. And wasnt there an article about "marginal use" of paper somewhere around? I cant remember, somebody mentioned it...

    9. Alright. Assume my question as a hypothetical. What would happen if that happened? :P

      Another said that the receiver determined it's value. That is not the same as causation. You are thinking along the right lines though.


    10. About what gives paper value:

      After WWII, Germany was pretty destroyed, okay. But supposingly somehow still the economy didnt want to start. They introduced the DM and basically you could throw away your old money 1:10 (but old obligations remained 1:1). Anyway, to get to the point: After a short period of time they introducted a new treadmill to the serfs: "Lastenausgleichsgesetz". They called it "solidarity", in order to "help the refugees" coming from the lost eastern areas.
      So for this "solidarity" they put a 50% mortage on each house (knowing that at that time almost nobody had a mortgage on their house), to work it off for the next 30(?)yrs.
      Hey, isnt that a great "solidarity" way to give paper value?

      Greets, AD

    11. Brandish your sign:

      "Will work for debt repayment currency"

  2. damm, somehow my orginal post gets always eaten by blogger, I try to split it:

    PART 1:
    Hi MF,

    thanks alot for that explanation, really:) Still I am maybe too dumb and dont get it, or something has been left out, let me show you:

    (Prior to go into the topic, lets assume that transportation costs do not exist, also lets neglect that the euro foundation has some small gold issues, lets assume it is pure fiat, would make it to complicated to discuss the real issue I like to point out.)

    Now some facts to show the dilema:

    German people live to work. PIGS people work to live. This is deeply and historically implemented in their genes over the last 500yrs. There is NOTHING that will change that, no matter about what kind of flows we suggest in our lifetime.

    1. "German people live to work. PIGS people work to live. This is deeply and historically implemented in their genes over the last 500yrs. There is NOTHING that will change that, no matter about what kind of flows we suggest in our lifetime."

      You are wrong. There is some truth in what you say, but not of the absolutist kind. The reasons behind German productivity and Greek laziness are somewhat cultural, but at present it is mostly because they CAN ( be lazy, the Greeks that is) the system allows it. FreeGold wont.

    2. I know. But it is politically desired, it is a doctrine. You dont live in Europe, so I guess you can not image what the politcal doctrines are and how the all day propaganda works. All major figures in the european parlament are either socialist or former communists. And the industry lobbies this, because they grap their stake of surplus from the trade, they dont care who's debt is being pushed around or paid.
      And as long as this lasts, Freegold can not evolve, do you remember, thats whats all this discussion was about.
      See, if Greece defaults, everybody will notice that the emperor has no cloth even the dumbest citizen, next defaults coming, big onces, banks gone (or nationalized) => Euro gone (at least as we know it, because those defaults you wouldnt be able to shuffle under the carpet of the ECB). Thats the whole point I made.
      And trust me, even than Greece will not start to work (even if they want, their is no industry left). It will just look like their neighbour Albania.

    3. Hmm. I think I will simply note that I disagree with you. :)

      Time will prove all things. ;)

  3. PART2...
    Germany will stay the next 5-10 years a surplus zone. Their industrial setup is to have no competition, or rather to focus on high price exclusively innovative products nowhere else available, regardless of price.

    Greece has nothing else to export but olive oil and grapes.

    Germany has already a lot of gold, at the CB (~3000mt) and in private hands (~5000mt). About Greece CB (~100mt) and private hands I dont know, lets say almost zero.

    Germany is also the biggest exporter inside the Euro zone _AND_ out of the euro zone.

    If Germany now continues exports (and they will, because austerity measures will be placed on the german public in order to do so, this is happening) and the germans hold euros to save in gold, they will need to buy the gold from somebody. Either inside the euro zone (e.g. the remainders from greece, that would be Euro/gold neutral) or from the outside (that would raise the value of the euro towards the outside euro area => your described Freegold mechanism would kick in).

    But I dont see how your following thesis would work inside the euro zone:
    "(the gold of germans) will have a lower purchasing power against goods in its own zone, but a higher purchasing power abroad (in Greece)"

    A potato in Germany will still cost the same amount of Euros as in Greece!!! And we even have another social factor making it even worth, already today: high educated PIGS people try to emigrate...

    And there is no price of gold high enough to balance that: Germany holding already 8000m/t in total and additional 4trillion in euro nominated private savings and the technological leadership for at least five years, major exporter inside AND outside the euro zone.
    Now please explain me how this can be balanced inside the euro with freegold.

    Thanks alot for your efforts in advance, I really appreciate this.
    Greets, AD

    1. No more time atm. Will try to reply later today.

    2. "A potato in Germany will still cost the same amount of Euros as in Greece!!!"

      No, it wont. After arbitrage it will again, yes. People will see the cheaper prices and import from there rather. This crossing of goods over the border of Greece will act to balance their trade flow, and then finally the price of potatoes will be the same again, due to arbitrage. Do not forget the element of time. :)


    3. See, and there you are mistaken:
      inflation rates are HIGHER in greece than in germany.

      how you explain that one? 8(
      The arbitrage is exactly the other way around: The greeks are so depressed and dont even bother to produce potatoes, or rather keep them than to sell them.
      I guess that phenom can be also explained with FOFOAs HI theory. Guess what happens if you are in a hyper inflation in a currency union, but one party runs out of money? (as I said, the germans have plenty of money due to TARGET2, they are drowning in money)

    4. I guess I will have to put systemic nature in context every time. I was talking under FreeGold, not the current system.

    5. hmmmmm, might be, might not be, since those TARGET2 flows already make my head spin in todays system, difficult for me to try to figure out how in a none exactly layed out future (freegold) euro system they might behave, just image they add euro-bonds or gold-bonds or whatever to the system.

      I am trying to figure that out, but I doubt it that I come to a really clear view, need FOFOAs help.....

      See, that's why I say: CURRENCY UNIONS ARE SUCKS!!!11 ;)

  4. obviously our RPG friend looks right now at the same problem:

    What that dude does not understand: "German people live to work. PIGS people work to live."
    And I can tell, since my in-laws are PIGS and I also worked there.
    This is not something politically made up to hail the germans and no moral judgement at all, but rather also serious studies exist, about how those social differences evolved over past centuries.

    1. AD

      These are complicated issues. I will admit that I get confused too at times. I suggest you spend some time thinking deeply about the 'corrections' to your view I have suggested.