Thursday, December 3, 2009 91 Comments

Gold and the central banks: the game theory

"About to" was definitely an overstatement! But since I first discussed the matter in 2006, the world has made remarkable strides towards understanding the monetary role of gold. I doubt this has anything to do with "John Law," but you never know - perhaps his post is responsible for a buck or two of the price. All kinds of people read teh Internets.

In case anyone with a lot of dollars is reading today, my position on the gold price is the same as in 2006. If gold will eventually be remonetized, gold is insanely cheap. If gold will never be remonetized, gold is insanely expensive. It's one or the other. Therefore, if you guess right about this question, you will make huge profits, and if you guess wrong take huge losses.

Your guess is probably better than mine, so I will refrain from making one. I note, however, that in 2006 the remonetization of gold was a decidedly fringe perspective. Now it appears regularly in the headlines. It is still a long way from happening. So there is plenty of time to hop on this bandwagon before it either rolls to glory, or off a cliff.

My specific prediction for the future of the gold-dollar exchange rate is: if there are more sellers than buyers, the gold price will go down. Otherwise, it will go up. You can quote me on this.

Aside from the traditional jewelry markets, which remain quite important as a demand contributor, what sets the gold price is the balance of buyers and sellers in the market for monetary or "investment" gold. If money is moving into gold, gold goes up. If money is moving out of gold, gold goes down. Given the existence of involuntary sellers (such as gold miners), some money always has to be moving in.

(Actually, I've never really understood why gold miners sell gold, beyond recouping the cost of mining. Why don't they just retain all profits, in gold, on their balance sheets? Why resort to old-fashioned dividends? That's certainly the way we play it here in Silicon Valley. All the more so for a gold miner which voluntarily sells gold, and whose shareholders are thus betting both ways in the gold market. Ideally, of course, the shares of a gold miner would be priced in gold, but this is really asking too much of 21st-century financial innovation. The 22nd might get to it.)

There is some interesting news on the flow front, which is that central banks have become net buyers, rather than sellers, of gold. Obviously, this trend changes the flow and drives the price up. If it reverses, of course, the gold price will go back down. Most industry observers believe that reserve-accumulating central banks will continue diversifying into gold. I am not an industry observer, but I agree.

Now, here is the interesting part. The game-theoretic process which in the past has selected gold and/or silver as monetary goods, which may just as easily operate in the future, and which may even be starting to operate now, is a form of distributed coordination. Previously, I have described this coordination game as a game involving a large number of small players - retail investors, as Wall Street would put it. However, the game theory works just as well for a small number of large players. Such as the central banks.

Moreover, the game theory only works if the players understand it. This is the nature of any Schelling point. Understanding can spread more easily among a small number of large players, than a large number of small players. Therefore, it seems like a fun exercise to restate the theory in these very different terms. After all - anyone can read teh Internets.

The accumulating CBs (China, Russia, India, Japan, the Gulf, etc) face a simple problem. Some good has to be the international reserve currency, and thus experience price appreciation due to monetary demand. At present, this good is the dollar (and dollar bonds).

The dollar, however, is diluting at a rapid pace, owing to the fiscal incontinence of USG. If you consider the dollar as an sovereign equity instrument, which I do, USG is in what looks a lot like an equity death spiral. USG is continuously issuing large amounts of new equity to finance its operations. This could end well, but history does not suggest that it will.

(Dollar as sovereign equity, Cliffs Notes version: the dollar is not a debt, since it is not a promise of anything. It must therefore be equity. If the dollar is a share, a dollar bond is a restricted share. For a fully-diluted valuation, restricted and contingent liabilities must be included.)

Thus, central bankers (such as those in Beijing) feel their assets are performing badly. This can easily be made a media issue. Which might involuntarily affect their careers. Thus, they seek other currencies in which to park their cash. Preferably, currencies which are not falling like a rock.

However, central bankers have a unique investment problem which you and I do not face. They have so much money that, anywhere they put it, they will move the market. For example, if reserve managers worldwide switch half their dollars into GBP, the following events will occur - coefficients are entirely random:

1. The pound goes up to $8.
2. Britain's economy collapses.
3. The BNP seize power and print trillions of pounds to pay their skinhead armies.
4. The pound goes back down to 10 cents.
5. The central banker loses the people's money and is hanged in the street by mobs.

If you are anyone who has large amounts of money, central banker or no, your goal is to spend that money in a way that does not move the market. Ideally, you would like to buy at a price set by supply and demand (not including you). You would rather not buy at a price set by supply and demand (including you). This is a tricky task in which many are paid much to succeed.

Market-moving purchases - as we'll see later in the program - pose a special challenge to accounting. They create what George Soros calls reflexivity. Standard 14th-century Italian double-entry accounting, while perfect if you are running a bodega, is not capable of handling this matter. Because central bankers are not used to thinking about monetary game theory, and have no idea how to integrate this with their 14th-century accounting, they fail to see the optimal strategy.

The problem that breaks Florentine accounting is: if I drive the market up by buying, how should I value what I just bought? Should I mark it to the market price? If so, I am marking it to supply and demand (including me)? Or should I mark it to the price I could sell it for? If so, I am marking it to supply and demand (not including me). The larger the position, the larger the difference between demand (including me) and demand (not including me).

Suppose, for example, that you have 50 billion dollars, and you use this stash to buy the entire 2008 and 2009 peanut crops. You triple the price of peanut contracts. Congratulations! Your position is now valued at $150 billion. You've made a 200% profit. You've made money just by marking to market. You should be a spammer.

This is called "market manipulation," or more specifically "cornering the market," and it happens to be illegal. But even if it was not illegal, it would be unprofitable, because you cannot generally profit with this strategy - as you sell, you are driving the price back down. Your peanut contracts are valued at $150 billion - but can you get $150 billion for them? You can't buy lunch with peanut contracts.

This is called the burying-the-corpse problem, the corpse being the vast quantity of peanuts that you have bought but don't intend to eat. The accounting profit is indeed a mirage. Unless of course you can bury the corpse - ie, get some other fool to take all those peanuts off your hands, at anything like the inflated price you have created.

There is an easy way to avoid this entire weirdness. Spread it around. Diversify. Don't make market-moving purchases. For the standard large investor, and doubly for the standard central banker, distorting the market with a purchase is considered a rookie mistake.

Thus the old-school CB answer to gold, now just beginning to fade. When asked why a return to the gold standard is impossible, the standard answer is: "there isn't enough gold."

What this means is that the stock of monetary gold is relatively small compared to the number of dollars it would have to absorb, were gold to replace the dollar as the international reserve currency. (Ie, not even considering the awful possibility that ordinary citizens decide to redirect their savings into the yellow dog and 100%-backed instruments, obviating the entire concept of a reserve currency.)

Thus, if CBs buy large quantities of gold, they drive the gold price up. Or more precisely, if they exchange large numbers of dollars for gold, they drive the gold-dollar ratio up. Or at least, so theory predicts. And for once, practice seems to match theory - at least, in China:
“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.
Indeed. Hu Liaoxian is even trying to jawbone the gold market down:
“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”
[...]
However, officials in Beijing are aware that China’s $2.3 trillion reserves are now so enormous that the central bank cannot buy much gold without distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – “buying the dips” in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.
Either Mr. Cheng and Ms. Hu do not understand the game theory of monetary formation - or they do and they are playing it close to the chests. If they - or their colleagues - ever figure out the game, God help the dollar.

When a CB buys gold, four things happen. One: the CB insures itself against the chance of gold remonetization. Two: the chance of gold remonetization increases. Three: the gold price goes up. Four: the buyer looks good, because the assets he bought went up.

How is this different from buying the pound, or buying peanuts? Because the price increase in the pound, or in peanuts, is unsustainable. What goes up has to come back down. For their own different reasons, the pound and peanuts are incapable of absorbing total global monetary demand, and acting as a stable international currency. Therefore, a sophisticated investor of large money avoids generating phantom profits by distorting the market in pounds or peanuts.

With gold, it is different. What goes up can go back down, as it did in the '80s. (In 1980, it looked rather as if gold was to be remonetized. Then Volcker saved the dollar with 20% interest rates. Of course, at the time America was also a net creditor.) But because we know that gold is a viable monetary system, we know that when gold goes up, it does not have to come down. If it doesn't come down, that means gold has been (re-)monetized. Peanuts cannot be monetized - they cannot become arbitrarily expensive. Gold can. Therefore, the decision calculi for gold and peanut purchases are fundamentally different.

The gold price has been increasing at roughly 20% a year since 2001. Perhaps coincidentally, the global dollar supply is diluting at rates not too different from this. Betting on the continuation of this trend is not difficult - one the way to bet on it is to buy gold. Which causes the trend to continue. Reflexivity! The dollar itself is a bubble, held up by the monetary demand for dollars - and the dollar does not appear to be an especially stable currency.

Thus there is an entirely different Nash equilibrium out there - one in which all the central banks dump the dollar for gold. This causes the gold price to skyrocket, creating permanent profits for all the reserve-accumulating central banks.

Don't believe me? Think about it. When remonetization is complete, by definition the CBs will be computing their accounts in gold. Since the price of gold in dollars, under this scenario, is much higher than it is today, it will look like the CB made an enormous profit on the transaction: in exchange for green pieces of paper, now of minimal value, it received good gold. Or it was foolish and held on to the green paper, in which case its bankers are lynched in the street.

This is a self-reinforcing feedback loop. The more gold the CBs buy, the more incentive they have to buy gold. Because if the game ends with gold winning, the game will be scored by how much gold you got for your dollars. This will be a consequence of how soon the CB exchanged its dollars for gold. Devil take the hindmost! A classic panic scenario. A melt-up for gold; a melt-down for the dollar.

In other words, when gold is remonetized, the numerator and denominator on the "gold price" are exchanged. The relevant price is now the "dollar price." What is a dollar worth? How many milligrams of gold can you trade it for? This piece of paper is a financial security, n'est ce pas? Does this security yield gold, own gold, redeem itself for gold, etc? No? If you want it to be worth anything, you might want to change that...

Here is the difference between gold and peanuts. No one will ever ask how many peanuts a dollar is worth, because peanuts will never be a monetary good. For one thing, it is too easy to grow them. Gold can be monetized, and peanuts cannot be monetized, because of fundamental physical differences between gold and peanuts.

Every monetary system is a self-supporting market-manipulation scheme of this type. As Willem Buiter points out, money is the bubble that doesn't pop. In a free market, a currency is stable if and only if the currency is reasonably watertight and does not dilute much. In this panic - the same panic "John Law" anticipated - we see the "dollar bubble" popping, and a new "gold bubble" forming. If someone finds a way to print gold, of course, the gold bubble will pop and some other good will accept its monetary demand - rhodium, perhaps. Or baseball cards.

So, if Cheng Siwei and Hu Xiaolian understood the game theory, they might go ahead and "stimulate the market." China cannot prevent her purchases from stimulating the market. But she can ensure that when she stimulates the market, she stimulates it first - thus getting the best price. And thus ending up with the most gold.

Collectively, the central bankers of the world might agree that they do not want gold to be remonetized. Individually, it is in their interest to defect from this consensus. As the American Century decays, individual motivations tend to become more prominent. You and I are not in a free market - but the central banks are.

And there is another individual motivation that CBs might have for remonetizing. Suppose a large exporter, such as China, which undervalues its currency and runs a large trade surplus as a result, takes a huge radical step and goes all the way to a 100%-reserve gold currency. The ultimate hard currency. If this succeeds, China is the new England - the financial capital of the world, forever. Everyone else's money? In a word: pesos. Hard currency is Chinese currency. China's natural supremacy over the barbarian kingdoms of the West is restored.

There is a practical problem with Chinese remonetization: China has very little gold. Even after the PBoC converts all its dollars to gold - even at the gold price generated by this conversion - it will not have enough gold to back all the yuan in circulation. At least, not at the present yuan-dollar ratio.

When a CB fully remonetizes by converting its balance sheet to hard gold, a fiat-currency note becomes an equity share in the central bank's gold pool and can be valued as such. What is the share worth, in gold? What are the central bank's assets, measured in gold? Same question. If the CB has 1000 tons of gold and has issued 1 trillion notes, each note is worth a milligram of gold. Gold accounting - not so hard.

In other words, to fully remonetize to gold, China (or any country, even the US with Fort Knox), will have to devalue its currency. The entire event obviously devalues all fiat currencies against gold, because it sends the price from $1000 an ounce to something more like $20,000. But since the US has a huge hoard of gold, the dollar needs to devalue less against gold than other currencies, such as the yuan. Thus, in any full remonetization, China must devalue the yuan against the dollar.

Now: class, what is the economic effect of a devaluation? What are central bankers around the world struggling desperately to accomplish? Same question! The answer is: "stimulus." Devaluation is inflationary; inflation is a stimulant. Age-old economic truths. China's low gold reserve is not a problem, but an opportunity. It is not a bug - but a feature.

Of course, if you resort routinely to devaluation or any other stimulus, you become a stimulus junkie. You get chronic inflation - fiscal needle-tracks. But this cannot happen as the result of remonetizing to gold. Because - duh! At the end of the game, your economy is on the gold standard. You are a healthy financial and industrial power, not a strung-out inflation junkie. England in the 1870s, not Argentina in the 1970s.

And ideally a you've gone all the way to a 100%-reserve hard-money standard, which means no more booms and busts. So, when I propose remonetization, what I'm saying to central bankers is the equivalent of saying to a heroin addict: after a hit of this junk, you'll feel so high for so long, you'll never want to shoot up again! If you can find a junkie who wouldn't take this offer, your country has some very unusual junkies.

In previous centuries, the phenomenon we know as a "recession" was sometimes described as a "shortage of money." I too am experiencing a shortage of money - can anyone give me some money? Doesn't everyone have a shortage of money? But the term, which seems silly, is actually quite reasonable - a shortage of money is actually an excess of debt. An economy experiences a shortage of money when it has run up unsustainable debts. It is collectively bankrupt. Its actors tend to find themselves individually bankrupt as well. Hence, recession.

For instance, the classical gold standard of the Bank of England era failed because, after World War I, the gold cover (ratio of CB-guaranteed gold debts, to CB gold) was just too high. This, too, was a shortage of money - a shortage of gold. The correct answer would have been to share the pain equally all around, by devaluing the pound and other currencies against gold - ie, making them reflect their actual gold value. But this was too politically painful; so instead, the entire system was allowed to collapse. Some consider this a good outcome.

But the global economy does not have a shortage of gold. It has a shortage of dollars. It is not oppressed by unpayable gold debts. It is oppressed by unpayable dollar debts. (If lending were restricted to self-interested market actors who need a dollar to lend a dollar, ie not the Fed, you'd really see that shortage.) When you revalue gold, carried on the balance sheet at $42 an ounce, to the post-remonetization price of tens of thousands an ounce, what are you doing? Creating one heck of a lot of new dollars.

Therefore, if Cheng Siwei and Hu Xiaolian follow my advice, join the bubble instead of fighting it, and unilaterally remonetize with devaluation, China should experience the following results:

First: dramatic stimulus to the Chinese economy. Second: dramatic inflow of gold into China. Third: dramatic, but temporary, inflation, in the context of boom conditions and general prosperity. Fourth: eventual stabilization, with China a wealthy First World country which is the world's financial and industrial leader. Fifth: large gold-plated statues of Cheng Siwei and Hu Xiaolian are erected all over China.

Of course, remonetization would also produce enormous profits for gold speculators. Ie, anyone else who jumps on the bandwagon. Currency transitions are inherently turbulent processes. Central banks, as they should, hate turbulence.

On the other hand, if there is no option but to make the transition, it may be better to rip the band-aid off fast than slowly. It is certainly better to understand the situation - and once you understand it, the outcome seems difficult to resist. As in many cases, the CBs may just need to move faster and more decisively than the speculators.

The reason I still expect gold remonetization to happen - in the long term, not tomorrow! - is that there's simply no other viable alternative. Everyone knows that the global economy needs a new currency. Most can see that the dollar cannot be saved or replaced by any other sovereign currency or basket thereof - because no central bank could tolerate the economic effects of the upward revaluation that would result if its currency replaced the dollar in CB portfolios. When the impossible is eliminated, the improbable becomes a certainty.

91 Comments:

Anonymous Pals said...

I generally agree with your points, but would like to add the curious observation that China seems to be encouraging its citizens to buy gold and silver.

http://seekingalpha.com/article/159962-china-urges-citizens-to-buy-gold-and-silver

This strikes me as favoring the interpretation that the Chinese do not understand the game theory of monetary formation. If Chinese citizens (and there's a lot of them) buy gold individually, this could lead to gold remonetization, but the Chinese CB would not have gotten on the train early. The result would be plenty of gold in the hands of the people and not enough in the hands of the CB. The Yuan might collapse then.

It is highly unlikely the ruling Chinese regime is trying to foster a John Galt spirit among its populace. Far more likely they don't know what they're doing. They wouldn't be the only CB that doesn't understand gold, would they?

For me, the strongest argument in support of gold monetaization is the insanity in charge of Washington. There is nothing that will not be treated with more printing. And there is no hope for any political change that will bring about a stop in money printing. The only possible endpoint to this inflationary orgy is a collapse of the dollar. The longer it goes on, the sooner its collapse must be coming.

P.S. It was blatantly obvious that you indeed were John Law!

December 3, 2009 at 2:58 AM  
Anonymous josh said...

what the hell happened to the antiversity?

December 3, 2009 at 4:58 AM  
Blogger Thrasymachus said...

I like the idea of the dollar as equity- that occurred to me many years ago, that a dollar is a share in the US economy.

December 3, 2009 at 5:34 AM  
Blogger Botogol said...

I think you're talking your book.

December 3, 2009 at 6:42 AM  
Anonymous c23 said...

Whoa.

I think you're right. The question is, what is the time frame? You would have been just as right in 1940, but obviously the time frame would have been so long as to be irrelevant for investors living then. We're 69 years closer now, but are we close enough? The frustrating thing about unsustainable practices is that they tend to go on for longer than you think before they finally fizzle out. Some people lost their shirts shorting the internet bubble in '98.

Is it really impossible money could flee to some other fiat currency? It may be true that the end result would be trillions of Euros printed to finance skinhead armies, but that could take many years, which wouldn't help you if you lost money on gold in the near future.

December 3, 2009 at 7:29 AM  
Anonymous josh said...

For those of you who own gold, do you personally hold it or is it held in a vault in some foreign country? Who are the most trustworthy dealers? I want to make a small investment (I wanted to a year ago, but I got lazy. Kicking myself.), but I really don't know how to get started. Any advice?

December 3, 2009 at 7:58 AM  
Anonymous Anonymous said...

If this succeeds, China is the new England - the financial capital of the world, forever.

Since London is not now the financial capital of the world, and has not been for a long time, this is perhaps not the best analogy...

the strongest argument in support of gold monetaization is the insanity in charge of Washington.

Yup, and especially in view of the definition of insanity being "doing the same thing over and over again even though it keeps failing.

For those of you who own gold, do you personally hold it or is it held in a vault in some foreign country? Who are the most trustworthy dealers? I want to make a small investment (I wanted to a year ago, but I got lazy. Kicking myself.), but I really don't know how to get started. Any advice?

I like goldmoney.com and Perth Mint, which keep physical gold in foreign countries. I don't want to keep it in my house or a US bank.

December 3, 2009 at 8:11 AM  
Blogger newt0311 said...

@Pals

The collapse of the Yuan is the point. The idea is that we take all the Yuan in circulation and we exchange them for gold vouchers. People with gold can also exchange their gold for vouchers. They will of course get a return in the thousands of percentages and likely become rich. They speculated and speculated well.

As to the rest if your post, I agree with it. It is very doubtful that China is trying to instill a John Galt spirit. It seems more likely that the politburo is simply trying to maximize the amount of gold under its control.

Also, the strongest argument for gold monetization is indeed the insanity in charge of Washington. A competent sovereign could have insured a perfectly stable fiat currency simply by not expanding the monetary base. Washington alas has failed miserably.

December 3, 2009 at 8:18 AM  
Anonymous Leonard said...

I think the skinhead armies is mostly a joke. The larger point that MM is making there is that all of the major currencies are now run by keynesian "economists", aka, quacks. And even if they weren't, democratic politics makes the prescription of keynesianism (inflate in good times; inflate more in bad times!) irresistable.

Of course, that does not mean the world would not jump from the sinking dollar to some other seemingly-better fiat currency. It's just hard to see why any of the others are any more politically sound. The obvious except here is of course gold, but only once you perceive it as money and not a commodity. I suppose one might also except the yuan -- it is run by unaccountable commie apparachiks, so in theory it can be managed soundly. Or at least it is not obviously subject to the normal democratic desire to spend now and pay later.

As for how to buy gold: MM uses goldmoney.com. I use GLD. My reasoning here is weak: GLD, being exchange-traded, is something I can easily buy and keep track of via my normal Fidelity accounts. Goldmoney requires you to wire it funds, which is slightly less convenient.

December 3, 2009 at 8:51 AM  
Blogger DR said...

"In case anyone with a lot of dollars is reading today, my position on the gold price is the same as in 2006. If gold will eventually be remonetized, gold is insanely cheap. If gold will never be remonetized, gold is insanely expensive. It's one or the other. Therefore, if you guess right about this question, you will make huge profits, and if you guess wrong take huge losses. "


Assuming this is true, the way to profit isn't to take an outright position on gold but buy deep out of the money options on both sides.

December 3, 2009 at 8:55 AM  
Anonymous Steve Johnson said...

Leonard said...

I think the skinhead armies is mostly a joke. The larger point that MM is making there is that all of the major currencies are now run by keynesian "economists", aka, quacks.

The point is that almost every possible (theoretical) candidate for monterization is flawed because the supply can grow to keep the price constant or declining.

Pounds? Print more of them.
Peanuts? Grow more of them.
Oil? Dedicate more effort to extracting it.

Gold, on the other hand, doesn't quite work this way. All of the gold mined in the past is still hanging around. It's centuries long history as a monetary metal guarantees that people have dedicated lots of effort to digging it up wherever it can be found. The amount of new gold that will turn up after gold is moneterized is smaller than the amount of new anything else that will turn up after anything else is moneterized.

December 3, 2009 at 9:15 AM  
Blogger Patung said...

"Any advice?"

Bullionvault is one, vaults in london, zurich, new york, most people favour the former two I believe for possibly paranoiac reasons...

December 3, 2009 at 10:26 AM  
Blogger Sarasti said...

Steve: any particular reason another relatively rare and highly-demanded metal couldn't be used instead? Or does gold happen to occupy a sweet spot where its supply is easier to deal with than platinum or palladium and less fluid than aluminum, silver, or copper?

(Peanuts and oil have the additional downside that they're consumable, which causes the price to fluctuate even more. Whereas gold, even if it's being used for something constructive - conductivity springs to mind - tends to stick around.)

December 3, 2009 at 10:31 AM  
Blogger GW said...

One significant flaw with this from the Chinese game-theoretic viewpoint is that the USA (FED + IMF) has a gold reserve an order of magnitude larger than China's. If China was to remonetize gold, it would dramatically increase Washington's power over China (and probably bolster USD in a continued role as reserve currency even though it's not backed by that gold). I suspect they're not too keen on that possibility.

In the meantime, then can increase their gold reserve in fits and starts, as they've been doing.

Another factor you ignore is that what really backs a successful global reserve currency isn't a commodity in limited supply, but power...particularly military power.

The US Dollar hasn't been backed by gold for a while. It is, however, backed by the US military. That puts the dollar on the "Hot Lead Standard" which will trump any precious metal standard any time, anywhere. The Chinese do not have the military power to back a credible reserve currency, even if they go 100% gold-backed.

Whether or not the US is able to maintain a credible Hot Lead Standard backing for the greenback as we move into the future is another question, but the answer to it doesn't necessarily have much to do with the price of gold.

December 3, 2009 at 10:38 AM  
Anonymous Leonard said...

Sarasti: it is not impossible that some other commodity metal could displace gold. But there are two main reasons to expect gold will win.

First, no other metal except silver has a history as money. And silver lost the competition to be money. If you are at all influenced by history, gold's the One.

Second, as Steve alludes: the world stockpile of gold is huge by comparison to production. Current yearly production is perhaps 2% of the stockpile. For all other commodities, including platinum or whatever, the production levels are fairly close to the stockpile. I don't think this would matter if somehow one of the other metals won and become money. But it does suggest that knowledgeable people won't want it to win as much. From the POV of owners of already existing metal, mining is inflation. So, to the extent that people are owning metal as money, they want to hold the least inflation-prone metal.

December 3, 2009 at 10:45 AM  
Anonymous Anonymous said...

"Assuming this is true, the way to profit isn't to take an outright position on gold but buy deep out of the money options on both sides."

Indeed...but at what maturity date? You could pay a hell of a lot of premiums in the meantime, just buying up and then not exercising.

December 3, 2009 at 11:01 AM  
Anonymous Leonard said...

GW: do you expect the "hot lead" standard to stop printing dollars? If so, how exactly do you feel that they will balance the budget? If not, why do you expect rational people to keep investing in shrinking dollars?

Hot lead is worthless unless you use it to take stuff from foreigners. But the USA manifestly does not do that. When the USA invades lesser countries, not only do they fail to pillage, not only do they fail to set up a profitable tax-colony, they actually spend money on them! Rebuilding! Nation building! What kind of fucked up "imperialism" is that? Progressive imperialism, that's what.

The nation of Goldenstein has no army at all. Yet, strangely, their currency is on the ascent, and the dollar is on the descent. Until you can explain this, your theory of "hot lead standard" is dead in the water.

December 3, 2009 at 11:06 AM  
Blogger newt0311 said...

@GW

You are correct in general. Armies can (and often have) been used to enforce reserve currencies. Usually, this is done through taxation.

However, to implement this, the power in question has to be willing to rule the taxed and if needed, to terrorize them. The US does not have anywhere the political will to carry out such a program. The US army is large enough to terrorize much of the world but not large enough to occupy it. The US government would never endorse a program of organized terror. The US has the means but not the will.

December 3, 2009 at 11:06 AM  
Blogger newt0311 said...

(contd.)

I saw Leonard's post after I posted myself. I agree with his post on all points.

December 3, 2009 at 11:08 AM  
Blogger G. M. Palmer said...

Really quickly:

Why do any of you hold gold outside your houses? Do you expect a company holding gold, were gold to be remonitized, to have any incentive to actually give you what they owe you?

"Gold shares" seems like the right wing version of carbon credits.

December 3, 2009 at 12:18 PM  
Blogger Leonard said...

GMP: yes, there would certainly be "an incentive" for GLD and Fidelity to honor their corporate charters and US law. That would be the law as it currently exists. The question here is not whether GLD and Fidelity would follow the law. It is whether the USA would change the law. Surely there is always an incentive for the state to raise revenue, and in the event of dramatic remonetization, all those new gold-millionaires are the obvious target.

I would certainly agree that having physical control of your own gold would be a good idea in the event of a remonetization. In this case, you would at least have the option of cheating the government by hiding your gold. On the other hand, this would make you a felon...

The lesson I draw here is two. First, I don't see any real difference between any form of corporate-mediated gold ownership. MM likes goldmoney because there the gold is really yours, and also that it is held in another country. I don't see this as significant protection from taxation.

Second, if you do decide to buy gold and hold it yourself, you want to make quite sure that there is no paper trail for the Feds to find. I am not sure how to go about this effectively and safely.

December 3, 2009 at 12:46 PM  
Blogger newt0311 said...

@GMP and Leonard

The only completely safe method of assuring ownership of gold etc... is to leave the country. Until one leaves the country, they will always be vulnerable to the government's actions.

Singapore and Switzerland seem like places which won't go after newly minted gold millionaires. Try them.

December 3, 2009 at 12:56 PM  
Blogger werouious said...

@josh -- i also wanted to hold some physical gold and looked at some of the options out there. i am not at all wealthy so i was looking for options that would let me go in $200-#300 at a time. the best thing i found was the gold coins from the canadian mint. they have lots of different sizes and are extremely pure. i don't know if the country of origin would be a problem when/if you want to sell, but i figure the canadians are pretty trustworthy.

December 3, 2009 at 2:42 PM  
Anonymous blue anon said...

Why are you guys talking about extracting wealth from imperial holdings. Isn't the hot lead standard partly about the fact that we can't be conquered? Image if back in 1938 you had payed US dollars, or aussie dollars, for polish money of british pounds. What happened to those currencies? Were they toast?

December 3, 2009 at 3:01 PM  
Anonymous blue anon said...

Also, we have a long tradition of government so we probably aren't gonna go commie or nazi. That's the other thing about us.

China can defend itself, but some kind of French Revolution may be expected by people, especially those who aren't biorealists and so don't really recognize that northeast Asians don't care that much about politics. There's also the demographic ageing thing there which I think is worse than it is here.

Let's see, who else can defend themselves: Russia. Yeah, great investment there.

December 3, 2009 at 3:05 PM  
Anonymous blue anon said...

Finally, while hot lead does fit and sound a lot better, it's really a hot hot hot hot hot hot hot hot hot hot hot hot hot hot uranium/plutonium/hydrogen standard.

December 3, 2009 at 3:07 PM  
Blogger newt0311 said...

@Blue Anon,

But thats the great thing about hard-metal currencies. They don't depend (at least as much) on government competence.

It is of course possible, through the use of government force, to dislodge them but to maintain them requires a minimal amount of effort. Considering the sclerosis infecting modern governments, this is perfect (until they need more stealth taxes through inflation that is...).

December 3, 2009 at 3:35 PM  
Anonymous blue anon said...

I wouldn't mind owning a little physical gold, like $2,000 (which is a lot, to me). How do you guys aim to deal with the denomination if the time ever comes? What are you going to do with a $300 gold coin when you're just buying toilet paper? Will you take a chisel and make it into 10 mg crumbs? Where is everyone gonna get a sensitive scale all of a sudden. Or do you think they'll just look at your bit, and if they won't take it, you add another smaller bit or walk.

December 3, 2009 at 5:04 PM  
Anonymous Anonymous said...

In places where civil order was stressed, like Argintina, nobody used gold. People said if you tried to sell or transact gold you would be dead pretty soon. Just too much concentrated value on absolute bearer terms. Gold wedding rings, an alloy with reasonable per unit value would be a good medium of exchange. I think the key is to sell if it ever explods when the value is high ($20,000/oz) but before thew inevitable demonization of gold owners (horders!!) gets up a full head of steam. Can;t be too greedy; just be happy you were wiped out less than everyone else if gold preserves some of your lifetime savings.

December 3, 2009 at 5:38 PM  
Blogger newt0311 said...

@Blue anon,

This was exactly the problem that England historically ran into. Their solution was to use independent bank notes -- basically small bearer bonds. Adam Smith talks about this in his Welth of Nations.

December 3, 2009 at 5:42 PM  
Anonymous Lenin of Liberty said...

This post is daft -- a daftness that has infected the libertarian movement since the 70s at least. I've lost track of how many times I've heard libertarians say that the dollar is "intrinsically worthless" or "has no value." I wish they'd give those worthless dollars to me...

The U.S. dollar is not an equity instrument. It is a debt instrument. The dollar is back by mortgages, car loans and corporate bonds. It is backed by every dollar-denominated securitized loan in existence. Fort Knox could be robbed by Martians tomorrow and the currency replaced with notes bearing the images of Bill Clinton and Pee Wee Herman and the dollar would still have intrinsic value.

If I don't have dollars to pay my mortage bills, I lose my house. Ditto for millions of other people. Since the U.S. is still a pleasant place to live, and has more rule of law than most places, homes in the U.S. are valuable. Note the lines of people trying to come into the U.S. The American Dream has international value.

Yes, the U.S. government has the ability to devalue the dollar. Print more dollars to chase the same debts, and you get inflation. But as long as people are making dollar denominated securitized loans and the Fed doesn't get bat-shit crazy, we won't have true hyperinflation.

(Many third world nations experience serious inflation because their currencies are largely equity instruments. Much of their real propery has title problems so mortgages are of less use for currency backing.)

December 3, 2009 at 5:44 PM  
Anonymous Anonymous said...

Why do any of you hold gold outside your houses? Do you expect a company holding gold, were gold to be remonitized, to have any incentive to actually give you what they owe you?

Why not? The rule of law should prevail. One hedges against this by holding the gold in a country like Switzerland.

I'd be much more concerned about having gold in my house (or even in a safe deposit box) in the USA and then the government making it illegal to hold gold or remove it from the country.

How do you guys aim to deal with the denomination if the time ever comes? What are you going to do with a $300 gold coin when you're just buying toilet paper? Will you take a chisel and make it into 10 mg crumbs?

That's why you buy "junk silver" - it is (hopefully) usable for practical purposes.

the Fed doesn't get bat-shit crazy

You mean it's not already???

December 3, 2009 at 5:54 PM  
Anonymous P.M.Lawrence said...

"My specific prediction for the future of the gold-dollar exchange rate is: if there are more sellers than buyers, the gold price will go down. Otherwise, it will go up. You can quote me on this."

Talk about putting your foot in your mouth and following it up with giving a hostage to fortune. As an accounting tautology, there are always just precisely as many sellers as buyers (after adjusting for amounts, i.e. counting each seller and buyer once for each transaction and not aggregating to get the sizes of the set of sellers and the set of buyers).

No, what affects the price is the willingness to become a seller or a buyer at that price, so changing the price correspondingly; it's the numbers of would be sellers and would be buyers that count. (There are other factors too, e.g. the willingness to steal it, to use it up, or to start or stop extracting it from resources of some particular convenience.)

"Dollar as sovereign equity, Cliffs Notes version: the dollar is not a debt, since it is not a promise of anything. It must therefore be equity."

That is crawling with fallacies. Not only does it presume to have identified everything in the range, it also presumes to have identified the range itself. Actually, as fiat currency, the US dollar is a token that may be used to extinguish debt to the issuer, typically in payment of taxes. That debt can itself be created arbitrarily without observing accounting identities that match debits and credits in a way that conserves an identity either side of its point of creation.

So Lenin of Liberty is wrong to write "The U.S. dollar is not an equity instrument. It is a debt instrument. The dollar is back by mortgages, car loans and corporate bonds. It is backed by every dollar-denominated securitized loan in existence. Fort Knox could be robbed by Martians tomorrow and the currency replaced with notes bearing the images of Bill Clinton and Pee Wee Herman and the dollar would still have intrinsic value."

It is neither an equity instrument nor a debt instrument (unless you only start your classifications after the fiat creation of tax debts and treat that as somehow outside the system); it is not backed by any of those things, but by taxes that reach those things, and as such its value is not intrinsic but derivative - though it would keep that value for so long as that connection was maintained.

It would be possible to support a fiat currency backed by rent payments or similar, even if the pool of revenue/rent yielding assets had been acquired forcibly or fraudulently (say, by buying them with newly issued currency); unless that were also continuing, that would put the violation of conservation of accounting identities outside a time frame, and standard accounting would apply within it. Or, you could put a fudge factor into your accounting by which creating tax debts was matched to some sort of provision or suspense account, which would simply sterilise the other end with credits that piled up (think of "bad credits" that you never expect to pay, by analogy with bad debts that you never expect to be paid). With that, accounting conventions would work consistently, but as the bank notes are not a claim on the bad credits, they are not a debt instrument.

December 3, 2009 at 6:47 PM  
Anonymous Zdeno said...

Finally, UR's true purpose is revealed: The information age's very first pump-and-dump blog. We buy gold, moldbug retires, and it turns out this Carlyle fellow never even existed.

Anyways with regard to the the game theory of a return to some sort of hard metal standard, let's take it as a given that the PBoC reads their John law and figures out that the current regime of fiat currencies is unsustainable, and it is in their best interest to set the terms of a global return to a hard currency.

Why Gold?

As I understand, gold is a Schelling point because of its long history as a unit of exchange. This argument is persuasive if a Schelling point is required in the coordination game, as would be the case in a decentralized world full of small countries, each with a relatively small role to play in the currency market.

China however, is the 800-pound gorilla. They have the economic clout to declare any suitable precious metal they want as the new global currency. Why would they take a multi-trillion-dollar haircut by monetizing gold? Seems like it would be in their best interest to monetize silver, rhodium, or perhaps some form of hard digital currency.

The original experiment Schelling performed was to have two students declare where and when they would meet on a given day in NYC. The students would try to choose the most "obvious" place and time - frequently Grand Central Station at Noon. This experiment is contingent on both students coming into the scenario as equals, unable to communicate with each other. In the coordination game of global currencies, China has the power to choose the time and the place. If she can get the rest of the world to ditch Grand Central and come right to her door, why won't she?

Cheers,

Zdeno

December 3, 2009 at 7:12 PM  
Blogger newt0311 said...

@Zdeno

China doesn't have enough clout to establish a monetary base by itself. They may have $800 billion but the global market for dollars is measured in several trillions. They need coordination from others, particularly Europe. If they try to establish say, silver, they won't get the benefits of the full inflationary pressure that establishes a global reserve currency.

If they are the first movers on the gold rush, they will not get as large a fraction of the monetary base aas with an alternative metal but on net, they will have more because gold has a much higher net (as a truly global reserve currency) and because they were the first movers on it.

The the classic choice between all of $40 and half of $100.

December 3, 2009 at 8:20 PM  
Anonymous c23 said...

Lenin said


Yes, the U.S. government has the ability to devalue the dollar. Print more dollars to chase the same debts, and you get inflation. But as long as people are making dollar denominated securitized loans and the Fed doesn't get bat-shit crazy, we won't have true hyperinflation.


Look at USG's budget commitments, and then look at the politicians and voters who would have to pay them. Can you really say that it's unlikely that they'll support a combination of huge tax increases and deep spending over printing their way out of the mess?

Inflation on the level of hyperinflation is not necessary to make the dollar a bad bet.

December 3, 2009 at 8:21 PM  
Blogger G. M. Palmer said...

I think you fellows are imagining that there will be some effective governance to enforce the remonitization of gold.

When USG fails, the only real monetary option will be gold and to a (much) lesser extent silver.

"The rule of law" will be fsckall of an incentive for some group of people with more guns than you to give you real money that you paid for in pixels.

I don't know that I would keep LOTS of gold near my person, but not to keep a little is silly. Especially if it can (and will?) go up in value an order of magnitude.

December 3, 2009 at 9:07 PM  
Blogger Gold said...

Great Blog!You have mentioned very useful information about silver and
gold coins.And Thanx for giving me good knowledge about silver and
gold coins.I visited a site before in that there are a lot of collection available for gold coins and US Mint Silver Coins.You can also visit that site for more knowledge.

December 3, 2009 at 9:29 PM  
Anonymous Anonymous said...

"Gold in Fort Knox" Ha! Ha! Ha!
Everything else you wrote is spot on! Keep up the good work.

December 4, 2009 at 12:43 AM  
Anonymous Pals said...

Newt,

I think you’re misunderstanding how currency collapses work. If (hypothetically) the Chinese government has a high amount of gold backing its currency while gold is at $1000 and the price shoots up to $10,000, then the Yuan has just become a very good strong currency because it is backed by gold. Yes, it would be devalued (compared to gold), because the backing was never 100%, but it would still be a strong currency because it has a lot of gold backing it.

If, on the other hand, the Chinese people have thousands of tons of gold stashed under their mattresses, and the government has very little gold, then if gold shoots up, the Yuan is shafted because it loses a lot of value, and people would rather use gold as money. This destroys the Yuan as a currency and makes the Chinese government almost impotent. They would have to then confiscate the gold. Not fun.

The perfect parallel is FDR in 1934. People had too much gold and as the dollar continued to slide, people were dumping it. The end game was a collapse of the dollar and the destruction of USG. So FDR had to confiscate the gold to avert that.

Hence my point: if China understood the game well, it wouldn’t want its people to be buying gold, it would much rather want to buy the gold itself.

Although… there could be some Chinese John Galt within the government who knows this and is telling the people this to shaft the communist party!

GW and blue anon,

Read some of the previous Moldbug essays on gold to understand the question better. You’re attaching too much importance to the hot lead and missing the monetary analysis.

Lenin of Liberty,

Look up the word “intrinsic” in a dictionary.

Also, you say: “But as long as people are making dollar denominated securitized loans and the Fed doesn't get bat-shit crazy, we won't have true hyperinflation.”

If this isn’t batshit crazy, what is? And how’s that securitization business been doing recently, eh?


Leonard,

The real reason other metals are at a disadvantage is that if their production is ramped up; it can immediately produce very large quantities that can meet increased demand, lowering the price. This makes it hard for them to have the huge spike in price that is both the manifestation and the trigger of monetization.

With gold and silver, thousands of years of stockpiling mean that no matter how much production is ramped up, it cannot come anywhere near meeting new monetary demand, and so the spike is irreversible and self-reinforcing.

Incidentally, does anyone have any thoughts on silver? It seems the ratio of its price to gold has been narrowing, meaning that it’s making bigger gains than gold recently. According to Mencius’ logic, this should alarm you to the possibility that it might be the new money.

Zdeno,

That’s an excellent point. I hadn't thought of this before, but I think you’re absolutely right. Shifting 1 Trillion Dollars into anything that's suitable as a monetary commodity will almost certainty seal the deal.

December 4, 2009 at 2:33 AM  
Anonymous PGGT said...

AM I TOO LATE TO CUT AND PASTE EVERYONE'S COMMENTS HERE AND RESPOND TO THEM ONE BY ONE, LETTER BY LETTER?

DURP DURP

December 4, 2009 at 2:46 AM  
Anonymous josh said...

thanks for the advice. Now, I just need to grow a pa

off topic,
I was looking for primary sources to use in a history class, when I came across this from Time magazine. Did you guys know that Hitler was funny? It actually reminded me of MM. I kept smiling, and then feeling really weird about it.

http://www.time.com/time/magazine/article/0,9171,761197,00.html

December 4, 2009 at 5:08 AM  
Anonymous Alex said...

buying physical bullion isn't the best way to own gold by any stretch. the liquidity stinks, and you also have to deal with storing it.

it's easy enough to open a futures account with someplace like tradestation, where you can take a liquid position on futures or options on the NYMEX listed futures. if the leverage and margining of an outright is too daunting, you can buy calls (even though the prmiums now are no bargain.) u might consider buying call spreads instead (ie buying a 1300 call and slling a 1400 call against it, 4 USD to pay 10 for 1400/oz or more in dec 2013.)

December 4, 2009 at 5:52 AM  
Anonymous Alex said...

I've never really understood why gold miners sell gold, beyond recouping the cost of mining

gold miners sell gold at least in part to service debt whose coupons are in dollars not ounces, and because their lending banks demand that it be hedged. not every lender is bullish metals.

Still another reason is that gold mines are themselves real options struck roughly at the extraction cost. Much of a gold mine's worth comes from volatility gains to be made range trading the USD/GC relationship in the same way one would monetize a vanilla option.

more reasons: gold leasing doesn't pay very much, so inventories have a meangingful carry cost, compounded by insurance and warehouse fees.

palladium is up a lot more than gold - is anyone looking at that one? a much smaller effective float, all sorts of renewables applicaton as well as refining, either of which should make it very tempting to chinese buyers in coming years.

December 4, 2009 at 6:15 AM  
Anonymous Anonymous said...

"The rule of law" will be fsckall of an incentive for some group of people with more guns than you to give you real money that you paid for in pixels.

If you can't get your money out of a Swiss or Australian bank, then the world is in such a Mad Max situation that the inability to access your bank account is the least of your concerns.

December 4, 2009 at 6:51 AM  
Blogger G. M. Palmer said...

Well if you're in the US and USG is tightly controlling communications, then yes, you have a problem. Moreover, "large amounts" of bullion is relative. $20,000 of bullion is a pound, folks -- a sleeve of coins less than half a foot tall. If gold "only" goes up by an order of magnitude, you'll have more cash than you'll likely need for a while. If you can afford say 60 or 100k now then you'll be even better -- and still hardly inconvenienced.

December 4, 2009 at 7:30 AM  
Anonymous Leonard said...

Pals:

The real reason other metals are at a disadvantage is that if their production is ramped up; it can immediately produce very large quantities that can meet increased demand, lowering the price. This makes it hard for them to have the huge spike in price that is both the manifestation and the trigger of monetization.

Yes, this is what I was getting at when I said "mining is inflation".

On silver: there is no serious remaining monetary stockpile of silver. (I guess China is buying some, but the total stockpile compared to production per year is still minimal.) Silver is used in jewelry and other shiny things, so there is some "collectible" monetary penumbra. But there are no longer tonnes of it owned by any central bank. It is functioning pretty much like any other commodity metal.

My take on what is happening in all the precious metal markets is that people are playing commodities as investments. The housing bubble has popped, and no new bubble seems to be puffing up as yet, even though the Fed is certainly trying. There's a lot of money floating around right now, looking for a good home. You can get negative real returns on a t-bill... any takers? (crickets) But most of this money is not smart money, that is to say, these investors do not have access to the analysis of John Law. (If they did, they would straight for gold, but they don't.) Much of the money going into precious metals is going into gold; it takes much more investment there to move the market because there is so much of it. But even a relatively modest shift in other precious metals will tend to move their prices, because they have no stockpiles to speak of.

I guess that what we will see in gold is a slow and steady ride up, whereas other metals will be up and down as people enter them, then leave whenever a new mine ramps up production, a cache is found and sold, or whatever. Or when they get to speaking to a goldbug who grasps the nature of the possible remonetization event. "In the end there can be only one."

December 4, 2009 at 7:35 AM  
Anonymous Gert said...

President Obama, read Mencius!

December 4, 2009 at 9:05 AM  
Anonymous Anonymous said...

If this is a gold bubble, it's unlike any other bubble that I've ever come across because it keeps happening over and over.

Normally, after a bubble reaches its maximum point of inflation and pops, it stays popped and doesn't begin to inflate again for many years or even decades - think Nikkei stocks in 1989, Nasdaq stocks in 2000, and housing in 2005. None of these bubbles show any real sign of inflating again, though, with all the money printing over the last year or so, anything is possible.

No, if the current move up in gold is a bubble it has to be some kind of new "recurring" bubble that offers better prospects for those wondering whether they should be buying the metal at more than $1,200 an ounce - if the bubble does burst sometime in the months ahead, given what's happened in recent years, it's likely to inflate again at some point, probably in September of 2011.

Of course, governments around the world could probably put an end to these recurring gold bubbles if they took Paul Volcker-like tough-love measures to restore confidence in paper money once and for all.

But, realistically, given today's decision makers, there are probably only two chances of that happening - slim and none, slim reportedly having just left town.

December 4, 2009 at 9:22 AM  
Anonymous Anonymous said...

Good read! Interesting to strip the situation down to game theory.

China? Right now, we seem to have a struggle between two power groups. The Communist Gov and the new capitalists on the coast. The New capitalists who are the other part of Chimerica want to continue the present policies. Obviously this cannot continue. The old commies/nationalists must get the upper hand and forget the American market and start creating an internal Chinese market demand.

So unpeg the dollar and let the Chinese CB change the dollar reseves to gold.

December 4, 2009 at 9:26 AM  
Anonymous Lenin of Liberty said...

@P.M. Lawrence: The dollar is indeed backed by taxing authority as well. I have to pay property taxes in dollars to keep my house. But I pay a hell of a lot more to my bank.

Look up fractional reserve banking and "money creation." Most of the money in our system was "created" by banks and other financial institutions. The original equity portion of the money base is a small fraction of total money. Bank created money has problems -- there are some positive feedback loops involved -- but it is not equivalent to simply printing money.

We used gold backed money to get the ball rolling; the dollar had to have value for people to borrow dollars in the first place. But even before the Fed was created, the money supply was backed by more than gold. Gold was a yardstick.

@c23: I am expecting 70s era inflation. Bad, but not hyperinflation by any means. Stock up on leisure suits.

@Pals: The Fed may be wrong, but it is not batshit crazy -- at least not yet. Some of the paper the Fed bought will turn out to have value after this panic is over. To the extent that the Fed overpaid, we will indeed have inflation.

---

Caveat: I assume inflation, but I might be wrong. We may have already seen the inflation in the form of the housing bubble. If credit rules tighten at the same time as the Fed floods the market with dollars, we might have a wash -- at least for durable goods and real estate. The cheap plastic crap at Wal Mart may become less cheap, however. And we might skip a year of electronics deflation.

December 4, 2009 at 9:33 AM  
Anonymous Anonymous said...

As usual the comments here are quite possibly the best on the web.

A few comments. Mostly on other comments. Many of these points have already been addressed – oh well.

China is a representative democracy. Yes, there is only one official party. What of it. Anything the Chinese Government does, it does for the same reasons USG does things - politics. There is no CCP "master plan".

China is now the world's largest producer of gold. Not much in the ground, but what is there can be extracted quickly. As the price of gold increases, that it is a helpful political tool. So why is the Chinese government encouraging citizens to buy gold? Perhaps for the same reasons USG encourages citizens to buy grain products.

Owning physical gold is not a good hedge against the end of civilization as we know it. Better hedges are ammunition, pepper, and single-malt scotch.

If you live in a country with moderate rule of law (such as the USA), then storing your physical gold in an overseas banking institution is counterintuitive. You're betting on catastrophe (more likely, seizure of private gold holdings a la FDR) where you live, but international wire transfers as usual? Doubtful. Let's review the Seasteading dilemma. So long as USG doesn't care about your overseas gold, having it overseas is worthless. As soon as USG decides to care, having it overseas won't matter.

The dollar is not equity. Equity is paid in by somebody. Who paid in the equity dollar? (No, not taxpayers. That is not how a fiat money system works.) Technically the dollar is a debt instrument: it says "Federal Reserve Note" on the front. Yes, the "promise to pay" is not worth much. This makes it junk debt. Junk debt is not new.

But this is immaterial. The value of the dollar is not as a financial instrument, but as money. Money is a commodity medium of exchange which arises naturally out of a barter system because it is convenient.

Schelling points are a simple identity. They are because they are. The clock in GCT is a good meeting place because people agree that it is, not because the stars on the ceiling are pretty. Money is money because people agree that it is, not because it is “backed” by anything. Whether dollars or gold, money is money because it is convenient. It is possible that the dollar became convenient as money because USG forced its adoption through military power. (That isn't really what happened, but it could have.) However, how we got there is immaterial to its useage as money today. Just as why many individuals decide to meet at the clock in GCT is immaterial to its usefulness as a meeting place.

“Remonetization” of gold is not a zero-sum game. If adoption of a gold standard will benefit the U.S. more than China, this does not mean that China doesn't benefit.

"Remonetization" is also not quite correct. Gold already is money, and has been for thousands of years. It just isn't a universal currency. But neither is the dollar – there are places you can go and things you might like to buy for which dollars are not very useful. (E.g., prison.) There probably has never been a universal currency. It may be useful to think in terms of competing forms of money. As gold becomes more competitive with dollars in its useage as a commodity medium of exchange, its value as money (as opposed to a shiny metal) increases. The “dollar value of gold” becomes meaningless: the value of money is in what productive assets you can exchange it for – like books, or ham sandwiches.

-- Dirtyrottenvarmint

December 4, 2009 at 10:02 AM  
Anonymous Anonymous said...

MM talking up gold is the greatest contrarian indicator ever! MM posts about gold on 12/03 and on 12/04 its down $50/oz.! I don't have much of an opinion about where gold is going, but its definitely amusing how well this blog has picked the local tops.

December 4, 2009 at 10:15 AM  
Blogger G. M. Palmer said...

Dirtyrotten:

Oh, yes yes. One must certainly own guns + ammo + salt + spices + staples + seeds (gassss?).

Gold (and, again, to an extent, silver) will always be valuable disproportionate to its utility. Ergo, always smart to have a bit.

Any investment over say $200k is best invested (for the one expecting civilization to collapse) in large, easily defensible swaths of land.

December 4, 2009 at 10:20 AM  
Anonymous Anonymous said...

If you live in a country with moderate rule of law (such as the USA), then storing your physical gold in an overseas banking institution is counterintuitive. You're betting on catastrophe (more likely, seizure of private gold holdings a la FDR) where you live, but international wire transfers as usual? Doubtful. Let's review the Seasteading dilemma. So long as USG doesn't care about your overseas gold, having it overseas is worthless. As soon as USG decides to care, having it overseas won't matter.

If we get to the point where the USG is seizing gold - and most likely, everything else via punitive taxation - then I intend to emigrate. Buh-bye! In order to do so, you need to have a nest egg overseas. Switzerland and Australia don't want indigents. The key is to get your money overseas before the USG stops you or taxes it too heavily. Then you don't have the problem of trying to take your money with you - you simply go to where your money is, or some other place where you can access it.

An American tyranny without TEOTWAWKI is far more plausible than TEOTWAWKI.

December 4, 2009 at 10:59 AM  
Anonymous Lucas said...

Question: What if a medium sized CB choose to go 100% gold, would this be enough to shift the entire world reserves? In other words: how big must a big player be to cause reflexivity? Would Brazil be big enough?

Another question: What happens if a small CB goes gold? Even more instability?

Yet another question: Couldn't we conceive a scenario where all CB that didn't make the transition into gold get together to use political pressure to stop the gold-standard-loving Chinese government?

And yet one more: CB are controlled by government. Assuming Public Choice school is correct (ie: politicians act in self-interests), assuming a gold standard would greatly diminish government power of individuals, wouldn't CB veer from this policy, out of a longer-term calculation (ie: they would be praised now, but would lose power later)?

Either way, is seems to me that the dollar wouldn't go all the way down. Probably, its destiny would depend altogether on the decision of the then ruling leadership. They might also move the dollar into the gold standard, greatly downsize government, etc.

December 4, 2009 at 12:19 PM  
Anonymous Anonymous said...

Anyone who invests in derivatives thinking that they would survive such a sea change is deluded. It is the whole notion of derivatives that has polluted the punchbowl to start. Notional value has gotten too unwieldy - hence the interest rate bomb that ties hands today. Sure - "bet on gold", but cash in your chips before they incinerate. When GLD and COMEX join hands and take the lover's leap, you won't even get the car they left behind.

December 4, 2009 at 1:03 PM  
Blogger Leonard said...

Lucas those are good questions.

Regarding the nature of the game: it is unstable, and there is no way to completely predict the outcome. Collusion among the major players can, in theory, stop gold monetization, even if a minority adopt it. But I would think they would need much more forceful measures than they seem likely to be willing to engage in.

For example, if China were to "go gold", one way they could certainly be stopped is thermonuclear war. I doubt Obama would be willing to push the button for that, though, in spite of his already having secured his peace prize. We might also imagine a scenario where China goes gold and the USA threatens to embargo them. That is, they threaten a worldwide economic collapse.

As for how "public choice" relates here, it is not clear. A public official should seek only to self-aggrandize; helping out other politicians may or may not be predicted by selfishness, depending on how tightly they are bound. Certainly gold monetization is disempowering for politicians in general. However it may be that for some CB officials, their own jobs are not threatened.

The dollar cannot lose all of its value unless the USA abolishes its privilege as legal tender. But that is not the point here. When we speculate about $20000/oz, we explicitly acknowledge that the dollar still has value: it is worth exactly 1/20000 of an ounce of gold. Rather, think of this in terms of "money is the bubble that does not pop". Right now, that bubbly force has puffed up the value of a dollar considerably. The speculation is what happens when said bubbly force is transferred from the dollar to gold. Then dollars decline, and gold increases in value.

Back in February, MM suggested that a ballpark guess can be constructed by comparing annual global gold production, which while elastic is not as elastic as one might think, to annual global savings. Using that, I computed a figure of $169,780/oz.

December 4, 2009 at 1:30 PM  
Blogger Anthony said...

So, if Cheng Siwei and Hu Xiaolian understood the game theory, they might go ahead and "stimulate the market." China cannot prevent her purchases from stimulating the market. But she can ensure that when she stimulates the market, she stimulates it first - thus getting the best price. And thus ending up with the most gold.

Ah - but their current strategy does this. They buy gold in smallish quantities. They jawbone the price down. They keep buying in smallish quantities at something resembling current prices. They build their stockpile up more before anyone else starts the run on the market.

It takes two to start the run - if just one CB decided to make a run for gold, the other CBs could dump some gold and crush the errant one. If two decide, then it's game over, unless combined, they're small enough to be crushed. China wants to be sure they have enough gold, and enough green paper, to be able to play in the run on gold when it decides it wants to make a run on gold.

December 4, 2009 at 1:48 PM  
Anonymous Anonymous said...

Haven't read the other comments. My thought is that this can't happen yet because China's military is still too weak. The "band aid" approach would likely spark a war. USG may be a dysfunctional mess, but our military is still strong. It wouldn't take much to convince the rubes that China is the goat in need of slaughtering if it took an aggressive step. China realizes that it can't yet go to war with us. If China acts slowly, USG will likely continue to run this country into the ground. China will grow its military strength and ours will stagnate until we are too weak to do anything when the hammer drops.

December 4, 2009 at 3:56 PM  
Blogger Laeeth said...

I commend the commentary of Paul Jones to this house.

http://www.scribd.com/doc/21753600/Tudor-Third-Quarter-Letter

The history of inflations is that it is a deflationary crisis that precedes the acceleration phase. Central banks do not sign their death warrants unless their appears to be no other choice. This was the case in Weimar Germany, and in Argentina and possibly it will be true this time round in the UK and US.

Bernholz' Monetary Regimes and Inflation and Bresciani-Turroni's study of the Weimar inflation are both very good reads.

December 4, 2009 at 4:23 PM  
Anonymous P.M.Lawrence said...

Lenin of Liberty wrote 'The dollar is indeed backed by taxing authority as well... But I pay a hell of a lot more to my bank. Look up fractional reserve banking and "money creation." Most of the money in our system was "created" by banks and other financial institutions. The original equity portion of the money base is a small fraction of total money... We used gold backed money to get the ball rolling; the dollar had to have value for people to borrow dollars in the first place. But even before the Fed was created, the money supply was backed by more than gold...'

There is a considerable confusion here, which you almost clear up with that last sentence. All those other things do indeed happen - but they are multipliers, not backing. That is, without something providing a supporting base - backing - they do not have anything to multiply; the currency would collapse in short order if the backing were taken away and only the multipliers were left, as soon as the new value support of zero had gone round the cycle a few times.

For a loose analogy, think how regenerative braking works in an induction motor. It gives out AC power - but only while there is a separate AC source providing "reactive volt-amps" to give it a base.

December 4, 2009 at 5:43 PM  
Anonymous P.M.Lawrence said...

Oops, I meant "second last sentence".

December 4, 2009 at 5:46 PM  
Anonymous Anonymous said...

los angeles now has "gang tours":

http://www.latimes.com/news/local/la-me-southla-tours5-2009dec05,0,6167426.story

December 4, 2009 at 8:23 PM  
Anonymous Poseidon said...

"Ideally, you would like to buy at a price set by supply and demand (not including you). You would rather not buy at a price set by supply and demand (including you)."
China's urging its citizens to buy bullion looks to me like a way of doing just that. Of course they'll probably seize it all someday a la Roosevelt in 1934.

"Either Mr. Cheng and Ms. Hu do not understand the game theory of monetary formation - or they do and they are playing it close to the chests. If they - or their colleagues - ever figure out the game, God help the dollar."
I would be amazed if they weren't aware of exactly what they are doing. As soon as I read that a few days ago, I just assumed they were trying to talk down the market to help themselves to more cheap gold. Incidentally, it sure seems unlikely we'll see any more 30% dips in the price of bullion, at least not until it spikes a heck of a lot higher. There are too many big players wanting to buy the dips, or at least avoid moving the price up with their purchases.

"Four: the buyer looks good, because the assets he bought went up."
And the reverse is true, e.g., "The Brown bottom." Of course, looking bad doesn't necessarily keep you from becoming the head man in England.

"Thus there is an entirely different Nash equilibrium out there - one in which all the central banks dump the dollar for gold."
That, sir, is the difference between you and I. You call it a Nash equilibrium. I call it a mad dash for the exit, and I question only when, not if. The dollar's fall will occur in a series of dramatic episodes, I have no doubt. Not smooth.

"When remonetization is complete, by definition the CBs will be computing their accounts in gold."
And then there will be "enough" gold for a gold standard. I like!

"A classic panic scenario. A melt-up for gold; a melt-down for the dollar."
Like'n ah sayid...

"Gold can be monetized, and peanuts cannot be monetized, because of fundamental physical differences between gold and peanuts."
Mencius is not an advocate of the Peanut Standard. Perhaps if their acceptance as money was legislated by fiat...? Carter was an advocate.

"[China] will not have enough gold to back all the yuan in circulation. At least, not at the present yuan-dollar ratio."
Kim Jong II, please report to the central bank.

"But since the US has a huge hoard of gold..."
Last audited during the Eisenhower administration. I would be shocked, just shocked to discover it has largely been replaced with a pile of IOUs from Morgan. And any rational person would agree with Treasury's objection to a modern audit: "It would cost too much."

"At the end of the game, your economy is on the gold standard. You are a healthy financial and industrial power, not a strung-out inflation junkie. "
Ah, Mencius. Are you smarter than a Princeton full of quant economists? You simpleton, you.

"When the impossible is eliminated, the improbable becomes a certainty."
Did you nick that from young Spock in the new Star Trek film??

December 4, 2009 at 11:52 PM  
Anonymous blue anon said...

> The "band aid" approach would likely spark a war.

China has ICBMs that do 15,000 km, so how can we have a war. At most we can arm their foes, a la 'Nam or Afghanistan during the Cold War.

December 5, 2009 at 1:04 AM  
Anonymous Pals said...

Laeeth,

That's an excellent point and one that hardly gets mentioned. This is well worth keeping in mind when sme mainstream economics retard tells you inflation isn't an issue because we have deflation.

Rothbard argues this in The Austrian Theory of Money, which is well worth a read.

Excerpt:

The ultimate result of a policy of persistent inflation is runaway inflation and the total collapse of the currency. As Mises analyzed the course of runaway inflation (both before and after the first example of such a collapse in an industrialized country, in post-World War I Germany), such inflation generally proceeds as follows:

At first the government's increase of the money supply and the subsequent rise in prices are regarded by the public as temporary. Since, as was true in Germany during World War I, the onset of inflation is often occasioned by the extraordinary expenses of a war, the public assumes that after the war conditions including prices will return to the preinflation norm. Hence the public's demand for cash balances rises as it awaits the anticipated lowering of prices. As a result, prices rise less than proportionately and often substantially less than the money supply, and the monetary authorities become bolder. As in the case of the assignats during the French Revolution, here is a magical panacea for the difficulties of government: pump more money into the economy, and prices will rise only a little! Encouraged by the seeming success, the authorities apply more of what has worked so well, and the monetary inflation proceeds apace. In time, however, the public's expectations and views of the economic present and future undergo a vitally important change. They begin to see that there will be no return to the pre-war norm, that the new norm is a continuing price inflation—that prices will continue to go up rather than down. Phase two of the inflationary process ensues, with a continuing fall in the demand for cash balances based on this analysis: "I'd better spend my money on X, Y, and Z now, because I know full well that next year prices will be higher." Prices begin to rise more than the increase in the supply of money. The critical turning point has arrived.

December 5, 2009 at 9:38 AM  
Anonymous Pals said...

continued:



At this point, the economy is regarded as suffering from a money shortage as evidenced by the outstripping of monetary expansion by the rise in prices. What is now called a liquidity crunch occurs on a broad scale, and a clamor arises for greater increases in the supply of money. As the Austrian school economist Bresciani-Turroni wrote in his definitive study of the German hyperinflation:

The rise of prices caused an intense demand for the circulating medium to arise, because the existing quantity was not sufficient for the volume of transactions. At the same time the State's need of money increased rapidly... the eyes of all were turned to the Reichsbank. The pressure exercised on it became more and more insistent and the increase of issues, from the central bank, appeared as a remedy.... The authorities therefore had not the courage to resist the pressure of those who demanded ever greater quantities of paper money, and to face boldly the crisis which ... would be, undeniably, the result of a stoppage of the issue of notes. They preferred to continue the convenient method of continually increasing the issues of notes, thus making the continuation of business possible, but at the same time prolonging the pathological state of the German economy. The Government increased salaries in proportion to the depreciation of the mark, and employers in their turn granted continual increases in wages, to avoid disputes, on the condition that they could raise the prices of their products… Thus was the vicious circle established; the exchange depreciated; internal prices rose; note- issues were increased; the increase of the quantity of paper money lowered once more the value of the mark in terms of gold; prices rose once more; and so on…
For a long time the Reichsbank—having adopted the fatalistic idea that the increase in the note- issues was the inevitable consequence of the depreciation of the mark—considered as its principal task, not the regulation of the circulation, but the preparation for the German economy of the continually increasing quantities of paper money, which the rise in prices required. It devoted itself especially to the organization, on a large scale, of the production of paper marks.

December 5, 2009 at 9:39 AM  
Blogger GW said...

I have one simple rebuttal for those who seem to think that the gold standard is somehow instrumentally superior to the Hot Lead Standard: FDR's seizure of private gold holdings in the 1930s.

It's not the 1930s any more. The Orwellian state is now fully established and our culture has already accepted arbitrary seizure under things like RICO and Zero Tolerance.

If you think you can stand against something like that, a situation in which your precious gold holdings become legally akin to a vault full of rock cocaine and subject to instant seizure by paramilitaries, I wish you luck. Gold isn't money any more when any use of it is subject to proscription and seizure.

Don't delude yourself into thinking that's not politically or legally possible. It's why the dollar is backed by Hot Lead, not gold, in the first place. Doing it again would be a trivial exercise (and would probably start with seizure of GLD and COMEX reserves and voiding of all paper assets backed by gold).

December 5, 2009 at 4:36 PM  
Anonymous Anonymous said...

The Nature of Money and Government

"Federal Reserve money buys protection from punishment. You are punished if you don't pay taxes. This has become the Federal Reserve's primary monetary authority. The moral hazard of basing monetary authority on punishment has now been realized in the systemic and out-of-control gang rapes of prisoners in the US. All other unlawful acts by US governments are now overshadowed by the murderous, sexually sadistic character of governmental authority that has developed in US penal systems. Federal Reserve money is now protection racket money, or, if you prefer "punishment protection money". Calling it "fiat money", "debt money" or even "legal tender" obscures its true character. The transition to this form of money began in 1913, when the 16th Amendment dramatically expanded the potential need for legal tender in the form of taxes while, in that same year, the Federal Reserve Act started the process of removing from legal tender any backing value other than the protection it affords against punishment. That this redefinition of "legal tender" was unconstitutional(1) has become only a minor dimension of the massive decay in legitimacy and moral leadership during the 20th century triggered by these acts of 1913. These acts were largely in the interest of continental European banking concerns doing business under the name of J. P. Morgan. As vital interests of the United States were sacrificed on their behalf, those foreign interests are reasonably called "enemies of the United States", the acts of U.S. citizens on behalf of those enemies "giving them Aid" under Article III, Section 3, Clause 1, of the Constitution, and therefore all such citizens "traitors"."

[...]

December 5, 2009 at 7:01 PM  
Anonymous Anonymous said...

The Nature of Money and Government

Continued

[...]

THE MURDEROUS, SEXUALLY SADISTIC BASIS OF THE FEDERAL RESERVE

The Federal Reserve creates money by setting interest rates on the debt owed by the US government -- debt backed by the full faith and credit of the US government. Such debt is paid primarily by collecting taxes. Taxes are collected by the IRS, without the collection of which the Federal Reserve's authorities would be worthless. The IRS can bypass bankruptcy protection and place people in de facto debtor's prisons.

Once in prison, debtors to the Federal Reserve's actions are subjected to a variety of forms of abuse -- the most common of which is rape. More rapes are committed against men in our prison system than against all women in free and prison society, combined, every year. These rapes usually take the form of anal intercourse. Of the various sexual transmission modes for HIV, anal intercourse is the most efficient. Rape increases the efficiency of HIV transmission by causing physical trauma which tears the victim's flesh thereby creating a more effective point of HIV innoculation of the victim. HIV infection in the prison system is much higher than in the general public. Rapists are generally considered "psychopaths" and particularly in prison, being abused can predispose one to psychopathically abuse others.

3 out of 4 prison rapes are committed against young men whose primary ancestry is north and west of the Alps by men whose ancestry is primarily south and east of the Alps, even though those N&W men make up less than 40% of the prison population -- it is therefore "racist" and a cause of the formation of "white" supremacist gangs in prisons. It is also men of such ancestry that are most likely to be placed in prison for nonpayment of the taxes that back the Federal Reserve's credibility. Private debt collection agencies cannot avail themselves of such horrendous incentives with anywhere near the facility of the Federal Reserve's collection agency: The IRS. Wealthy individuals who don't want to think about where to place their money to accrue interest are therefore more likely to place it with the Federal Reserve than with any private sector counterpart.

The US Federal Government, by basing its monetary authority on punishment protection with the treasons of 1913, has degenerated into an irredeemably murderous and sexually sadistic regime operating without lawful authority.

When Pennsylvania Quakers established the original penitentiaries, they were places where a man was to spend time alone in a room with a bible to contemplate the error of his ways. Now they are the source of most acts of rape in our society as well as a primary dissemination point of the deadly Human Immunodeficiency Virus that causes AIDS(2).

This is so much the case that a standard book on preparing for prison life "You Are Going to Prison" by Jim Hogshire, answers the question "Will I get butt-fucked?" quite simply and in the affirmative. Government itself routinely uses the EXPLICIT threat of gang rape in 'crime prevention' programs aimed at youth, such as that depicted in the public television broadcast of "Scared Straight"(3) where youth offenders are warned about their fate as sex slaves if they go to prison. Awareness is so widespread that Hollywood movies routinely make light of the pervasive nature of prisoner rape. Until recently, federal officials have avoided, like the AIDS epidemic they help spread, any indication that they are conscious of the fact that their authority relies, in large measure, upon cruel and unusual punishment. But even that taboo may be crumbling(4).

Continued

December 5, 2009 at 7:05 PM  
Anonymous Anonymous said...

Continued

"Any reasonable man must ask and demand an answer to this question:

"How has the Quaker conception of the penitentiary been so perverted that the threat of HIV-infected gang rape of prisoners is now a primary component of the government's authority?"

The answer is simple yet profound. It lies in the distinction between the two bases of money:

Reward VS Punishment protection

Everyone is familiar with the concept of reward money -- money issued with a promise from the issuer to reward the bearer usually with some commodity, such as gold or silver, upon presentation to the issuer.

The concept of money backed by punishment protection sounds unfamiliar to all but a very few scattered individuals. It is unfamiliar even to Nobel Prize winning economists, let alone the vast pool of PhDs from whence they are chosen.

Yet punishment protection money is as simple and obvious as it is pervasive:

Money issued with a promise from the issuer to protect the bearer from punishment upon presentation to the issuer."

December 5, 2009 at 7:05 PM  
Anonymous Anonymous said...

The Nature of Money and Government

FORGET THE CLOTHES: THE EMPEROR IS A MURDERING RAPIST RUN AMOK

Many critics of President Clinton accused him of being a murdering rapist. But President Clinton was simply the by-product of an epic perversion that has overtaken the lawful government of the United States. It would be understatement to call this perversion a criminal gang. Criminal gangs only occasionally commit rape and murder against their own community. They don't pretend to be a lawful authorities in public. They don't issue their own currency as protection racket money and then demand it as "legal tender". They may rationalize their criminal conduct, but they don't convince themselves that what they are doing is lawful. They admit to themselves that they are gangsters. At least they are that honest. But, perhaps this is simply because gangsters are afraid to compete with the most massive criminal organization in history, whose roots extend back at least to 1913 when the Income Tax and Federal Reserve were created.

The Federal Reserve was created in the same year as the Income Tax for one simple reason:

The US Federal Government was shifting from Reward to Punishment Protection as the basis for its monetary authority.

Federal Reserve Notes are promises to reduce the bearer's risk of punishment for tax code violation, upon presentation to its collection agency, the IRS, in the form of Income Tax.

Note here that it is impossible to reduce the risk of punishment for violation of the income tax code to a level commensurate to the threat of prisoner gang-rape(5). This has become the foundation of the IRS/Fed's all-pervasive aura of fear(6) upon which their punishment protection money is based. The Income tax code is so complex that not even the IRS with all its private contractors from law and accounting firms, can reliably and reproducibly interpret it. This makes it possible only to _reduce_ the risk of punishment -- no matter how much wealth you turn over to the IRS.

In this manner the federal government creates demand for the Federal Reserve's otherwise worthless paper(7). Under the evil monetary basis of punishment protection, the government's monetary authority is limited only by the degree to which it can create pervasive terror of its prison system in the hearts of nonviolent potential tax code "offenders" -- and that means you.

With punishment protection as the basis of its monetary authority, and therefore its ability to buy votes, it was only a matter of time before the US Federal Government, as though an animal trained by operant conditioning, would find ways of increasing the severity and cruelty of its punishments.

Continued

December 5, 2009 at 7:09 PM  
Anonymous Anonymous said...

Continued

But like rat in a maze, the US Federal Government had a problem to solve:

How to impose cruel and unusual punishment without arousing the wrath of a people whose ancestors had risked a 1 in 4 chance of dying in the first year of migration to the New World in order to escape just such evils?

The solution, reached without conscious intent (conspiracy) of individuals was a form of punishment so cruel and unusual -- SO TABOO -- that no decent human being would even want to think about it, let alone use freedom of speech and the press to talk about it:

Gradually cultivate prisoner rape as the basis of government authority.

By replacing pillory, open corporeal punishments and work restitution, so common before the 20th century, with an environment in which Mafiosi and other gangster types are protected from prisoner rape while the American pioneer cultures, less prone to prison gang formation, are systemically gang-raped, an ethnic bias was created against the very peoples who founded the country to escape government predation. The actual bias is apparent as at least 3 out of 4 prisoner rapes involve blacks victimizing men of Protestant heritage while Mediterranean Mafiosi are somehow immune.

The ruthlessly pragmatic and sadistically sociopathic genius of this is that its very intensity, both as physical trauma and moral outrage, rendered it invisible.

Such is the mentality of the child molester who relies on the traumatic nature of his crime to cover his tracks -- seemingly unable to control his subconscious urges. Such was the mentality of those men who, in 1913, gave us the Federal Reserve and the Income Tax.

December 5, 2009 at 7:10 PM  
Blogger Mitchell said...

That gives a new meaning to "sado-monetarism".

December 7, 2009 at 2:37 AM  
Anonymous Anonymous said...

Every time Moldbug speaks kind words about gold, it always falls in price. I agree with an earlier commenter that Moldbug is the greatest contrarian indicator of the gold market.

-Victor

December 7, 2009 at 6:25 AM  
Anonymous Thom said...

Why, lookee here, it appears George Will is a Moldbug disciple!

The CRU materials also reveal paranoia on the part of scientists who believe that in trying to engineer "consensus" and alarm about warming, they are a brave and embattled minority. Actually, never in peacetime history has the government-media-academic complex been in such sustained propagandistic lockstep about any subject.

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/04/AR2009120403073.html

December 7, 2009 at 7:19 AM  
Anonymous Anonymous said...

Requiem for the Dollar

The thing to do, I say, is to restore the nets to the tennis courts of money and finance. Collateralize the dollar—make it exchangeable into something of genuine value. Get the Fed out of the price-fixing business. Replace Ben Bernanke with a latter-day Thomson Hankey. Find—cultivate—battalions of latter-day Hellmans and set them to running free-market banks. There's one more thing: Return to the statute books Section 19 of the 1792 Coinage Act, but substitute life behind bars for the death penalty. It's the 21st century, you know.

December 7, 2009 at 8:56 AM  
Blogger G. M. Palmer said...

Thom,

The few political hacks I have passed UR on to (and the folks they have shared him with) tend to agree with MM's diagnosis but not his recommendations. I don't doubt Will has read him or listens to someone who has.

December 7, 2009 at 9:18 AM  
Anonymous Sompstri said...

Thom,

The term "government-media-academic complex" has been used by others before.

Raju G. C. Thomas used it in the book Yugoslavia Unraveled: Sovereignty, Self-Determination, Intervention back in 2003.

December 7, 2009 at 9:35 AM  
Anonymous generic commenter said...

The solution to our monetary problems is more democracy:

http://www.youtube.com/watch?v=vJtS9CuyuaU&feature=player_embedded

December 7, 2009 at 9:00 PM  
Blogger Make Money Fast said...

Got $400,000 for my $20,000 deposit
We are a group of professionals dedicated to deliver you a stable return.
In Working-LR we are using the best analysis tools to help maintain our high profits in the Forex and Gold trading.
Our investment strategies are built on solid, proven to work commodity trading techniques developed by an elite reputable group of fund management professionals.
We use various investment strategies and always diversify our investments.
Diversification in trading is its most important part which minimizes the risks and generates larger profits.
500% daily for 3 days
800% daily for 2 days
2000% of your deposit after 24 hours
2000% of your deposit after 12 hours
2000% of your deposit after 8 hours
2000% of your deposit after 2 hours
2000% of your deposit after 1 hour
I got $400,000 for my $20,000 deposit
Date: 2009-11-27 13:36
Batch: 236043XX
From Account: U3548080 (workinglr)
Amount: $400,000.00
Memo: admin@workinglr.com

http://www.workinglr.com/?U9571960

http://www.workinglr.com/?U9571960

The min deposit is only $200, You can get $1000 daily for 3 days.
1500% OF YOUR DEPOSIT IN 3 DAYS. Never missing payment

You can find the site listed on
http://www.yahoomsngroup.com
http://www.payinghyiponline.com
http://www.makecurrencyonline.com
http://www.hyipfunding.com
http://www.libertyreserveforex.net

If you don't get paid from workinglr.com ,please mailto: Woodleyxqe@gmail.com
I will return 100% of your deposit.You have real no risk!

December 7, 2009 at 11:02 PM  
Anonymous Thom said...

I was just being kinda funny-jokey, y'all. That Will column was getting a lot of play in the blogosphere yesterday, so I kept running into that excerpt. And every time, I would see the phrase THE CATHEDRAL emerging onto my mind's screen like the opening title of Star Wars.

December 8, 2009 at 5:52 AM  
Blogger G. M. Palmer said...

Thom,

but the distribution of ideas is a fun topic on which to speculate.

i mean what the hell else are we doing? wearing golden bowties?

December 8, 2009 at 9:06 AM  
Anonymous Anonymous said...

Gold Down Over 8% in Last Four Trading Days

December 9, 2009 at 4:30 PM  
Anonymous Leonard said...

Gold Down Over 8% in Last Four Trading Days

Thus: BUY!

December 9, 2009 at 4:59 PM  
Anonymous Anonymous said...

Mencius,

Nouriel Roubini, whom you've praised in the past for calling the financial crash and for taking a somewhat Austrian approach to things, is now calling the gold rise a bubble and suggests buying Spam instead.

Any thoughts?

December 12, 2009 at 1:54 PM  
Blogger Zimri said...

In other news, for the Jacobites amongst us: it looks like Elizabeth Saxe-Coburg is about to appoint li'l Charlie as Duke of Windsor, ruler over the Bahamas and all its domains.

Hopefully we can get Crown Prince William to read this blog . . . .

December 12, 2009 at 10:07 PM  
Anonymous Moses said...

U.S. physical currency can be viewed as unbacked. However, there's not much physical currency in circulation and much of it is overseas. The U.S. is not Wiemar, Zimbabwe, or even China today. The currency is mostly debt, backed by mortgages.

Laeeth is entirely correct that the initial phase is a debt deflation. The Fed and global central banks tried to avoid the deflation, a situation of far too much debt and not enough money, by filling in the gap with new money. However, they have just created more debt backed money where they've succeeded, and where they've failed, the new money sits in bank reserves as "neither a lender nor a borrower be" is the new national motto.

Yes, Virginia, U.S. physical dollars are in fact scarce! In order to have a hyperinflation, it will require either massive literal printing of money or digital printing. Say, USG announces on Saturday evening that all bank accounts will have an extra zero on Monday morning.

If we avoid deflationary collapse, there's no need for such a drastic step. We may have bad inflation and higher gold prices, but no remonetization.

December 13, 2009 at 7:53 AM  
Anonymous Genius said...

Dude. You do realize that you owe us a post from Thursday, right?

December 13, 2009 at 1:10 PM  
Blogger Mitchell said...

Celia Green on the psychology of coronation.

December 13, 2009 at 8:10 PM  

Post a Comment

Subscribe to Post Comments [Atom]

<< Home