The golden calf

In my post "The Nature of Money" I noted that money's use as a store of value is secondary to its function as a medium of exchange, and commented that long-term savings should not be held as "money" but rather as hard assets or investments in productive activities. I made it clear that my personal belief is that the latter is far preferable, because it benefits not only the holder but the rest of society too.

This attracted the attention of a number of people who appear to have an almost religious belief in the virtue of gold as a store of value. The result was a bruising three days of intense debate on twitter, which was only ended when I blocked several of these people and warned off the rest. I was frankly shocked by the fervour of their belief: the more convinced they were that eventually I would "see the light" the less I wanted to have anything to do with them. I felt much as an agnostic must feel when subjected to the attempts of religious cultists to convert them to their religion. How can an inert metal be the object of such faith?

Since that encounter I have spent some time reading the writings of their guru, an anonymous blogger known as FOFOA (which apparently means Friend of Friend of Another). I'm going to summarise here what I have drawn from these writings.
  • In these people's world, gold does not rise in price as people invest in it, unlike any other commodity. They invert the charts that show the rising gold price and use them to demonstrate instead that the dollar is collapsing.   
  • They then go on to suggest that because the dollar is the international reserve currency, when it collapses against gold everything else will collapse too and there will be worldwide hyperinflation (I've noted before that hyperinflation is currency collapse, not price increases per se). They call this a "phase transition" into a new financial world where gold will be the international reserve and all savings will be in physical gold, not in money or in any forms of asset-backed paper. They believe that once the gold price reaches a certain level this transition becomes inevitable, and therefore they are pushing for the gold price to rise (or rather, for the dollar to fall against gold, as they see it).
  • They believe the reason for the dollar's collapse is the unsustainable level of US public debt, which is driven at least in part by its trade deficit arising from the dollar's status as international reserve currency. They call this status an "exorbitant privilege" and claim that it has been used to enable the US to borrow higher amounts, at lower interest rates, than any other country. Although there is currently a large and liquid market for USTs - and even a shortage of them - they believe that the world will eventually reject US debt as a safe asset, which will trigger unstoppable flight to hard assets (gold) and hyperinflation of the dollar against gold as noted above.
  • They encourage all the "enlightened" to buy physical gold to protect their wealth against the coming hyperinflation, which will also see collapse of the value of all assets except physical gold and other "hard" assets. 
  • They note that central banks have been buying gold. They seem to think this means the central banks are preparing for the phase transition, in which they expect the financial system to be recapitalised with gold.
  • Their aim is to create a system of paper currencies unlinked to gold (they do not propose return to the gold standard) whose function is only as a medium of exchange, coupled with physical gold both as an international reserve and a store of value for all savers. There would no longer be any means of saving in currency or in any form of asset-backed paper. At-risk investment for a return would still be possible, but the current arrangement where by ALL savings are reinvested in productive activities would end. In this respect their theories are similar to those of other "full reserve banking" enthusiasts, except that they do not accept public or private debt as appropriate backing for savings: to them, all savings should be in physical gold. 
  • They identify the Euro as the future currency of international trade, because in their view it has broken the link both with national governments and with gold: they regard the gold reserves held by the ECB as a pure store of value unconnected with the currency. The fact that the Euro is the national currency of 17 countries is of no importance to them, and they dismiss out of hand the possibility that the Euro may prove unsustainable because of the deep structural imbalances between its member countries. 
These theories together create a looking-glass world: everything is the wrong way round. In particular, the reversal of the gold price chart makes it impossible to have a normal conversation about "flight to safety" behaviour and the pricing of commodities. Duncan Weldon noted in his recent post that the reasons people give for low gilt yields resemble a Necker cube: whether the cube faces inwards or outwards depends on your perspective. The reversal of the gold price chart is similar. The rest of humanity regards gold as priced in dollars, so when lots of people are buying gold its dollar price rises: in that it behaves like any other commodity. But not to these people. Gold, to them, is not a commodity, so its price is not moveable: if the amount of dollars required to buy an ounce of gold increases, that is because the value of the dollar has fallen, not because the price of gold has risen. To these people, gold is the ultimate, original, perfect store of value, which has been deprived of its true status by the use of paper (including gold-backed paper) as a store of value. They describe the "freeing" of gold from its present use as a fixed asset backing paper investments, and from any present or future monetary use, as Freegold.  

I must emphasise that this is my understanding. One of the features of my conversations with the Freegolders people was their insistence that I did not understand, and that when I did I would convert to their belief. The FOFOA blog itself says something similar about people who criticise its writing. For me this is uncomfortably close to the concept of "gnosis" - the idea that there is hidden or special knowledge that is acquired only through spiritual enlightenment.  And when you partner this "gnosis" with their belief in a financial Armageddon from which only those who subscribe to their teachings will be saved, we seem to have something akin to a doomsday cult.

However, although I am uncomfortable with the quasi-religious presentation of this set of theories, if they made sense economically I would subscribe to them. But as far as I can see they don't - at least not in any vision of the world that I recognise. My real objections to their proposals are far more fundamental. 

Firstly, these people do not like or trust government. I've noted before that when people don't trust government they reject it: they may physically leave the country, or they may take their assets out of the country or place them (as they think) beyond reach of the grasping hands of public servants, or they may seek to overthrow it and replace it with something more to their liking. These people think that by putting their wealth in physical gold they can prevent it being eroded by government mismanagement (inflation) or expropriation (taxation). And their belief in financial Armageddon and phase transition to a new gold-based financial order (which they are working to bring about by encouraging people to move their savings to physical gold) amounts to seeking to overthrow the existing system and replace it with something more to their liking. 

Personally, I think government is necessary. Yes, all governments have their faults: some are corrupt, some are incompetent, some are unlucky. But they do provide the basics in society: protection of boundaries, rule of law, and - increasingly - social safety nets. This latter is the most controversial, and there are plenty of people who think it is far too large and protects people who don't really need protection. Personally I think that social safety nets are a good thing: there will always be people who exploit them, but they are nonetheless one of the things that raise us beyond mere "survival of the fittest". The desire and ability to care for those who are not able to care for themselves is part of what distinguishes us as a species: it is, to some extent, what makes us human. Government is responsible for redistributing resources from those who have more than they need to those who have less than they need: philanthropic giving also achieves this but on a more patchy and less consistent basis. It is not surprising that those who have more than they need, and who selfishly wish to hang on to their surplus, resent government seeking to take it from them. That selfish desire to hang on to wealth is I believe the main motivation of the Freegold supporters. And that brings me to my second objection. The unproductive hoarding of wealth runs counter to everything I believe - both economically and as a Christian.

Economically, I think large-scale hoarding of wealth is bonkers. Our economies don't grow by themselves: businesses need capital in order to produce, and the creation of that capital requires investment. Investment comes from the excess production of other businesses and individuals, recycled back into the economy through lending to, and equity investment in, productive activities. There is nothing productive about sitting on a hoard of gold, and the only beneficiaries of the trade in physical gold that would ensue from forcing all savings into gold would be the buyers and sellers of gold. That is not to say that the present situation, whereby debt and equity assets are "churned" on secondary markets, is much better: but at least the initial investment goes into productive activities, even though subsequent trading of the assets is largely unproductive. If the initial investment is in gold or other hard assets, NO-ONE benefits. And if enough people invest in hard assets instead of putting their wealth to productive use, the economy will be starved of the investment it needs to grow. Far from encouraging people to buy gold, personally I would impose punitive taxation on large holdings of unproductive assets. It's economically disastrous. 

The argument used by those who have surpluses is that they have gained them through their own hard work and should not have to use them to benefit others. This frankly is the law of the jungle. If everyone thought like that society would be a very unpleasant place: those with wealth would hoard it, and those without wealth - including those who are unable to care for themselves - would starve. In my post on the benefits of a debt money system I pointed out that lending is one of the ways in which we recycle the resources of the rich to benefit the poor: the other mechanisms by which we do that are taxation and philanthropic giving. These people reject both lending and taxation, never mention philanthropic giving at all, and promote hoarding. And this is where both my understanding of economics and my Christian beliefs force me to reject everything they propose.

When production is insufficient to meet the needs of all, surpluses deprive others of their needs. The only justification for holding a surplus would be if production is falling, when meeting one's own future needs at the expense of the immediate needs of others is at least understandable (though from a Christian perspective clearly wrong). But if production is NOT falling, then hoarding surpluses is both economically and morally wrong. Economically, because it deprives the economy of the investment it needs to increase production to a level where everyone's needs can be met - which surely must be the goal of any civilised society. And morally, because hoarding a surplus when there is no reason to assume that it will be needed in the future, is sheer greed, and refusing to use that surplus for the benefit of others is sheer selfishness. So when people put their savings into unproductive assets, they are guilty of both greed (because they have taken more than they need) and selfishness (because they have deprived others of what they need). I'm sorry to use emotive terms, but we are no longer in the realms of simple economics. We are dealing with the morality of hoarding.

The entire moral argument for Freegold therefore hangs on belief in financial Armageddon. Without that, I doubt if many people would buy it. No wonder the guru promotes the "coming disaster" story.

So, is this financial Armageddon likely? Are we really facing global hyperinflation, currency collapse and economic meltdown? I don't think so, because the whole argument comes from an inverted view of the world: even if the dollar crashed against gold, it still would not be experiencing hyperinflation if its value held up against other measures. But if we were, I wouldn't be hoarding gold, personally. Tinned food, candles and matches would be far more useful. The Freegolders seem to think that their "phase transition" would only take a few months, and they reckon they have enough food stored to keep them going during that time. But economic and social chaos on the scale they envisage wouldn't take a few months to resolve. It would take years. And I stand by what I have already said. I do not believe that protecting my wealth, while leaving others to suffer what would be appalling hardship during such a change, is compatible with my Christian beliefs. If this ship is sinking, I will share my last sea biscuits with my fellow crew members and go down with the ship, rather than save my life at others' expense.

But what if the guru is completely wrong? What if financial Armageddon doesn't happen? What if - as Izabella Kaminska has suggested in her recent series of posts, "Beyond Scarcity" - we are entering an era not of insufficient production to meet everyone's needs, but an era of OVER-production? If there is actually more than enough production to meet everyone's needs, then hoarding is pointless and surpluses are worthless. The value of a surplus is determined by the extent to which it is needed, regardless of the medium in which it is stored. Surpluses by definition are not "needed" now, at least by the holder - though as I noted above they may be needed by others. But if they are not needed in the future either, they have no value.

Without financial Armageddon, Freegolders - and other hoarders - would be forced to confront this conundrum: if a surplus has value and is not used in a way that benefits others, it is immoral, because it deprives others of their needs: if it has no value, either now or in the future, it is pointless.

So why do they do it? I don't know, but I am reminded of the story of Moses on Mount Sinai (Exodus chapter 32). He spent rather longer up the mountain than the Israelites were expecting. They became fearful that he wasn't coming back, and that (more importantly) God had abandoned them. So they turned to another god. They melted down all their gold jewellery and created a golden calf, and they bowed down and worshipped it.......


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Comments

  1. Interesting.

    I have come across the expression "Guns, Gold and Gold" to describe Armageddon sects. Gold because there will no money, guns to protect their property and God because there is a religious connotation to the end of the world. Personally, I think they are fruit bats.

    The sect you describe also sound similar to our very own UK based Freeman of the Land sect. These whackjobs believe that Parliamentary laws have no validity and that common law is supreme. They have all sorts of mumbo jumbo surrounding this and have been known to disrupt Magistrates Courts during sittings on the ground that the court has no validity. Not a very wise thing to do.

    I share your beliefs, as unfashionable as they currently are, that the strong should care for the weak.

    I would like to think that if members of these sects, which are often associated with so-called Libertarianism, had brains they would be dangerous. Unfortunately, I don't. I think they are dangerous because they don't have brains.

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  2. Should read "Guns, Gold and God", not "Guns, Gold and Gold".

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  3. There is nothing productive about producing more usable stuff than you consume and then settling up with the world via something (almost) totally useless in that you owe no one anything, and no one owes you. Settled. With (almost) useless shiny rocks. OMG!!! WAT?

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    1. If production IN AGGREGATE is more than the world needs, then surpluses are fine - but they are also worthless. Even gold only has value if someone else wants it.

      If production IN AGGREGATE is less than the world needs, then your surplus deprives someone else. In which case your action to protect your surplus (hoarding) is immoral.

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  4. When production is insufficient to meet the needs of all, surpluses deprive others of their needs.

    Wat??? Not gold. Hoarding gold deprives the hungry in Africa?

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    1. Yes, it does. As I pointed out, buying gold simply enriches the traders of gold. The hungry - in Africa or anywhere else - never see any of the money.

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  5. Although well-written, this article has issues on so many levels that my head gets inverted. It doesn't matter if freegolders are a cult or if a store of value benefits only the holder. Social obligations cannot be compulsory.

    What truly matters is that the current state of monetary affairs has allowed the slow and insidious siphoning of wealth by the ones exerting the legal tender privileges. In prior centuries, this was one of the divine rights of kings --now it is governments and their anointed central bankers that have immorally appropriated that right through the perpetual con of legal tender. Gold is a way to elect out of that paradigm (it is still a mass illusion of another sort but it is a free and voluntary mass illusion).

    The Monetary Future -- an economics blog on digital currency

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    1. Social obligations absolutely can be, and are, compulsory - what is taxation if not a social obligation?

      However, I have not suggested that productive investment should be coerced. What I suggested was that unproductive hoarding should be discouraged through punitive taxes (Pigouvian taxation). I didn't mention this in the post but the obvious other side to that is tax incentives for productive investment.

      Disengaging with society through unproductive hoarding does not solve the problem you identify. Directly investing in productive activities (peer-to-peer lending, crowdfunding, local initiatives) is a much better alternative.

      I'm amazed that the writer of an economics blog is so blind to the economic damage caused by unproductive hoarding.

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    2. I am not an economics expert so feel free to enlighten me but I the methods used by those with economic power seem irrelevant if they are not motivated by social obligations, the difference between whether kings hoard gold or governments/banks manipulate currencies are just different means to the same end. The key thing that what matters is the morality and motivations of these groups.

      I understand that, in theory, having money tied to a resource or metal give it a base value whereas fiat currency can be manipulated but if the fact that whomever has the power to control either of these scenarios purely does this to accumulate for their own personal gain then does it matter whether gold or money is the means to do so? How does gold help distribute wealth more fairly than fiat currency if there are no social obligations or empathy to help those who are not lucky enough to have wealth? Also, does competing over a rare metal to decide wealth not bring in a whole bunch of different problems unto itself? That's what I would believe but I am quite happy to admit that I no expert in this field.

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    3. Tom,

      thank you! You have TOTALLY understood the point of this post and expressed it better than I did. It is the greed and selfishness that creates hoarding that I am fundamentally attacking. I also think there is a fear element too, which the Freegold guru plays to with his doomsday scenario. But whether the hoarding behaviour is in gold, paper or moon cheese is not the point. It is disengagement with society and refusal to share surpluses with others so they can become rich too that I am criticising.

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    4. What is astounding is that you seem to possess so much unwarranted faith in your leaders' ability to safely pull you through to the other side of the looking glass.

      Society is going through a process like musical chairs where some will emerge on the other side and some will not. That is not our fault. It is the bankers' fault. Your path almost guarantees that it is the monetary overlords that will emerge intact at the expense of everyone else. Therefore, your ideas tend to do more harm than good.

      On the additional confusion that you add to the matter by injecting productivity and obligations, I refer you to William Graham Sumner, "Excerpts from What Social Classes Owe to Each Other"
      http://www.ucc.uconn.edu/~PBALDWIN/sumner.html

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    5. I know you are a freegold supporter, so I expect your view of the world to be inverted - it's interesting that you talk about the "looking glass", because that's how I described your world in the post.

      Please explain to me how trying to encourage people to engage with the real economy by investing in productive activities, instead of disengaging and hoarding, demonstrates "faith in my leaders?" Regardless of what happens to the financial system, it is production of real goods and services that will pull us through to prosperity again. That is what I think people should be investing in - not hoarding an inert and fundamentally useless metal, or (for that matter) equally useless bits of paper. You worship a false god.

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    6. Alister Cyril Blanc1 August 2012 at 12:09

      Jon,

      Isn't it astounding that so many people have faith in politicians, or highly political market participants, considering the degree to which so many of at least the former and probably the later, too, are arguably variations of 1st class welfare recipients? People who talk & speculate but don't expend much of their own labour in more directly serving the needs or wants of others?

      Again, how is people trading not merely in information but actual physical goods and/or services demonstrating any (let alone more) "faith in [our] leaders?" These so-called leaders appear to be relatively powerless, in a way not totally disimilar to what record-label owners are now in this digital era enabling self-publishing; an era placing a premium on self-governance rather than dependency on external governors.

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  6. As I pointed out, buying gold simply enriches the traders of gold.

    You mean a bit like trading ABS, MBS, USTs, Gilts, JGBs, CDOs, etc? The common theme of all these of course being someone else has to return more than they borrowed, to satisfy the demands of the people who are prepared to share their credit but (naturally) want something in return for doing so. They are, after all, taking the risk they won't get back the principal. Let's set aside for now the systemic necessity of them being made whole in the event of default, to protect the credibility of the system itself.

    The hungry - in Africa or anywhere else - never see any of the money.

    Yes, but they see the investment returns from all those aforementioned asset-backed debt-obligation securities. Not that a dollar/euro/pound would be of much use to an African anyway - what they would ideally prefer is trade demand for their domestic goods and services that they wish to make available, not simply charitable donations in the currency of some other jurisdiction that they can export in return for the things they are currently unable to produce for themselves.

    The difference between an equity-based paradigm and your preferred debt-based regime, is that the former operates in natural balance while the latter fosters an unnatural and ever-escalating class struggle between savers and debtors, as the assets inevitably concentrate into fewer and fewer hands while the corresponding debt obligations spread like cancer over a greater and greater proportion of the population. This is what the Occupy movement is really all about; I hope they come to better understand it soon. Really, what difference does the price of gold make to the people who do not produce any surplus? What are they being deprived of? What they are not being deprived of, is a slice of their future production for the privilege of borrowing money today so they can keep up with the price rises that all the other borrowers around them are foisting onto them.

    Of course, all of our discussion about what we believe might be best, is really just a distraction from reality. Gold has value because the people of this world who control the truly enormous surpluses have already selected it as their preferred equity holding. It will always have value, because these entities demand it in settlement for trade - and we all need and want what they are trading, particularly oil, so they can dictate the rules of engagement. Perhaps you might try to tell them what they should do with their surpluses, rather than dictate what we the populace of deficit countries should do with our pathetic personal surpluses. I wish you good luck with that.

    Candy Sange is out!

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  7. 1) Yes, trading gold is EXACTLY like trading those bits of paper on the secondary market. It is fundamentally unproductive and enriches no-one except the traders.

    2)I have not suggested that the hungry in Africa see the returns from paper trading on the secondary market. You create a false comparison to defend your position and you ascribe to me beliefs I don't hold. I specifically said in the post that trading on the secondary market is unproductive.

    3) Where have I suggested that I support a debt-based paradigm? I don't mind whether people's investment in productive activity is by lending or by buying shares (equity). I want them to invest instead of hoarding.

    If what you mean by an equity-led paradigm is that people who don't produce enough for their own needs do without while others who produce more than they need hoard their surplus in the form of gold instead of lending it (or giving it) to those who need it so that they can use it to generate more production, I want no part in that. I am amazed by the selfishness of that attitude, and I don't think the Occupy movement has ANYTHING to do with that. They call for the abolition of "debt money", but they don't understand what they are asking for. It is no accident that the countries in the world with the highest standards of living are those with a debt money system.

    The main reason for the rise in the gold price in the last decade has been because of paper gold (ETFs) not physical gold. Do your research. We don't currently settle any trade in gold.

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  8. Hiya

    As one of "these people" perhaps you don't mind me commenting, then again perhaps you do. :)

    "gold does not rise in price as people invest in it," Nope. That would be standard goldbug rhetoric, that gold simply keeps purchasing power over (thousands of) years. We do not agree with that.

    "They then go on to suggest that because the dollar is the international reserve currency, when it collapses against gold everything else will collapse too and there will be worldwide hyperinflation" Nope. Though the effects of the dollar no longer being used as store of value has some difficult to predict consequences, it is not necessarily the case that all currencies will hyperinflate. It will depend on monetary policy in reaction.

    "They believe that once the gold price reaches a certain level this transition becomes inevitable, and therefore they are pushing for the gold price to rise" Again nope. There is no specifically determinable trigger level and we are not pushing for anything. We are just observing what is happening, and the inevitable consequences.

    Next point seems correct. Though perhaps you may have added something about the debt being unrepayable in real terms, it's not simply unsustainable. :)

    "They encourage all the "enlightened" to buy physical gold to protect their wealth against the coming hyperinflation, which will also see collapse of the value of all assets except physical gold and other "hard" assets." Nope. We encourage people to buy as much gold as their understanding allows. In your case I suppose we would suggest no holding at all. :P

    Next seems correct again, though I would add that central bank buying is not the only reason we think some central banks are prepared.

    "There would no longer be any means of saving in currency or in any form of asset-backed paper." Untrue, though doing so for long term savings has always been a losing proposition.

    "but the current arrangement where by ALL savings are reinvested in productive activities would end." Correct. Have you ever contemplated how much malinvestment occurs due to their being no other choice?

    (cont)

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  9. (cont)

    "and they dismiss out of hand the possibility that the Euro may prove unsustainable because of the deep structural imbalances between its member countries." No we don't. However this is only true in the current $IMFS system, under the new system these imbalances would disappear due to the flow of gold.

    " For me this is uncomfortably close to the concept of "gnosis" - the idea that there is hidden or special knowledge that is acquired only through spiritual enlightenment." It is simply a matter of the issues being complex, and that understanding takes deep reflection. Not spiritual but intellectual "enlightenment".

    "seeking to overthrow the existing system and replace it with something more to their liking." I repeat, observers not activists. Though I will concede that some are more determined in their conversations with others. ;)

    We understand the functions of government, and why they are necessary. We do think they have exceeded those bounds.

    We also concede the desire for social redistribution. It will be possible under this system.

    "Our economies don't grow by themselves: businesses need capital in order to produce, and the creation of that capital requires investment. Investment comes from the excess production of other businesses and individuals, recycled back into the economy through lending to, and equity investment in, productive activities." Agreed.

    "There is nothing productive about sitting on a hoard of gold, and the only beneficiaries of the trade in physical gold that would ensue from forcing all savings into gold would be the buyers and sellers of gold." Wrongheaded. There is no implied force, and there is in fact benefit in taking savings outside the system, in that it encourages prudent investment, only in productive enterprise.

    "These people reject both lending and taxation, never mention philanthropic giving at all, and promote hoarding." All incorrect.

    TF

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    1. Thank you for your explanation. I have to say some of your comments above are COMPLETELY at variance with the views of many other freegolders with whom I had extensive discussions last week. They also seem at variance with the writings of FOFOA - notably the global hyperinflation meme, which you deny but to which FOFOA repeatedly returns. It seems you do not agree among yourselves.

      I did say in the post that this was my understanding, based upon my conversations last week AND my reading of FOFOA's writings.

      But you do not address my core objection to your ideas, which is that hoarding wealth unproductively is disengagement with society. Taking savings outside the system does not "encourage prudent investment". It unnecessarily limits the availability of funds for investment, and when everyone does it, it starves the economy of the investment it needs for growth. It is fundamentally selfish and only enriches the traders of gold. In that it is no different from hoarding the useless paper that you castigate (and which I don't defend either).

      You do not really address the moral issues I raise.

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    2. True, I did not get around to that. My time was limited at that stage.

      Hyperinflation is only spoken of with certainty about the US dollar at FOFOA blog. The rest we speculate on, but it is not possible to predict.

      Perhaps you are referring to the "all paper will burn" concept, which is related, but rather refers to the trust that will be damaged in most currencies if the current supreme paper currency, the dollar, fails.

      I had a conversation with you the other day on twitter about hoarding and morality. My position remains that an action can only be considered immoral in this regard if it harms other people. Hoarding is not immoral, until someone else is hurt by it. Furthermore hoarding of necessities are more immoral than hoarding of non essentials. This most useless yellow rock, gold, has almost no industrial applications. Hoarding it does not deprive anyone of any needs they may have to live. As such morality is not relevant.

      We have no problem with voluntary charity, hell we are even okay in the understanding that social security is demanded.

      A lot of what you deem to be 'moral' obligation I consider to be immoral, and counterproductive. If the productive capacity of an individual is say 200 units, and he needs 100 for survival, you imply it is moral to take those extra 100 units and give it to another who has 0 productive capacity, by force. You ignore that if there is no personal incentive to produce, no excess production, to take by force, occurs. Why should I produce 200 units?

      Your espoused ideology is simply another form of the communist ideology, one which has proven itself to be worthless.

      (cont)

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    3. (cont)

      "You cannot bring about prosperity by discouraging thrift.
      You cannot help small men by tearing down big men.
      You cannot strengthen the weak by weakening the strong.
      You cannot lift the wage earner by pulling down the wage payer.
      You cannot help the poor by destroying the rich.
      You cannot keep out of trouble by spending more than you earn.
      You cannot further the brotherhood of man by inciting class hatred.
      You cannot establish security on borrowed money.
      You cannot build character and courage by taking away man's initiative and independence.
      You cannot help men permanently by doing for them what they could and should do for themselves."

      - Rev William JH Boetcker

      "You cannot multiply wealth by dividing it. You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it. (Dr Adrian Rogers was a conservative Baptist preacher who was a three-term president of his church. He was very well known in the USA for his conservative opinions on issues related to his view of Christian Values.)"

      - The late Dr. Adrian Rogers 1931/2005

      The Fool

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    4. I have not ANYWHERE said that someone's surplus should be taken from them "by force". You have now resorted to inventing things I did not say. The only suggestion I did make which I guess you could regard as being close to this was punitive taxation of large holdings of unproductive assets. But I would be doing that to discourage that form of saving, not to take the assets for other purposes. If people moved their savings to productive investments they would avoid the tax: indeed, conversely, I would be offering tax incentives for direct investment in productive enterprises (by which I do NOT mean buying securities on the secondary markets - that is just as much "hoarding" as buying gold).

      Please explain how encouraging people to invest their savings productively instead of hoarding them unproductively discourages all the things you say it does? I have throughout this discourse talked about PRODUCTIVE INVESTMENT TO INCREASE PRODUCTION, not about direct redistribution of resources from richer to poorer - though investment of surpluses to increase production does have the effect of making the poor richer. Why do you have a problem with using your savings in this way to benefit both others and yourself?

      There is nothing Christian about unproductive hoarding, and the Christians you quote do not justify it in any way.

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    5. Hi

      You have a number of themes running in this discourse. One of them is productive investment to increase production. Another is our moral and social obligation to provide what we produce in excess to those in need. It was the latter I was criticizing. You will have noted I agreed with you above that productive investment is good and necessary.

      Taxation is an application of force, if an indirect one, which manifests in direct force the moment one does not comply. While arguably some things the government does, could and should be funded by taxes, the extent of the current welfare state is not a natural or sustainable occurrence.

      I laud productive investment. However the current situation where all funds Must be invested at all times in order to provide a yield and temper the effects of inflation, combined with the controlled/manipulated interest rates creates a situation where unproductive investments occur and capital is actually destroyed in the process; a great tragedy I'm sure you'll agree. Since the natural indicators of the market health are now all under government control, including the constantly diminishing value of fiat currency, making sound and Productive business investments becomes an increasingly impossible task.

      If we add the strangling effect of government regulation on business it is no wonder we are having such crises.

      "The most recent Small Business Administration (SBA) evaluation of the overall U.S. federal regulatory enterprise, prepared by economists Nicole V. Crain and W. Mark Crain, estimated annual regulatory compliance costs of $1.752 trillion in 2008.

      SBA-estimated regulatory costs exceed all 2009 corporate pretax profits of $1.317 trillion.

      Regulatory compliance costs dwarf corporate income taxes of $198 billion.

      Regulatory costs tower over the estimated 2011 individual income taxes of $956 billion by 83 percent."

      from http://www.financialsense.com/contributors/pater-tenebrarum/the-war-on-vegetable-gardens

      TF

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    6. Please tell me why your particular opinions on what government should and should not pay for through taxation should carry more weight than the views of the majority of people? If you don't like what government does, persuade the majority round to your point of view so you can elect a government more to your liking. That's called democracy.

      I do think society has a whole has a responsibility to provide for those who cannot provide for themselves. Exactly how that is done is a matter of debate: the alternatives are taxation and philanthropic giving. Which you prefer really depends on your political stance.

      Since it seems your considered opinion is that taxation is coercion, then you will regard tax spending on supporting the weak as forced redistribution of your hard-earned surplus, and you will do your level best to resist this - as indeed you are doing. You probably would prefer the weak to be dependent on voluntary support from the rich, or you may even think the weak should "man up" or die. The fact is, however, that at the moment the majority of people don't agree with you, and since we live in a democracy, you don't have the right to overturn the decisions of the majority.

      If you accept that a democratically-elected government raises and spends taxes according to the will of the majority, then your recourse is also democratic: persuade the majority that your taxes should not be used to support those who cannot care for themselves, and elect a government that will dismantle the welfare state. That's democracy.

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    7. I submit you have a very flawed understanding of what democracy is.

      I would also note that the founding fathers specifically did not create a democracy for this very reason. The United States is a constitutional republic.

      Might does not make right.

      In the supposed the debate you ignore, the directly mentioned effect of taxation, which is reduced production as an aggregate.

      Thank you for your responses. I honestly do not have time to engage you on all these issues. I wish you the best of luck.

      TF

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    8. "That's called democracy"

      Yes.

      "I do think society as a whole has a responsibility to provide for those who cannot provide for themselves."

      Yes.

      Now, what about those who can but won't. Or those that could, but see they don't have to because they can vote for some party that will bend the Big Men over the table and take what they want? What's not to like about this for all the very numerous little people out there, given they are clueless about how unsustainable it is and what will happen if it's attempted for any extended period of time.

      Democracy = survival of the unfittest. #FAIL

      Delete
    9. So what would you propose as an alternative to democracy, then? Dictatorship of people like you?

      The fact that some people abuse the system doesn't make the entire system wrong.

      Delete
    10. Yes, there are limits to democracy because of the Constitution. But your government is popularly elected, and within Constitutional limits is responsible for acting according to the mandate given by the people who elected it. You want the government to do something else, elect a different one. Unless you can prove that what it is doing is unconstitutional, of course. Good luck with that.

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    11. The fundamental problem with Democracy today is that politicians can promise what is only deliverable by pushing the costs onto future generations. So that's what they do.

      How about a Democracy where the politicians can't deliver on promises they are not honest about funding? Now there's an idea.

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    12. Well, when we borrow from future generations we are sharing in their future prosperity, which will be greater than ours. Or at least it will be if we invest in it. But of course, if we take from our economies in the form of unproductive assets which we hoard, there will be no investment, and our economies will be no more prosperous in the future - and we will indeed have cheated our grandchildren.

      What do you regard as "honest funding"? Waiting until you have earned the money before you invest in the activity that will enable you to earn it? That's like waiting for Godot.

      Delete
    13. "Honest funding" = telling people what it's really going to cost them. And funding it. Not hiding it until later, when it'll be someone else's problem.

      Delete
    14. Alister Cyril Blanc1 August 2012 at 19:48

      FC, the following is merely my humble suggestion, because I do not dare speak for anyone else, much less someone like yourself who's undoubtedly far smarter than I.

      You said to Motley Fool, "tell me why your opinions on what politicians should & should not pay for through 'taxation' should carry more weight than [mine]?" In fact, you actually said "more weight than the views of the majority of people?", but my point's that due your goodwill you're talking, or perhaps more accurately imagining - consciously or not - as if you're thinking for "us"; the "public"; "others' -- in that your simply seeking to advocating a menu of spending items you deem more likely to be in the interests of the greater good - a noble thing, unquestionably, except here's the rub- value is subjective & total information at anyone time is unattainable, even to supercomputers given the dynamism of human spontaneous thought in a constantly changing world; so no ultimate decision maker, or blog writer can technically know the definitive answer which you presuppose can be communicated.

      Everything you write is exceedingly intelligence & beautifully clear, but this idea of "tax" not being theft is clearly a log-jam in your work, preventing you from a truly more meaningful depth of discourse.

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    15. Alister,

      It is unfortunate that when I disagree with your deeply-held beliefs about the nature of society - of which the status of taxation is part - you start saying that I have a problem with my thinking. I could equally argue that the log-jam is on your side, because your flawed concept of humans as social animals means that you assign no value to collective decisions. You believe that everything operates at an individual level and the collective is at best imaginary and at worst acts against the interests of the individual. I fundamentally disagree with this. Humans operate both at individual and at collective levels: it is the balance between the individual and the collective that is the subject of political debate and ideology.

      The decision who and what to tax, and the decision on what to spend tax revenues, if made by democratically-elected governments, is a collective decision. There will always be a minority who disagree with it - of whom you seem to be one. Minorities, especially rich minorities, are often under-represented in democracies in relation to their financial contribution, but that doesn't make the taxation of those minorities illegal. It may make it immoral, but that's a different question.

      As I explained in our twitter conversation, laws are determined by governments. If government doesn't define taxation as theft (and it isn't going to, is it) then it is not theft, however much you might like it to be.

      There is no "log-jam" in my thinking on this. I disagree with you, that is all.

      Delete
    16. Oh, and I don't expect my views on what I think tax revenues should be used for to override the collective view. But I expect my opinions to be taken seriously and not ridiculed. I don't claim to have all the answers. I am simply expressing my opinions and attempting to persuade (not force) others to agree with me.

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    17. That is not actually factually correct. You are suggesting that a 'producer and a beggar' both have an equal vote as to the use of the excess funds of the producer.

      You question my dispute as to who determines the use of funds that I generated. "Ownership" without the ability to choose how such assets are used is not ownership.

      I also expect my opinions to be taken seriously, especially if we are having a discussion as to how My surplus should be used.

      TF

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    18. If you wish to have a debate about the morality of taxation, I'm afraid you will have to hold that elsewhere, not on this post.

      The fact is that in modern democratic societies taxation is legal - it is not "theft" in any legal sense and you will not find a court of law that will support your claim of illegality. And in a modern democracy the producer and the beggar DO have equal votes as to the use of tax revenues, even though they come entirely from the producer. I can see why you might think that is unfair, but that is the current situation.

      As far as investment of your surplus is concerned, I have not suggested that what is left over after you have paid your taxes is anybody's responsibiity to invest but yours. I am merely trying to influence your decisions.

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    19. I do not have a need to debate that here. I would like to point out however that your implicit defense is a common one. That whatever is legislated as legal is outside the bounds of moral judgments.

      The POTUS now has the power to execute American citizens without trial, a power he has already used. Does the fact that this power was granted legislatively make that it is above moral reproach or consideration? I would say not.

      You are trying to influence decisions based on shaming language instead of cold intellectual arguments. Calling people greedy, etc is a direct personal attack.

      You implied earlier that I am the kind of person who would let others starve and laugh about it. I take offense at that.

      My broad views on what is right is for the most part aligned with yours. I am simply a student of history who would rather see proven sustainable solutions to the problems of poverty and hunger, rather than ideological niceties that fail magnificently at accomplishing those ends.

      TF

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    20. I really don't think you can compare the morality of taxation with the morality of summary execution. One of the reasons I don't want to discuss the morality of taxation in this post is that this is a large and complex subject. All I would say at this point is that your surplus is not simply generated by your own hard work and thrift, however much you may think it is; and that there are arguments both for and against taxing surpluses to benefit those in deficit.

      Your arguments may be dressed up in cold intellectual clothing, but they are fundamentally emotional. Logical, they aren't. If you were genuinely interested in sustainable solutions to the world's problems you would be more in sympathy with my point of view. Hoarding surpluses doesn't create "sustainable solutions to the problems of poverty and hunger". Recycling surpluses to invest in productive activities does. But your vision is clouded by your emotional attachment to your surplus and your anger at what you see as unfair seizure of part of it in the form of taxation. Consequently you do not engage with my arguments and you accuse me of personal attacks that I have not made. I have been clear about the circumstances under which I regard hoarding as immoral, and I have explained why I take that view. I am not prepared to discuss the morality of taxation.

      I have never implied that you would "let others starve and laugh about it". You've made that up - and it's not the first time you've done that, either.

      Delete
  10. Yes. Let's all invest our savings in equity instruments!

    Under the right circumstances it could increase production. But the reality is it generally doesn't.

    When someone buys a share of, say, Monsanto, all that changes is someone else passes ownership of the pre-existing share - ideally at a higher price to them than the one they paid. Nothing else changed but the price of the shares in the market. There is nothing more produced.

    Now, if nobody ever sold and Monsanto just kept offering more and more shares on the market, they would actually receive money and could invest in increased productive activity. The end result might well be more corn or wheat for the world to consume - hurray! Except, if that was what was happening then not too many sensible people would choose to buy the shares, knowing their slice of equity was going to be indefinitely diluted. So, yeah, paying for overtly diluted shares is like charity. Charity is good. Give your money away all you want. But charity isn't charity any more when it is coerced.

    When one invests, even in debt (lending money), it only changes the price of whatever one choses to invest in. If one chooses to lend, it changes the price of credit. If one invests in corn it raises the price of corn (don't tell the Mexicans). If one invests in honey bees, it raises the price of honey bees (driving out the marginal honey bee buyer from the market).

    But if one invests in gold, it only affects the price of a (nearly) useless element. Where there is no substitute for gold, the part of the production cost attributable to gold is trivial. Even if gold rose by two orders of magnitude, the change in cost of the end product will be negligible. I am not actually aware of any current applications where gold cannot be substituted - yes, even in electrical contact applications, where alloys have recently been developed that already are both cheaper than gold while also resolving the oxidization issue and retaining high electrical conductivity.

    Something that you don't appear to be able to visualise is that when someone sells gold the buyer transfers money to them. Given they are selling gold, and they are demonstrably someone who has a propensity to net-produce (otherwise, how did they end up with gold in the first place?), they must have a more productive use for the money in mind. The world needs unrestricted access to both money (for lubrication of commercial activity) and the means of production (i.e.: just about everything aside from almost useless gold). When a net-producer buys gold in the market, money is moved where it can be put to productive use. This is nearly analogous to someone with a great idea borrowing the same money, except they won't have to repay more later and the lender doesn't have to worry they might not get their principle back. If they don't have gold to sell for funding on this project? No problem, they can still borrow currency - but it will need to be a sound-looking idea, since the banks will no longer be awash with everyone else's money that they're itching to get a return on.

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  11. Please describe one thing that is less anti-social and more productive for net-producers to retain as their store of value? As already illustrated, passing equity shares from hand to hand will not be a satisfying response. Nor will debt-backed securities which suck the life blood from future economic activity as they earn their compounding interest with each cycle of relentless reinvestment - always more and more interest, up to the sky... but where does all the extra money come from to satisfy these unending demands? Perhaps we should move to interest-free, or better still negative-interest loans. Yes, I can see these really taking off as an asset class. Charity for the win!

    Finally, you appear to believe that physical gold would continually rise and rise, indefinitely. I disagree (with the one caveat that the currency managers of the world will need to start learning fast about what is prudent activity). I think it will find a new stable equilibrium price, much higher than the current one, as the present debt-soaked system is recapitalised by it. If my view on this is correct, perhaps you can see why holders of physical gold might later see advantage in selling gold in order to persue more productive activites. You also might consider doing your own research, because I think you will discover on closer inspection that you have the paper/physical effect completely upside down, inside out and seen only from the corner of one squinting eye. Plus you may come to realise that when it comes to settlement of international trade, the mind will not conceive what your eye has not yet seen.

    Seriously. I’d like for someone to convince me that blind, ignorant and indifferent private investment through a third party (financial advisor or whatever) is in anyway better for the investor or the economy than buying gold.

    However, Candy Sange now really is out.

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    1. Yes, I'm well aware that you see the world inverted. I don't share your upside-down view. I do my own research rather than blindly accepting what you and others of your kind say.

      I have not suggested that the way we currently "invest" is any more productive than hoarding gold. On the contrary. Most "investments" are purchased on the secondary market, where they enrich nobody but the traders. They do not add productive value to the economy after their initial offering. So I would equally criticise these "investments" as unproductive hoarding. You've devoted a lot of words to attacking me for a view that I don't actually hold.

      I don't agree with you that purchasing gold returns money to the economy. All it does is enrich the traders of gold - who if they weren't trading gold might have to do something that is actually useful. You are feeding parasites, not benefiting the economy.

      Why do you think I believe that physical gold would rise indefinitely? I don't, actually. That is a belief of gold hoarders, not me.

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    2. "Why do you think I believe that physical gold would rise indefinitely?"

      "All it does is enrich the traders of gold"

      Maybe you meant to say something else?

      Oh wait! You mean that it will rise and then fall -- the price of physical gold will continually and widely fluctuate, so traders can scalp losers for their losses, even despite the unfolding reality of unstoppable demand for it. Demand in recent decades satisfied by the supply of various types of "gold derivative" that are in the process of being rejected by a marketplace that is slowly awakening to what is really happening. Very much derivative and ever less underlying. An expansion of derivative supply structurally supported at first by the Europeans, but no more, and then picked up and run with by the Chinese for another decade or so, but again no more.

      Time reveals all things. Good luck on your journey everyone.

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    3. No, friend. I meant exactly what I said. Physical gold trading is a financial market activity: the money never gets into the real economy. Unless you buy gold from the local jeweller, of course - but all he is likely to do with his profits is hoard them in unproductive assets, just like you, isn't he?

      Delete
  12. "it is the monetary overlords that will emerge intact at the expense of everyone else."

    Yes. Maybe, and perhaps this will be too far out in the long grass now for you, but just maybe they were only doing what everyone else demanded of them?

    Maybe everyone else really had it coming all along.

    "Therefore, your ideas tend to do more harm than good."

    Yes.

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    1. You do not see that your mindset is exactly the same as the mindset of the monetary overlords. It is merely a matter of scale.

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    2. Yes, that one was all for The J Man. ;)

      But since you ask, here's mud in your eye!

      "It is no accident that the countries in the world with the highest standards of living are those with a debt money system."

      Not so fun now the credit machine has been firmly dropped into reverse, huh? Methinks we dropped a cog or two on the road back there a little way. We may be cranking for some time and still get no satisfaction.

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    3. Peter, I've written elsewhere about the relative merits of credit money systems versus savings-led systems - the link is in the post. In terms of their operation there is not much to choose between credit systems and savings systems: both have their faults. Credit systems tend to blow up on excessive debt, savings systems on unnecessary scarcity. It's really a question of which you prefer, but as I don't see a savings-led system as innately more stable or fairer than a credit-led system, I don't see any point in changing it. I'd rather look at ways of making it work better.

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  13. 1 of 2

    I agree that there is a shared sense among many of the contributors at the FOFOA blog about how the world ought to work, a shared suspicion of government, and a confidence that freegold would solve a lot of political problems as well as economic imbalances. But if you read FOFOA's works and the two predecessors he relies on, you will see that is not his message. His message is that this is the direction things are heading regardless of whether we want it to happen or not, and whether we think it is a good thing or a bad thing.

    In principle I agree with you that government is not inherently evil, that we have moral obligations to one another, and that there is no problem with government enforcing these obligations -- through taxation or otherwise. But I am skeptical of government's *competence* to assume the role of central manager over the economy. I wholeheartedly agree with your statement: "Investment comes from the excess production of other businesses and individuals, recycled back into the economy through lending to, and equity investment in, productive activities." That's the way things should work. The problem is that things don't work that way anymore. The central banks have destroyed capitalism. Interest rates are at 0%. Surpluses are not recycled back into the economy in the form of productive investments. Instead, the central banks have given up on "recycling" and have instead goosed the system with perpetual monetary stimulus. My issue is not with government in the abstract. My problem is with the corrupt and incompetent government we have.

    I find your ethical principles to be admirable, particularly your statement: "If this ship is sinking, I will share my last sea biscuits with my fellow crew members and go down with the ship, rather than save my life at others' expense." I aspire to the same level of moral perfection that you do.

    But I think the flaw in your reasoning becomes evident in this statement: "And morally, because hoarding a surplus when there is no reason to assume that it will be needed in the future, is sheer greed . . . ." I am focusing on your words "when there is no reason to assume that it will be needed in the future." This is where I think we live in different worlds. I do not have a lot of wealth.

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  14. 2 of 2

    I am mindful of St. Paul's letter to Timothy when he admonishes: "But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever." So I feel like I need to save enough to provide for my household. But how much do I need to save? Given the structure of the current monetary system, it is very very difficult to answer that question. So I want to err on the side of caution. Is that wrong? And it's not just the monetary system. I also need to worry about the government/insurance industry's intrusion into health care and the crony system they have created. Health care costs are spiraling out of control and I have no idea how much I need to save to take care of my family. I want to responsibly set aside enough, but I am a small fish. How much is enough? For the vast majority of your readers and the contributors at the FOFOA blog, the moral dilemma is not hoarding a surplus that we know we will not need in the future, but struggling to know how much we will need to save to feel confident that we will have something to give when the need arises.

    I don't think freegold is a moral issue or that it needs any moral justification. I simply think this is the direction the world is headed. Regardless of whether debt based money is morally superior or not, the fact is that all the major governments of the world have issued more debt than they will ever be able to repay (in real terms). Growth rates will not return to where they were when energy and resources were cheap and plentiful. That means that the debt is not going to be repaid (in real terms). For all the holders of that debt, there is an economic catastrophe on the horizon, and the only question is whether the day or reckoning comes quickly or slowly.

    How should you prepare so that when the ship goes down you have some sea biscuits to distributes to your unprepared companions? That's how I frame the issue.

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    Replies
    1. I did say that if you believe the "coming economic disaster" story, then hoarding is understandable. I don't think protecting myself at the expense of others is morally defensible, though I acknowledge that children do need protection since they can't provide for themselves. But I don't accept that "economic disaster" is coming.

      St. Paul's remarks are not to do with saving, they are to do with people sponging off others instead of doing productive work. You might like to recall that St. Paul was a tentmaker...he had a real job and paid his way instead of relying on others to fund him. I could argue that gold traders are sponging off others instead of doing productive work. They keep back some of the money they take off you, don't they? you don't get the amount of gold that your money COULD buy, you get the amount that they will sell you, which is not the same thing.

      Regarding hoarding - keeping back money for oneself instead of investing it in the productive enterprises of the community - you might like to read Matthew 25:14-30, which is the Parable of the Talents, and Acts 5:1-10, the story of Ananias and Sapphira. Jesus is distinctly unimpressed with the person who hoarded unproductively instead of investing, and Peter's criticism is literally lethal.

      I have more time for people who regard freegold as an inevitable development but who aren't trying to sell it, than I do for the evangelicals who were trying to convert me last week. I don't agree with you, though. I think the direction that the world is going in is entirely different and far more exciting.

      I do sympathise with your concerns about healthcare. I'm British, and we don't have the same issue. With all its faults, the fact is that our NHS does protect people from the uncertainty that you in the US have. Obama acknowledged that when he addressed our Parliament: he said "at least you don't go bankrupt when you get ill". We do, but not from the cost of treatment, which is what he meant. We go bankrupt from loss of earnings. But really, it's a question of what you want to spend your taxes on. Here in the UK we like to spend them on keeping people healthy. You prefer to spend them on enabling people to buy a house. We don't have mortgage interest rate tax relief, agency mortgages or federal home insurance.

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    2. I do not see how you can deny that economic disaster is coming. It is already upon us, though thanks to government intervention it is coming upon us in slow motion (which might now seem like a blessing but in hindsight will probably be seen as a curse). Do you really think that all of that debt will be repaid? If so, how? If not, how can disaster be averted given that the entire system is built on faith that the debt will be repaid? You seem to take comfort that there is a "shortage" of high quality government debt. But who are the buyers? (1) The government itself. (2) Traders who are frontrunning government purchases and who will be the first to bail when the tide turns. (3) Insolvent financial institutions that depsperately need Tier 1 capital. (4) Foreign governments who are buying in dwingling numbers. None of these "investors" really want to put their money at risk for the coupon payments on this debt. Do you disagree?

      Regarding the moral issues, I suppose we see the Gospel lessons differently. For one who seeks moral perfection and who has no family obligations, the command may be to "Go, give everything you have to the poor," in which case savings vs investing in productive assets never becomes an issue. For those who have family obligations, prudence demands at least some advance planning, and that means at least some saving. And I do not think that all saving is hoarding. The term "hoarding" has negative connotations and implies excessive behavior. Does the Parable of the Talents really mean that we should "invest" all of our savings? I never took that to be the lesson. Rather, I took the lesson to be that God will demand for from those who have been entrusted with more. And I do not read the story of Ananias the same way you do. The sin was not holding money back, but telling a lie to the Holy Spirit.

      We may not agree on the moral issues, but the real question is how to live life in the world we live in. Given that worldwide debt loads have become unservicable (setting aside for the moment repayment of principal, which is NEVER going to happen), and given the internconnectedness of the global economy, I think that all of this debt in all major currencies will be repudiated either gradually(through sustained high inflation, which is what the central banks all want) or rapidly, through a sudden loss of confidence (hyperinflation, which is what the central banks fear). If you were to agree with this diagnosis (which I realize you do not), does this imply a moral obligation to surrender all of my savings to the inflation monster or the myperinflation monster? I submit that prudence, a Christian virtue, requires otherwise.^^

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    3. Robert,

      I do have family responsibilities, actually. But I don't agree with your disaster scenario. There I think we have to agree to differ.

      However, I do think there will be sustained capital erosion over a long period of time - not through inflation but through very low or negative interest rates. And I welcome it, frankly. These are the lean times. People should be spending their surpluses (by which I mean investing them in productive activity), not trying to hang on to them. I include businesses in that, by the way - in fact cash hoarding by businesses is in my view more damaging than individual hoarding.

      Jesus called people who had family reponsibilities to leave their families and follow him.

      I think you have slightly misread the Parable of the Talents. It wasn't just a question of expecting more from people who have more - though that is an important point and the reason why it was LARGE holdings of unproductive assets that I proposed taxing. The one who hoarded instead of investing had his talent removed. By disengaging from society you could actually lose far more.

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    4. In the end, I think our biggest difference is our evaluation of the current economic climate. I think we are in the front end of a depression, and the government response has been to deploy a parachute. While that will help some slow the fall (paricularly whose who have the easiest access to the money), it will also prolong the pain for those who have already lost everything and who are living on food stamps. If it weren't for government mismanagement and too much debt and leverage, savings would have remained the source of capital, and we would ahve never falled into this trap. We could reset more easily and go about our business of investing in productive enterprises again. The 0% long term interest rates now mask decades of malinvestment at articifically cheap rates, and under these circumstances there is no way to distinguish productive from zombie enterprises. Your prescription is an interesting theoretical proposition, but it has no place in this environment IMO.

      On the spiritual side, yes, I understand that Jesus called people who had family responsibilities to leave their families and follow him. But should I interpret this to mean that I should drop my 2 year old off at an orphanage and give away all my possessions??? The command to love would seem to say "No way!" On the Parable of the Talents, I guess we agree to disagree. The focus of the parable is not on the evil deed of depriving the community of access to the talents, but in the individual's fear, paralysis, and inactivity. But in the end, I don't think it matters for the vast majority of people, because you say that you are only addressing those who have far more saved up than they can ever hope to need. Surely you don't think that *everyone* should put *all* of their savings at risk by "investing" in local businesses, do you? After all, most local businesses ultimately fail.

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    5. Robert,

      You don't understand the nature of a credit-led money system. Your comment implies that we have somehow moved from a savings-led system to a credit-led system, but that isn't the case. The situation is as it has been for the last 5,000 years: savings (in their broadest sense) are only possible if there is debt. To claim that it would have been better if the debt had been less is correct, but not because there would have been more savings. There would not - there would have been fewer savings too.

      The problem we now have is that as debt reduces, so must savings (in their broadest sense) - but people don't want to accept the inevitable erosion of their surpluses, so they are looking for safe places to hide them. This is understandable, but it is economically damaging. Which is why I am on a campaign to get people to put at least part of their savings into productive investments in the real economy - particularly small businesses, which are starved of funds. If everyone did that, the economy would grow instead of grinding to a halt. But it does involve people putting away their fear and taking risks. We got ourselves into this mess through fear - fear of what would happen if the dinosaur banks were allowed to fail. To quote Dune, "Fear is the mind-killer". That's why I am so opposed to the fear-mongers and gold-promoters. They are frightening people into hoarding instead of investing.

      On the subject of the Talents - my reading is that the problem was fundamentally one of fear and misunderstanding. The hoarder was afraid he would lose everything if he invested, and would therefore incur the wrath of his master. So he buried the Talent in the ground so at least he didn't lose it even if he didn't make anything from it. But that wasn't what the master wanted him to do, so he ended up losing it anyway.

      I do agree that my criticism is mainly aimed at those who have far more stored up than they could ever need. It is unfortunate that a lot of the comments have been from people who don't really fall into that category.

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  15. Never trust a government, they are the invaders:))) Love Walter Block!

    I like the metal people, they are convinced. Metal people separate the functions of money precisely but their view is driven by the property perspective - a major difference.
    Other example, the view to money in an enterprise is another one than the employees view which is still driven by the financing the household/life perspective. The functions of money interact/intersect with these views ...

    There have been periods in history when silver was exchanged 1:8 (Silver:Gold). You see metal prices over longer periods ... science.

    Metals and raw materials are interesting because of the products and industries built on top. I see IT still as industry built on silicon and electricity. The first is available almost everywhere and the second can become rare. The way money is made, is a different one.

    The analysis of products and industries from the perspective of materials leads to a better understanding of the world, beyond our limited view to the super market.

    Back to Silicon. Silicon can be found almost everywhere (special silicon is required still but no limit general) and we know the technical limitations - most of the movements in the IT market, device as well as architecture, are a result from trying to find better network structures for communication. The limitations are the technical limits of silicon - at the moment about 52 cores per node.

    The Cloud does not exist because of the mobile device or vice versa. Both exist because of an underlying idea - making business via transactions, business along the associations in a graph and not the nodes. (growth can become exponential). It's just limited by the computing power per node and the inefficiency influencing the degree of parallelism (organization).

    - The influence in the future is not the availability of raw materials in general. Something metal people do fairly consider. Property perspective.

    Other example - Magnetic core memory has been produced first in Asia because the memory was hand made. The size of western people's fingers have not been helpful ... too big. There are many reasons why hardware industry grew in Taiwan, but this is one (times of 128bit memory)

    Gold is metal money (convertible and transportable) and a lot easier to understand, because almost no one does have insight into the other markets. Assuming the gold price in manipulated - direction cheaper ... it's not false to purchase when it's cheap. Usually within 30 years there is at least one opportunity for a decade.

    Finally if someone believes in a breakdown and is following metal people's prediction - silver coins, about 400 onces would be enough, 3 months salary. What they say concerning gold, store it and purchase houses and other things 'cheap' or use it after the getaway. You must convert it, when the breakdown happens - this is the key point. Agreed, all of them believe in an inflationary shock wave.

    Governments will try to stabilize paper a lot longer, imo. So governments will sell gold first. Stocks are already cheap at this point in time - but no one knows and so it's wise to have both paper, metals, stocks and houses. No one knows.

    1kg gold is 1000 gram not more not less. It does have no value. It's convertible. But Interest for savings on a long term is not a good argument - the money savings account does not exist, which is good for the money supply in general (limits real world economy's money supply) but someone does have to earn the interests (grab the money from the increasing supply).

    Metal is not money. Metals have been used as money or the money's underlying because of trust and the limitation. The argument a certain resource input is required to limit the money's underlying is very odd - nothing but the view that the money's underlying should be value neutral - wish.

    Most of the Dooms Day arguments are used in order to sell metals.

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    1. Bunny,

      Lots of really interesting stuff in this comment - thanks. I'm very interested in the industrial use of metals and the future of IT. My comment above about seeing the future in a very different and much more exciting way was to do with this.

      "Most of the Dooms Day arguments are used in order to sell metals."

      Yes.

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    2. "Most of the Dooms Day arguments are used in order to sell metals."

      Yes. Goldbugs are clueless!

      Delete
  16. From one of your comments above: “Taking savings outside the system does not "encourage prudent investment". It unnecessarily limits the availability of funds for investment, and when everyone does it, it starves the economy of the investment it needs for growth.”

    The above statement is absolutely true if someone views currency as savings, and removes cash from their bank account to stuff it into the mattress. When you do this, you remove something that the economy needs (currency) for proper functioning. Currency is needed to pay employees of businesses, to entice holders of goods to part with them, to invest, etc. Currency is needed to pay taxes, to denominate debt, and so on. By keeping currency in a bank account, it is available for lending to the rest of the economy. All good things!

    So what is the consequence of spending currency on unproductive assets, such as gold, artwork, classic cars, etc? After some time, I have built up some savings in my bank account, and I would like to purchase a classic car with that savings. I could remove the currency from my bank account, hand it to the existing owner of the asset, who puts the currency in her own bank account. Or maybe I skip the cash and write a check. Either way, no currency is removed from the system. All that has happened is that the ability to direct the investment of the currency involved, has moved from me, to the previous asset owner.

    The asset itself was never an integral part of the economic system. A classic car has value, but it is not useful for building a house, investing in a business, growing the economy, etc. The currency I used to purchase the car is still available to the economy, to be invested, to be taxed.

    Eventually, years later, I will sell that car to someone else, and at that point I can spend the currency I receive in exchange on whatever I need. In effect, a portion of my long-term savings is in the form of a car, not currency. You might even argue that because I'm buying an asset and then reselling it later, this is better for the economy than keeping it in a savings account, because the purchase and later sale of the asset may be taxable, and the original currency I used to purchase it circulates freely while I sit on my car, also getting taxed as it changes hands throughout that time.

    If you can separate the concepts of savings and currency, then you can see that holding assets as savings neither “limits the availability of funds for investment” nor “starves the economy of the investment it needs for growth”.

    So the final question is, if I choose to store a portion of my savings in the form of assets, what is the best asset in which to hold savings? Optimally, the best asset is one that has a stable value relative to other real assets. In other words, I would like my savings to keep pace with the cost of things I will need to buy in the future, like food, fuel, housing, healthcare, etc. Every individual has the ability to make their own choices here, and different people in different countries come to different decisions. FOFOA argues that the best choice is gold. My point here is not to make the argument for gold, but simply to argue that choosing to store savings outside of currency, in the form of an asset (like gold) is not at odds with morality or economic prosperity to anyone, and may even be a positive overall.

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    1. I'm afraid I fundamentally disagree with your analysis.

      If, instead of buying gold, you buy an equity stake in a local business, you provide money to that business for expansion: it invests in capital, so it can produce more goods, sell more goods, take on more workers, pay you dividends and generally contribute more to the economy. Contrast that with your gold hoard - or your classic car, for that matter. It sits there doing nothing and benefiting no-one. In effect you are expecting SOMEONE ELSE to invest in the local business. But you bought your gold from a gold trader, and all he does is buy some more gold with your money. That money may NEVER find its way into the economy in the form of productive investment: it doesn't take much understanding of financial markets to realise that pretty much all of the money being churned through the trading activity - including the buying and selling of gold - never leaves the markets. It's rather like a crowd of people seeing a fire and each assuming someone else will ring the fire brigade. If everyone behaves like you, there is NO INVESTMENT in the economy and it grinds to a halt.

      That is why hoarding, particularly on a large scale, is economically damaging - and I think it morally wrong, too.

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    2. What if we have a local business that restores classic cars. They have employees, invest in tools and other equipment, and sell completed cars. What if I purchase my classic car from them? Do you believe the morality and economics of this is better than if that car passes through the hands of others before me? Taxes are paid every time the car changes hands - I would think that this fact would make you prefer it over a direct purchase from the company.

      Similarly, what if I purchase gold directly from a mining company, which has employees, mining equipment, land leases, etc? My currency goes to pay those employees, to equipment manufacturers, etc. Is this any different than buying gold in the open market?

      Ah, I think I see. You would prefer I provide my currency to the business for an equity stake, not purchase their output, with my savings. Or maybe provide a loan to the business, directly or indirectly (via my savings in a bank account). These are morally acceptable? I agree that this is an excellent approach for investing. If I had the time to research the company (direct investment), or the opportunity to expect a profit from indirect investment, this is exactly what I would do. But as it is, I don't have the time or risk tolerance for directly investing in companies – I have a regular full-time job. And my bank account is receiving a negative real-rate of return. You yourself have already asked: “But what if the guru is completely wrong? What if financial Armageddon doesn't happen? What if - as Izabella Kaminska has suggested in her recent series of posts, "Beyond Scarcity" - we are entering an era not of insufficient production to meet everyone's needs, but an era of OVER-production? If there is actually more than enough production to meet everyone's needs, then hoarding is pointless and surpluses are worthless.”. Putting my savings into a business to increase production doesn't make sense in an era of over production. So what am I to do with my savings?

      I'm not sure I understand the aversion to purchasing assets. If the asset already exists, it will sit there doing nothing productive, no matter who owns it. A classic car, by definition, already exists, and decades of gold mining output sits around in vaults. This is true no matter if I purchase them or not. The only way to change this is if everyone everywhere decides that unproductive assets have no value, but I don't see the value of unproductive assets universally falling to zero. Someone will always be willing to pay for diamonds, paintings, fine wine, etc. These things will always exist, and always have value, no matter the government policies, or whether we agree with it or not.

      Currency doesn't go into assets, it moves through assets. Assets have value because people subjectively give them value. The same is true of currency, which is valued by the assets it can buy. There is no money in markets – the market is denominated in currency – it's not currency itself. There is no “money being churned through the trading activity”. Trading activity is just traders swapping assets around, and some people will cash out gains made in trading those assets, for investing in businesses.

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    3. I do agree that if Izabella is right about over-production being the issue in the future, it is a game changer. Did you read her posts? Personally I don't think there will be over-production of everything, and there will still be opportunities to invest in new ventures. The human species is endlessly innovative and creative, in my opinion. And I don't think we are yet seeing widespread over-production anyway - although in some sectors there are serious price falls and heavy discounting, which does suggest over-supply (or lack of demand).

      I absolutely agree that if you bought gold directly from mining companies that would be a better use of your money than buying gold on the secondary market. But that isn't where the majority of gold comes from. The vast majority of the gold in circulation - and sitting in vaults - was dug up a long time ago. Buying and selling it on the financial markets benefits no-one but traders. Yes, as you say, someone could cash in and invest in businesses. But why do you expect others to do what you won't do yourself? What if everyone thinks as you do - "someone else will invest"?

      You are wrong that there is no money on the markets, by the way: when you invest in gold - including physical gold - your money goes into those markets and is used in the buying and selling of financial instruments including gold. It is intermediated into other forms, but they are still money. Cash (in the form of very short-term highly liquid bills) is WIDELY used on the financial markets.

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    4. I do agree that if you bought your car from your specialist classic car restorer it would be productive use of your money - as you say, it would give them business, pay their workers' wages. Oh, and if you actually USED your classic car, and by so doing provided work to your specialist classic car maintenance people, it would be EVEN MORE productive use of your money.

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    5. Thank you for the replies. I suspect that this post is keeping you quite busy!

      Yes, I have read Isabella's over-production posts, and I agree with your assessment.

      Your final comment on the classic car is the best expression of your position on this topic, in my opinion. I used the example of a classic car as a form of savings, because they generally hold value over time, and I can talk about "saving" without the complications/passions of gold or cash. You turned my savings vehicle (pun intended) into a consumable, by driving it around, and wearing it out.

      So the disagreement is one of the concept of "savings" itself, no matter the form. You would prefer a society in which everyone is effectively "in it together", where the savings of older workers are available for borrowing by younger workers, where the excess output of those who are more productive than their own needs is available to others. Savings is selfish, a withholding of “something” from the rest of society today, which can be sold in the future to some other selfish person.

      I propose that this is a false choice. Nothing is withheld, in either case. I'd like to zoom way out to the macroeconomic level. From this view, we have people with needs (healthcare, clothing, housing, tasty treats), wants (ipods, flat screen televisions, opera tickets), and people to supply these things to them. We operate as a society, where construction workers build houses, doctors provide healthcare, and so on. Money is just a mechanism for keeping tabs on everyone's relative output. A good money system is one which has low overhead for society – the more effort we put into keeping track of everyone's output, the less effort we have for more useful pursuits. By this measure, the current system is broken, because wall street and finance in general takes up a non-trivial percentage of intelligent people and everyone spends more time than they should thinking about their retirement accounts. Another measure of overhead is in the measurement devices themselves, physically. By this measure, we're doing pretty well. Most currency is digital bits which are effortless to create and store, and their use withholds nothing from the rest of the economy. Paper currency similarly has no real-world use, so using paper currency does not harm the economy. There is no “value” or “usefulness” in the currency itself. It's just a token for score-keeping.

      (continued...)

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    6. (... continued)

      Money does not build houses, grow food, or do anything productive. People do. Money has no value. People have value, and useful things, like toasters, have value. How we keep track of individual members contributions, is a far second to what's really important: that individual members contribute to society to begin with.

      So does the concept of “savings” harm society, as you say it does? I'll drop the classic car, and go back to gold now, both because it's a more popular form of savings (especially in the East), and because it works well for my example. A classic car is a poor token in which to put savings, because the car needs space and other overheads that would be better put towards more productive things than towards maintaining “money”. But gold shines here (another good pun!). Gold is basically useless to a productive society. You could argue, and FOFOA does argue, that gold is the most useless physical-world object for productive things, which makes it the most useful physical-world object for use as a money-token. There is definitely overhead in mining gold, but there as so-much existing above-ground stock, that we have plenty available for use as savings, if desired. And much of the productive world, such as India and China, does use gold for savings today.

      Again, the money tokens themselves have no real value. Currency, gold, stocks, bonds, etc. These are all just tokens or entries in a ledger that I can use to track my overall contribution to society relative to others. They do not have value themselves. If I produce more than is required for my own needs, it does not matter if I “save” my excess in gold, debt, or in any of these other forms, because in the end, society gets my real-world output (my services as a doctor, my food if I'm a farmer, etc). I get non-productive tokens in return, I get “money”. But down the road, when I'm old and less productive than I was in my prime years, I can trade my tokens back to productive members of society in exchange for the things I need. We need this concept of money, these record-keeping tokens, to keep everyone honest and incentivized. But it doesn't matter the form of the tokens themselves, be they debt instruments, gold, or numbers in a book. There is nothing immoral, nothing withheld from society, when one chooses to “save” instead of “invest”. Society gets my productive output, and I get access to society's output, either way.

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    7. You are confusing money with investment. I did not. I talked about production surpluses and recycling, not money. What form of money is in use has nothing whatsoever to do with the way in which surpluses are used - or not - to benefit both individuals and society. So I don't care whether you hoard your savings in classic cars that you never drive, gold or moon cheese. The point is that you are not using your surplus production, you are hoarding it. If everyone behaves like you there is no investment in productive activities and the economy grinds to a halt. Globally this is what is currently happening, and it is MUCH more dangerous than the Hyperinflation Armageddon Fantasy. And it is completely unnecessary. We have the production capacity to meet all our needs if we would only use it, but instead we hoard our surpluses and leave young people unemployed. Our future depends on young people and new ventures. If older people with savings won't invest in them then we have no future - and as older people, when they retire, are dependent on young people to pay for their healthcare, social care, state pensions and all the various benefits they receive, this is a VERY short-sighted policy on the part of older people.

      If you save enough for your retirement and no more, I understand your desire to protect those savings. However, I think it would be BETTER if part at least of those savings went into productive investments for a future return, rather than being hoarded in unproductive assets. But my real criticism is aimed at those who have saved far more than they could ever need but will not use those savings productively.

      Economically, if production AS A WHOLE is not in surplus then for you to have a surplus someone else must have a deficit. If production AS A WHOLE is in surplus, then everyone may indeed have enough or surplus. Is your fear that in the future there won't be enough - that we will have scarcity?

      If you have a surplus while others have deficits, then you have taken more from society than you have put in. Can you see that economically that must be the case? You don't get surpluses through your own hard work and thrift, though it may seem like it. You get surpluses by depriving others. I did say that in the post. Lots of people then assumed I was after big-state socialist take-from-you-by-force solutions to this, which I am not. I am trying to explain to you how production economics work so that you can see why I think you should be recycling your surplus. It has nothing to do with money.

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    8. Thank you Francis, for your reply. You state that “I don't care whether you hoard your savings in classic cars that you never drive, gold or moon cheese. The point is that you are not using your surplus production, you are hoarding it.”

      I do not agree. If I am a farmer, what I produce, is food. After selling all that I have produced, I receive money in exchange, and assuming I have a net-surplus overall after accounting for costs, I have some savings. Similarly with the doctor, who sees more patients, and receives more in fees than is required to meet costs. Again, you say “The point is that you are not using your surplus production, you are hoarding it.”. But no! Don't you see, that all of the food the farmer has produced was made available to society. All of the medical care that the doctor “produced” was made available to society. If a manufacturer of lawn mowers produces more than is needed to meet operating and supply costs, and stores extra lawnmowers in a warehouse someplace, then that manufacturer is hoarding their surplus production. But if they sell all of the lawnmowers, then all of their surplus production is available to others. The only thing they are hoarding is money, and there is no shortage of money today!

      You say that I am confusing money with investment. I say that you are putting value into money that is not really there. The value is not in the money/currency/savings, it is in everything else.

      You say “But my real criticism is aimed at those who have saved far more than they could ever need but will not use those savings productively.“. I say what a generous person. This person has produced more than she will ever receive back from society. We should all be so productive and beneficial to those around us.

      You say If you have a surplus while others have deficits, then you have taken more from society than you have put in. Can you see that economically that must be the case?. Again, I disagree. If I produce more than I consume, then I have given more to society than I have received. Society has given me money in exchange, which is itself less useful that that which I produced (can't eat it, can't wear it, etc). I agree to take the money, because I believe that down the road, society will let my exchange my money for something useful, but there is no guarantee of this, no matter what money we use. As you say, if armageddon comes, we're all better off with cans of beans than money.

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    9. Dr. Octagon,

      The only thing they are hoarding is money, and there is no shortage of money today!

      I think the problem that Frances is alluding to has to do with velocity of money. Velocity being inverse of demand for money. Demand for money as savings (safe asset) has caused the velocity to fall, therefore she thinks that to increase the velocity -- people should invest their savings in productive businesses. That is-- people should take more risks. Correct me if I'm wrong here Frances.

      This person has produced more than she will ever receive back from society. We should all be so productive and beneficial to those around us.

      It is not as black and white as you think. For example, Banker bonuses came at the expense of highly non-productive investing (such as selling CDOs, sub-prime mortgage crap). I'm sure the banking CEOs are rich in these savings in these debt tokens, but did they actually benefit the society with their work?

      There are some people that are parasites of the system, siphoning off profits but socializing losses.

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    10. e_r

      Great answer! many thanks :)

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    11. e_r

      Your reply confirms that the accounting mechanism is flawed. Dr. Octagon however is correct in separating the physical and monetary planes.

      All savings are debt, no matter the type of token, be it paper money or gold.

      Dr. Octagon rightly perceives that those that hold debt(no matter the form) have already given all to society, with the hope of perhaps someday reclaiming some of that value as needed.

      TF

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    12. Motley Fool

      if you read back you will note that it was me who separated the physical and monetary planes, actually. Dr Octagon confused them.

      The link between productive work and money is broken. There is no longer a reliable relationship between the amount of money that people earn and the actual value of their work to society.

      You are correct that all savings are debt.

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    13. MF,

      I think Frances is spot-on when she says:

      The link between productive work and money is broken. There is no longer a reliable relationship between the amount of money that people earn and the actual value of their work to society.

      You said: Dr. Octagon rightly perceives that those that hold debt(no matter the form) have already given all to society, with the hope of perhaps someday reclaiming some of that value as needed

      I don't know if that's the right perception. Selling CDO crap to investors and insuring against the same CDO crap by buying CDS: what benefit does this act confer to the society?

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    14. e_r - I said that productive members of society do not harm others when they receive and save money in exchange for their efforts. I did not say that everyone who collects money is productive. In fact, I already stated a few posts above that the financial industry is a problem, and I agree with your parasites assessment (I prefer the term rent-seekers myself).

      People taking more risks with their savings, and the velocity of money, are similarly unrelated to my point. Businesses get money from banks, which if they are doing their job correctly, will create it for likely viable businesses. That's what banks are for. I do not have the expertise nor the time to vet business plans, to invest in a business. Nor should I, as I have a different sort of job, which does benefit society. You may even own a product containing something I am directly responsible for. My job is to further the business in which I am already employed, not to spend my time on finance.

      These last few comments in this thread are arguments that the financial system is flawed. It's full of overpaid rent-seekers. It's not providing funds to businesses as it should (the velocity is too low). “The link between productive work and money is broken.“ I fully agree. Again, this is not my point.

      Back to the original post. Frances does not like the idea of saving in gold, because she believes that the act of saving itself harms society (the fact that it's in the form of gold is not the issue). Saving denies society of other uses for that savings. I have argued, unconvincingly it seems, that nothing is denied, in any way, because the savings, in this post in the form of gold, has no other productive use. No one is harmed. Well, maybe the bankers who no longer have access to my savings. ;-)

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    15. Dr. Octagon -

      I completely agree with your assessment on the function of the banks and the failure of these institutions to perform the required function. Instead, they have become rent-seekers par excellence, thanks to their complete take over of the Government and establishing a solid revolving door.

      Frances does not like the idea of saving in gold, because she believes that the act of saving itself harms society

      I fully disagree with her on this issue. If she believes that the link between productive work and money is broken, how does she expect ordinary people to put their savings in long term productive investment? Frances - I'm puzzled. Should we go and figure out which small businesses will be successful in our area and go invest money in them? Don't we have other jobs? What purpose is division of labor in a society?

      I have argued, unconvincingly it seems, that nothing is denied, in any way, because the savings, in this post in the form of gold, has no other productive use. No one is harmed.

      If Frances truly believes that the link between money and productive work is broken, she should really be talking about how to establish such a link first and then talk about why hoarding gold is depriving productive investment.

      In fact, saving in gold should be lauded because one wouldn't encourage rent-seeking by taking their money off this financial system full of rent-seekers.

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    16. Good heavens. Does your job occupy you 24/7? Do you have no engagement with your community? I don't believe it. But quite apart from that, there are non-bank lending and equity investment platforms, ethical investment funds, credit unions....I could go on and on. New means of bringing together investors and investment opportunities are being developed all the time. Your argument about lack of time, division of labour etc. is simply an excuse.

      I don't think you've understood what I mean by the broken link between productive work and money. What I mean is that there are people and businesses who do lots of productive work who have very little money, and there are others who are paid handsomely for being parasites. I'm trying to get the parasites to see that their money does not belong to them and should be recycled back into society in the form of investment in productive activities. Gold doesn't help this in the slightest. On the contrary, it provides the parasitic rentiers with a place to hide their ill-gotten gains. Do you really think that small savers and central banks are the only people buying physical gold? Why do you think I suggested punitive taxation of LARGE holdings of unproductive assets? The richest people in our society are arguably the least productive, economically. Why do you wish to help them keep their wealth?

      You are allowing your hatred of the financial system to blind you to productive uses for your money OUTSIDE the financial system.

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    17. Your argument about lack of time, division of labour etc. is simply an excuse. Yes, perhaps. More importantly, I also consider myself unqualified to make such decisions. I do not have a good enough grasp of viable business opportunities to do this. If I did, I would already do this. I'm not as concerned with who is between me and an investment opportunity (bank, ethical investment funds, etc), as I am with the abilities of those choosing the investments.

      One place where you an I differ is that you believe God will provide. I don't have the luxury of your faith.

      I don't think you've understood what I mean by the broken link between productive work and money.... I fully understand agree with your entire paragraph. Lots of unproductive "parasitic rentiers" are unjustly rich, many of them purchase physical gold. I'm all for taxing wealth, especially wealth that's inherited or far above what anyone would reasonably accumulate by "working for a living". But this is a policy issue, not an economic one.

      There are many parallel threads going on in this posting. I'm sure I could never keep track of who says what.

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    18. This comment has been removed by the author.

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    19. Oh, one final note. You stated: You are allowing your hatred of the financial system to blind you to productive uses for your money OUTSIDE the financial system.

      But my money is useless.

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    20. Your argument about lack of time, division of labour etc. is simply an excuse.

      I agree with Dr. Octagon, it is more a question of ability and specialized focus in the opportunities.

      And I also agree with Dr. Octagon that taxation is a policy issue, which the state has control over. Increasing the risk appetite of people's savings is not a solution or a substitute for the insanely unproductive wealthy to hoard their money.

      There are many parallel threads going on in this posting. I'm sure I could never keep track of who says what

      I'm losing track too, probably because too many dimensions have been covered in this post. I'm only interested in the practical economic dimension and my concerns/comments have been raised in this direction.

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    21. Generally I think your comments are fair - we have moved out of the general debate about whether gold investment is a good thing into questions of policy and practicality. Changing people's risk appetite is however both a question of persuasion at the individual level (which I am attempting to do) and state level (hence my suggestion for Pigouvian taxation of large holdings). But yes, this latter is a policy matter.

      I did say that my comments are principally addressed at those who are hoarding money that they could not possibly ever need, not small savers, and it is unfortunate that most of the commenters on this post have assumed I was mainly aiming at small savers. However, it is the same mindset: the small saver who buys a bit of gold is behaving in exactly the same way as the investor of billions who converts his money into Swiss francs. It is the risk-off mindset that I am challenging, because I consider it disengagement with society. If too many people think like that, the economy can't grow. It's one of those fallacy of composition problems: at an individual level, looking for zero-risk investments in a challenging economic environment is clearly rational, but at the aggregate level it can be economically disastrous. By fearing disaster you may bring it about.

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  17. Frances,

    Thank you for writing your critique on freegold. I would like to pose some questions to you:

    1. How do *you* resolve FOFOA's dilemma?
    2. Does FOFOA think fiat (paper) currency is good, bad or something else?
    3. There are roughly 170,000 tons of above ground gold hoarded by people all over the world (according to the world gold Council). Around 2-3tons of that moves from one entity to another each year (new mine supply, scrap metal, etc). Question:

    If the price of gold were to rise, wouldn't more of that gold move from one entity to another?

    Followup question: if the price of gold were to go from $300/oz to $1600/oz wouldn't we see a corresponding increase in the number of oz's being sold?

    4. Can any entity *sustainably* fund its consumption by constantly borrowing year after year?

    5. If the answer to #4 is yes, then ignore this question:
    When does a debt based consumption system finally end?

    Thanks,

    Milamber

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    1. Your question reads like FOFOA 101!

      1) I did not discuss the question of the Triffin dilemma in this post because I was more interested in the moral issues around hoarding in general. You will note that I am equally scathing about hoarding of other hard assets and, indeed, paper investments that don't provide money directly to productive enterprises. So I am hardly a supporter of the present system, am I?? However, since you ask, gold is not the only possible solution to the Triffin dilemma. The IMF is promoting SDRs as an alternative, and you may recall that Keynes' original idea was a separate international currency (Bancor). I regard the possible use of gold as an international reserve as not unreasonable, but I remain to be convinced that it is better than the alternatives.

      2) I explained in the post my understanding of FOFOA's position on paper currency. If I have it wrong perhaps you would like to correct what I said?

      3) I don't really care whether gold flows. In terms of the world economy, I don't consider it important unless the money generated from trading it actually finds its way into productive investment, which - as I've already explained - it doesn't. Increasing the velocity of gold trading on financial markets won't increase economic activity in any way, and in fact as gold price rises with demand (like any other commodity), a rising gold price is likely to indicate money being drawn from the productive economy into unproductive assets.

      4) The problem with debt is not the debt itself but its affordability. If the entity can service the debt, and investors are prepared to continue lending to it, the debt is sustainable. I assume you are referring to the increasing US debt level? At present there is no question but that this debt is completely sustainable. The question that needs to be answered is whether it will continue to be sustainable when interest rates start to rise. That day looks quite far off at the moment, so now is an opportunity to INVEST in the economy to increase its income so it can afford to service its debt (and also hopefully need less of it) in the future. Scaremongering about the nominal size of the debt mountain doesn't actually address the real issue.

      5. Given that my answer to #4 was "you didn't ask the right question", I will answer this one too. It doesn't end. We have had a credit based money system for the last 5,000 years - I suggest you read David Graeber's book "Debt: the first 5,000 years" for a good discussion of the anthropology behind my statement. Credit money systems go through periodic crises because debt tends to generate more debt. These crises are cyclical over time: debt crisis is typically followed by depression and unemployment, and the counter for that is increased private and public investment in the economy: then as the economy recovers there is high inflation and/or financial repression, as we saw after WWII, which brings the debt down as a proportion of GDP. When the issue is high inflation, everybody worries about that: when the issue is depression, everybody worries about unemployment. At the moment we have low inflation and unemployment. In the future I expect we will have high inflation, though I don't believe that there will be the hyperinflation that FOFOA predicts. But if we start behaving NOW as if we already have high inflation, we will prolong the depressionary phase and keep unemployment unnecessarily high for far too long. Consider what that means in terms of human misery.

      Delete
  18. Hi Frances,

    My bet is that this is going to be your most commented post. ;)

    From our brief conversation in Twitter, you have written out in detail your views on this subject and it also covers several dimensions, so I want to stick to saying intelligent specific things without veering us off topic.

    You said: I assume you are referring to the increasing US debt level? At present there is no question but that this debt is completely sustainable.

    That's not completely honest, because of Quantitative easing. How can you say that when trillions are taken on the balance sheet by the Central bank to suppress interest rates? I'm sure you would agree that there can be dangerous consequences on the political front, as you mention that you don't believe in the incorruptibility of the Government.

    If all of these bonds emanated from the Treasury are not absorbed by the Fed, only then would we see the true effect of investors seeking safe assets, wouldn't you agree?

    Wouldn't you also agree that Quantitative easing sends dangerous signals of complacency to the Congress and even to the entire world (invested in the US economy), because it gives the politicians time to kick the can down the road until the next election, without doing anything meaningful (on taxes or spending).

    I know you agree that Quantitative easing is not the best form of transmission mechanism, but I want to question whether you can really say the debt is sustainable in the face of interest rate supression/financial repression.

    ReplyDelete
    Replies
    1. It already is!!

      As you know, I don't support QE, but that's mainly because I think it is virtually useless. It is at best a very weak stimulus and you have to do an awful lot of it to have any noticeable effect.

      I would argue that the repression of interest rates is partly what makes the debt sustainable. That, and the worldwide use of USTs as a safe liquid asset - which means investors remain willing to hold it even at negative yields. If the US were paying the sort of rates on govvies that Spain and Italy are, there would be a much bigger problem.

      QE itself does not either add to, or reduce, government liabilities. It simply changes one form of government liability (interest-bearing term bonds) for another (zero-coupon bills). In the US, the Fed's notional "private" status means that we can't consolidate the balance sheets as we do in the UK to show the asset swap, so we are effectively grossing up the Fed's balance sheet. But you and I both know that the Fed's private status is a joke, so the new bills (cash) are still govt liabilities really, and all that has happened is that debt has been converted into money. When I put it like that, can you see why I am unconcerned about QE?

      I am aware of the inflation risk from monetizing debt, but in the last five years the greater risk has undoubtedly been deflation and QE has had some success at countering that, despite my reservations.

      Delete
    2. You said: I would argue that the repression of interest rates is partly what makes the debt sustainable.

      It is sustaining the unsustainable, to be precise. How long can that go on? Not too long and you wouldn't want to test the 'trust' factor, would you? Don't you think credibility is important for a monetary system?

      When I put it like that, can you see why I am unconcerned about QE?

      No. I don't see it, because QE is altering the maturity and converting something less liquid to something more liquid. Why do we need this alteration if there is appetite for safe long-term US bonds, LOL?

      Isn't QE actually perversely acknowledging the fact that this appetite from investors for long-term bonds is reducing, probably because they have lost confidence that these bonds will be repaid in real terms?

      QE has had some success at countering that, despite my reservations.

      Don't you see that advocating savings in the same medium as lending has increased the demand for loan-based assets, which in turn has fueled an exponential credit bubble?

      An unsustainable credit bubble had exploded and it had to happen. If we were to take that TARP and QE1 was done to slow down the deleveraging process, why was QE2 done and why is there renewed talk on QE3?

      I think QE is needed because of saturation of US debt across all over the world. My original point is that the debt is at unsustainable levels and the central bank is playing with fire because it is undermining confidence and resilience in the system.

      Delete
    3. No, that doesn't make any sort of sense. The Bank of Japan has been doing QE for twenty years. Is its debt being rejected by investors? Is its currency collapsing? No. Arguably the yen carry trade contributed to the Western credit bubble, but that's about all you can say, really. The UK also does QE - in fact as a proportion of its GDP it's done far more than the US. Is the world unwilling to hold gilts? Hardly. Yields are falling along the yield curve except at the very short end where the Bank of England is currently propping it up. That doesn't indicate lack of demand for gilts - quite the contrary, actually.

      There is definitely appetite for long-term bonds. Twist is creating an artificial shortage of bonds of maturities out to 10 years, which is driving up prices and repressing yields along the curve. If there were no appetite for longer-term bonds this wouldn't work, would it?

      I really don't think your argument that QE is needed because of debt saturation holds water. QE is intended to depress yields, and the evidence is that it does indeed have that effect. If debt were at saturation, that wouldn't happen.

      Delete
    4. The Bank of Japan has been doing QE for twenty years. Is its debt being rejected by investors? Is its currency collapsing?

      I don't think it is fair to compare Japan and the US, because one is a national currency with a high savings rate and majority of its debt held within the nation and the other is a world reserve currency, with an ultra low national savings rate and more than 50% of its debt held by foreigners.

      Arguably the yen carry trade contributed to the Western credit bubble, but that's about all you can say, really.

      Yen carry trade is the primary reason for the Western Credit bubble? What does Yen carry trade have to do with the US housing market?

      Delete
    5. I said "contributed to" not "primary reason for".....but I don't think there's much doubt that it was a significant factor. There's a reasonable explanation of the Yen carry trade's role in the Western credit bubble and ensuing crisis here:

      http://www.investopedia.com/articles/forex/09/credit-crisis-carry-trade.asp#axzz22Kjanr1J

      Delete
  19. Frances

    Thank you for your reply.

    I am in transit today, so can't comment more extensively right now. I would submit though, that a critique of freehold w/o tackling fofoas dilemma is like discussing the sun and ignoring nuclear fusion. It's kind of the whole point. g

    More comments later

    Milamber

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    Replies
    1. I can discuss the effect of the sun on the earth, the climate, the growing of crops and the wellbeing of humans without mentioning nuclear fusion. It is that "real world" level that I was interested in. I don't ignore the Triffin dilemma but it was not what I wished to discuss in this post.

      Delete
    2. Frances,

      I am caught up now on the comments. I would like to offer a few observations for you to ponder (if you are so inclined):

      First of all, my comment about nuclear fusion was not meant to be snarky. I was pressed for time. My apologies if it was interpreted as such.

      What I meant by writing the fusion comment is you wrote a piece critiquing Freegold, (And good for you! We need more non free gold folks reading about Freegold and critiquing it.) But you didn’t address the major tenets of Freegold.

      It would be as if you titled a piece “The Sun: How it works” And then did not include anything on nuclear fusion.

      If I may be so bold, I think that you have made the mistake of lumping Freegold theory into the rhetoric that one hears from the HMS gold bug community. It is a common mistake. And it is made by pretty much everyone that does not really delve into Freegold. I did the exact same thing when I first stumbled onto FOFOA's blog two plus years ago.

      If you really want to get into the meat of Freegold, then I would recommend that you research & answer those questions that I posed. And note I wrote FOFOA’s dilemma not Triffin’s. That should be a clue that you are not on the right track (as it relates to understanding Freegold). If you think that your answers that you gave are sufficient, then we will part friends & I won’t bore you with any more questions or commentary. :)

      Stay out of the Olympics traffic & have fun singing!

      Good luck,

      Milamber

      Delete
    3. Milamber,

      I deliberately used the term Triffin's dilemma. I am aware that FOFOA's dilemma is a different question, because it concerns the conflicting interests of debtors and savers. However, as I was discussing international trade and the role of the US dollar, Triffin's dilemma was the more appropriate.

      I get a bit tired of the Freegolders' constant assertion that I don't understand. I've now read quite a bit of FOFOA and I've discussed with a lot of Freegolders. The impression I get is of a very confused set of people. As an example, the "inverted gold chart" was sent to me by several Freegold supporters - not HMS gold bugs, I can tell the difference! - who insisted that gold is not in a bubble and the dollar is collapsing against gold. Then Motley Fool on the comments here says that's not what Freegolders think. It seems that Freegolders themselves don't understand FOFOA or agree among themselves. They also don't understand much of what I've been saying.

      You think I should research FOFOA more. How about you research some of the stuff I've said? Start with David Graeber - he's a really fascinating read. Read Izzy's "Beyond Scarcity" series and her posts on the future of banking (or rather, the death of banking). Read Litvaer on currency diversification and sustainable finance. Please, open your eyes and your mind. There are many, many more writings on the future of finance and of world production. We are indeed at the beginning of a paradigm shift, but it isn't the Hyperinflation Armageddon Fantasy that you fear. It's far more positive and far more exciting.

      Delete
    4. Frances,

      I am sorry you feel that way.

      If you have indeed read a lot of FOFOA (and I don’t doubt you at all since you state it), then I must conclude that you haven’t understood it. Otherwise your critique of Freegold would include analysis of the following items:

      - FOFOA’s dilemma
      - KSA Oil for Gold
      - Debtors vs. Savers
      - It’s the (gold) flow, stupid (you are not stupid, that’s the title of the post)
      - Credibility Inflation

      And many other Freegold subjects.

      You would also do well to read Jacques Rueff ‘s “Age of Inflation” and “The Monetary Sins of the West”, and you would also include a discussion of the Genoa Conferences of 1455 & 1922 & how they differed.

      And I haven’t even gotten into details of what Another, FOA (and Aristotle) have written!

      Since you have not addressed (In any detail) any of the above, I have to unfortunately conclude that you are NOT interested in doing a detailed critique of Freegold.

      A pity. I had high hopes when I saw your blog post referenced at FOFOA’s site.

      I do wish you well. And if you change your mind, I will be more than happy to engage in a discussion of the above.

      Good luck!

      Milamber

      Delete
    5. Milamber,

      this is a POST not a book. Do you know what my word limit is? I could not possibly do a detailed critique of the whole of FOFOA's output in one post. (Comments on posts can run for much longer than the posts themselves, so the length of the comment thread here is not a indicator of the possible length of the post).

      However, the point of this post was not to do a detailed critique of Freegold. If you think it was, you have misunderstood it. It's quite possible that the link from FOFOA's blog was misleading - I didn't post it and I don't know what was said about it there. However, the point of this post was to explain why I personally consider HOARDING - of gold or any other unproductive assets - both immoral and economically damaging. And in so far as FOFOA encourages hoarding, I consider it too immoral and economically damaging.

      I have read FOFOA's writings on all of those, actually. I have also read the Jacques Rueff stuff. Have you read James Tobin's critiques of Rueff? Tobin was Rueff's severest critic - and one of the greatest economists of the 20th century. Incidentally the inverted gold chart was sent to me by someone who called himself Jacques Rueff Fan and also sent me about six of FOFOA's blogs. See what I mean about confusion among Freegold supporters?

      I'm disappointed that despite my previous objection, you have once again resorted to saying I "don't understand". Did you not read my comments in the post about "gnosis" - special knowledge - being one of the features of a cult? You don't make me any more impressed with Freegold by talking about it as if it has some kind of deep significance that only the enlightened can understand.

      There is no way on this earth that I would ever sign up to the Freegold agenda. That is my considered opinion after doing really quite a lot of research. The more I read, the less attractive I found it.

      Have you understood the significance of "the golden calf"?

      Delete
    6. Frances,

      I am desperately seeking some logical argument to unseat the logic in Freegold. Why? Since I think Freegold is a very elegant theory that makes a whole lot of sense, I am constantly trying to disprove it. Call me the doubting Thomas of Freegold :) I would love to get back to my world where ever increasing amounts of debt emitted by one entity equals ever increasing amounts of wealth.

      To date, I have found no argument (including your analysis) that can counter Freegold.

      I do hope you will take the following constructive criticisms to heart...


      When you write a blog post and you include the following statement,

      “… I have spent some time reading the writings of their guru, an anonymous blogger known as FOFOA (which apparently means Friend of Friend of Another). I'm going to summarise here what I have drawn from these writings.”

      One would think that you would write about what FOFOA blogs about, yes?

      You have not done that.

      Instead, you have constructed flimsy straw men and then knocked them down. You have conflated HMS Gold Bug rhetoric with Freegold. Please do not think for one second that what you have written is a critique of Freegold. It most certainly is not.

      I will say this again:

      I welcome critiques of Freegold, and I hope to see one from you in the future. If you don’t want to give one, that is fine. But if that is the case, I would rec that you refrain from writing,

      “…I'm going to summarise here what I have drawn from these writings.”

      When you haven’t even correctly stated what Freegold is.

      As to Tobin’s critiques of Rueff, yes,I have read them.
      And so has FOFOA.

      In fact FOFOA has written about Tobin’s critiques. I am sure you saw that in your research; I will be generous and say you probably just forgot about it.

      One final comment for you to consider as you ponder Freegold:

      At least Tobin had the decency to understand Rueff’s arguments before he critiqued him.

      I do hope you will extend the same courtesy to FOFOA and do the same.

      Milamber

      Delete
    7. Milamber,

      I repeat, what I wrote is what I drew both from FOFOA's writings and the comments of his followers. I have not "conflated it with HMS gold bug rhetoric". To the extent that it is so conflated, it is because FOFOA's followers THEMSELVES have conflated it.

      Motley Fool criticised my comment about the inverted gold price chart. I presume you, too, think that the inverted gold price chart is HMS gold bug rhetoric? If so, you don't understand FOFOA either. I refer you to this post by FOFOA on gold backwardation. In it he makes it VERY clear that the dollar depends on gold and that gold backwardation signals - in his words - "the start of dollar hyperinflation". He quotes this from FOA:

      "All modern digital currencies do not go into an investment, they move THRU it... There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies"."

      If you were to chart that, you would find an inverted chart - dollar vs gold, not the other way round (and all other currencies vs gold for good measure). Sort of an imaginary gold standard.

      Zerohedge - not exactly known for his support of fiat currency - commented that he thought the reason for the backwardation was not lack of trust (which would indicate imminent price collapse) but lack of unencumbered metal. And silver is also frequently backwardated at the moment, which rather undermines FOFOA's argument (and supports Zero Hedge).

      I will leave you to read the rest of the post in the light of my comments. http://fofoa.blogspot.co.uk/2010/07/red-alert-gold-backwardation.html

      To be honest, you seem to have stopped reading my post after my summary of MY UNDERSTANDING of Freegolder beliefs. You've ignored the fact that I said it was my understanding: you've ignored the fact that I used FOFOA's own definition of Freegold; and you have not addressed any of the moral arguments I raise in the post. Instead you attack me for not writing the post that you thought I should have done.

      If there are any other points in my belief list that you consider are "conflated with HMS gold bug rhetoric", perhaps you would be good enough to tell both me and your fellow confused Freegolders which ones, and why?

      Delete
    8. Frances,

      According to A,FOA,FOFOA, please answer the following:

      What is Credibility Inflation?

      Why did the price of oil rise 400% in the 70's?

      What are your thoughts on Nixon, Burns, Kissinger et all concerns about the price of gold in the 70's?

      Why *SHOULD* the flow of gold matter in international BOP?

      The reason I am asking these (and the other questions that I asked, but I don't think I have seen an answer) is anyone who has spent time studying (in depth!) Freegold, would be able to talk intelligently about them. Even if they don't agree with FOFOA's take on them.
      I don't agree with FOFOA's take on some of the items he posts. But he will understand a position before he refutes it. And I am able to understand his position. I don't think you have done that here.

      Remember what Aristotle (the philosopher, not the Freegold poster) said,

      "It is the mark of an educated mind to be able to entertain a thought without accepting it."

      As an example, I have asked you several times your take on FOFOA’s dilemma. You have yet to provide one.

      Why?

      Are you ignoring the main arguments concerning Freegold? Or do you not have a take?

      Either way, not answering that question would be like me writing a biography about Frances Coppola and not mentioning how important singing is to her. I would not be doing my job if I did that. And people who KNEW Frances would RIGHTFULLY call me out on it.

      Finally, If you choose to not answer any of the above questions, I would like to offer some questions on “moral rightness” as it relates to Freegold. I do this because you seem to be so concerned about the moral righteousness of *SAVERS* choosing to hold their *SAVINGS* in gold. Not investment capital, but *SAVINGS*!

      Here are some questions to ponder:

      Is it morally right for the entire worlds's savings to be denominated in one nations debt (that can be printed at will) w/o consequence until a final collapse?

      Is it morally right that savers are being punished with negative real interest rates?

      Is it morally right that TBTF (and please note that I am NOT saying you agree with TBTF) can get whatever amount of $ that they need for however long they need it to stay liquid until through financial repression they might become solvent?

      Is it morally right that when countries agreed with the US on Bretton Woods that they got screwed when Nixon slammed the gold window shut in '71?

      I certainly could keep going on about what is “morally right”, but in the final analysis it doesn't matter.

      Freegold is not about "what FOFOA is arguing for" or what is "morally right". FreeGold is about what is going to happen as the SOV that the THE WORLD uses separates from the MoE. It is about, "...Where we are going!"


      FOFOA is simply commenting on this transition in real time. But since you wrote that FOFOA is trying to scare people into buying (Hoarding) gold, then try it. Go ahead. Try and buy gold from him & see what happens.

      While you are at it, what is FOFOA's favorite miner play that he is recommending to "followers"?


      If this international monetary system transition doesn’t happen like FOFOA is predicting, then watch out!

      $700 Trillion of Derivatives linked to $70 Trillion of unpayable debt held in the form of "savings" doesn’t look too good when it collapses.

      http://www.zerohedge.com/news/big-reset-2012-and-2013-will-usher-end-scariest-presentation-ever

      And it doesn’t matter if it is in the form of a debt deflation or explodes in a peel your face off hyperinflationary expansion.

      Milamber

      Delete
    9. I don't see why I should answer your questions when you refuse to answer mine. And I don't see why I have to demonstrate an in-depth knowledge of FOFOA's thinking to you, when you have failed to explain to me why my understanding of his inverted gold chart is apparently not right, even though it is a continual thread throughout the post I linked to in my previous comment. I did not write, and have no intention of writing, a detailed critique of FOFOA's writing, and I will not answer your questions on the detail of his work either.

      However, since the point of this post is morality, not FOFOA, I will answer your morality questions.

      1) Is it morally right for the entire worlds's savings to be denominated in one nations debt (that can be printed at will) w/o consequence until a final collapse?

      I do not accept that there will be a final collapse. And without that final collapse this is a non-question. There is no moral dimension to consider.

      2)Is it morally right that savers are being punished with negative real interest rates?

      I've already answered this further up the thread, but yes, it is. The world's excess debt is backed by excess savings. Savers have benefited massively from the growth of unsustainable debt. They were rescued from acute losses when the banks were bailed out, but because they took no losses the debt which backed their savings simply moved on to sovereign balance sheets instead of being written off along with the associated savings as it should have been. If the world is to reduce its private and public debt to something more sustainable, savings must also reduce. The only ways this can happen without catastrophic debt default is through high inflation and/or financial repression. This was the strategy adopted the last time we wrote down debt on this scale, which was after WWII. Savers were compelled to invest in public savings schemes that gave negative real returns, and there was persistently high inflation.

      3) Is it morally right that TBTF (and please note that I am NOT saying you agree with TBTF) can get whatever amount of $ that they need for however long they need it to stay liquid until through financial repression they might become solvent?

      That is not really a moral question, it is a practical one. It depends whether the bank in question is short of cash or actually insolvent. I refer you to my post on liquidity and insolvency. http://coppolacomment.blogspot.co.uk/2012/05/liquidity-matters.html

      You will see from the post that I do not agree with blanket bailouts of failing banks. But as with any business experiencing cash flow difficulties, if the underlying business is sound then supporting the cash flow is more sensible than allowing the business to fail simply because of funding problems.

      (continued)

      Delete
    10. (continued)

      4) Is it morally right that when countries agreed with the US on Bretton Woods that they got screwed when Nixon slammed the gold window shut in '71?

      As indeed countries were "screwed" when the UK abandoned the Gold Standard in 1931. That is the problem with a gold standard: it is only as good as the willingness of governments to meet their obligations. In the end a government's obligations to its citizens trump its external obligations.

      In both cases the Gold Standard was causing serious economic problems. In the case of the UK, there is no doubt that it weathered the Depression far better than the US at least partly because it abandoned the gold standard earlier. So in that case, I'm afraid I do think that reneging on international obligations was the right thing to do. The morally wrong action was going back on to the Gold Standard in 1925, since the only way a gold standard can be defended is by internal devaluation, which causes human misery.

      I'm sure you can work out by now what my answer is with regard to the US's abandonment of the Bretton Woods Gold Standard in 1971. I would remind you that the US's action was really forced by the devaluation of sterling in 1967 and the collapse of the London Gold Pool: that made the gold peg unsustainable and eventually forced the US to abandon it. But the morally wrong decision was made in 1944 when the gold standard was reintroduced.
      -----------------------------------------------------

      And finally. Surely you've worked out how FOFOA benefits from people like you buying gold? If you haven't, you either aren't very bright or you are blinded by your loyalty. He doesn't need to trade with you in order to benefit from your gold purchases. What happens to the gold price when lots of people buy gold, duh? And what happens to dollars? Look at the Gold Backwardation post again and consider how it is that FOFOA understands the motivation of Goldman Sachs so well. I wouldn't trust anything he says, quite frankly. He's laughing all the way to the bank.

      Delete
    11. Ok Frances, you have convinced me.

      Your counter arguments concerning Freegold are so compelling, only a blind Freegoldian would still consider it as a legitimate theory.

      Let me list (in order of importance) the arguments that you made that absolutely obliterated the Freegold theory:

      1.
      2.
      3.

      Oh that’s right. When asked to discuss some basic Freegold points, you retreated to “It is a “moral” post I made.”

      Why did I ever think your post had something to do with FOFOA & Freegold?

      Hmm. Let’s see. Oh that’s right. Quoting Frances from the 3rd paragraph,

      “…I have spent some time reading the writings of their guru, an anonymous blogger known as FOFOA (which apparently means Friend of Friend of Another). I'm going to summarise here what I have drawn from these writings.”

      Yep. I see now how I should have picked up that this was going to be a clear concise post on morality. You clearly identify that with you clever insertion of FOFOA & Freegold in your opening comments....

      Why am I not answering your questions?

      Because I didn’t write a blog post outlining false beliefs about Frances Coppola.

      You did exactly that concerning FOFOA & Freegold. And then when called on the carpet about it, all you can do is state that you will only discuss morality.

      Give me a break!

      My interest in commenting on your blog was because I thought you were going to take a critical look at FOFOA’s writings & Freegold. I thought that, because in your 3rd paragraph you said that is what you were going to do!

      Silly Me. What in the world was I thinking! I was wrong again!

      I would have thought that anyone with a calculator could figure out that a worldwide perpetually expanding debt based monetary system will eventually collapse. Once again though, you have proven me wrong!

      The collapse of the current international monetary system that we are witnessing right now, is mathematically guaranteed to happen. This is the $IMFS today.

      The only question at this point is how will it continue to collapse? Will it happen overnight? Will it take 10 years to play out? Will it devolve into a shooting War? Will the collapse flow into physical gold? Or will the debt be defaulted on? Or will SDR’s somehow be used to extend the system? Those are the questions I am pondering.

      Maybe I should go consult my “guru” or fondle my gold or go to sleep dreaming about FOFOA’s favorite mining company.

      BTW, just for grins, did you figure out which one it is yet?

      Milamber

      Delete
    12. Milamber

      You have completely misunderstood the entire point of the post - even though it was implicit in the title - and now you resort to rudeness and sarcasm because I won't write the post that you want or answer the trap questions that you set up for me to fall into. You haven't answered any of my questions and you haven't addressed the issues I raised in the post. From the start you treated this as an "I'm going to prove she doesn't know anything" opportunity, and now you are angry that I won't play your game.

      I have asked you to explain which of the beliefs I summarised are wrong (so I can correct them, obviously) and you have not done so: yet you still accuse me of spreading "false beliefs" about Freegold. I conclude therefore that you have no interest in engaging with the issues I raise and are still only interested in tripping me up. I can only hope that the other readers of this comment thread will appreciate, as I do, that resorting to insults while failing to address the issues means you have nothing useful to say.

      By all means comment if you are prepared to address the issues in the post, but if you continue in your present vein I will delete your comments. I don't feed trolls.

      Delete
    13. Frances,

      I believe it was you who wrote to me,

      "...you either aren't very bright or you are blinded by your loyalty."

      So I am either blind or dumb, but you aren't being rude, right?

      You wrote,

      "...answer the trap questions that you set up for me to fall into."

      I asked you to define basic freegold concepts that FOFOA blogs about. You refused to (or couldn't).

      Only a person who doesn't understand Freegold would call my questions "trap" questions. But then such a person shouldn't write a blog post criticizing that which said person doesn't understand.

      I won't pollute your blog anymore. I thought you wanted to have a discussion about a post that *YOU* made concerning Freegold & FOFOA's writings; clearly you do not.

      Milamber

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    14. Milamber

      I've explained why I won't answer your questions. And I repeat, this post is not, and was never intended to be, a critique of FOFOA's writings. That was YOUR ASSUMPTION which I have now told you several times was wrong.

      You say that my summary of Freegold beliefs is wrong, but you have not explained in what ways they are wrong although I have asked you several times to do this. When you do so I will take you seriously - and will make any changes you think necessary. Until then, my considered position remains that you are seeking to trip me up rather than engage meaningfully with the issues raised in this post.

      Your faith in FOFOA is touching, but I really think you should consider his motives. Why does he write this stuff? WHAT IS IN IT FOR HIM?

      Delete
  20. Whenever someone uses the words "greed" and "selfishness" as much as this writer does, I grip my wallet a little bit tighter.

    Funny how very concerned the noble carers-about-humanity are that everyone be compelled to "give" as much as these people think they should. They point government's gun at us and say "share your wealth", and then dismiss our objections as "greed" and "selfishness".

    Apparently this author thinks that if government didn't force us greedy productive people to "share", we'd walk smirking past the starving people in the gutter.

    With "caring" socialists like this author, there is no room for personal virtue left. It can't be left to the productive individual to decide who is worthy of his charity and by what means to provide it. There is no concept of true charity left, because everything people "need" (as decided by voters like her) is something they are "entitled" to and the rest of us are to be compelled on threat of imprisonment for tax evasion to "contribute" it.

    Really chilling that intelligent adults who call themselves Christians can have such an authoritarian view of how humanity should be governed, and such a poor opinion of the goodness of the productive - er, I mean the "greedy selfish" people.

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    1. What a pity you have so COMPLETELY misunderstood this post. Your "greed" and "selfishness" makes you unwilling to use your money to invest in productive enterprises to benefit both yourself AND others. It is fundamentally stupid.

      Delete
    2. I really wish Frances were a socialist but sadly she isn't. You should research terms (and read posts better) before you throw them around.

      Delete
    3. What if the choice is to invest money to the detriment of yourself and the benefit of others. Does it remain fundamentally stupid?

      You disagree with the 'apocalyptic' scenario, and that is well and fine. But you are proposing that those that disagree with you must accede to your views in their investments. Else they are selfish, greedy and stupid. Curious.

      There are no companies I am certain will survive this, and perhaps a small number I would reasonably expect too. That is the nature of risk. Why fault us for being risk averse and being prudent in our spending to the point where we generate a surplus, and then attempt to dictate how such surplus may be deployed?

      Delete
    4. If an investment is successful it benefits everyone.

      Charitable giving is of course investment of money to the detriment of yourself and the benefit of others. You may regard this as fundamentally stupid.

      If you remember I said in the post that the whole argument in favour of gold hoarding hangs on the apocalyptic scenario: if disaster is coming, hoarding is understandable. I think you are wrong: I see no evidence whatsoever to support your belief in financial Armageddon. And my own PERSONAL morality still would not allow me to hoard wealth to the detriment of others. But I don't expect others to subscribe to these beliefs: as I said, hoarding when there is disaster approaching is understandable. It is unproductive hoarding when there is NO discernable disaster coming that I criticise.

      If you really, really believe that there is going to be global financial meltdown any minute, then by all means hoard gold if you wish. Personally I'd rather store food, which I can eat and share with my neighbours, but it's a matter of personal choice.

      All of the above simply repeats what I said in the post. Can I ask you please to read it more carefully?

      Delete
    5. I apologize. Time constraints means I did not read your post as carefully as I should have.

      We will have to agree to disagree on the nature of what is coming.

      I do have some food stored for precisely this reason. Buying food with all my excess savings I would consider hoarding, as I could not possibly consume it all, and I am not that charitable that I am willing to give away all my excess production.

      I see a need to save for my old age, I hope you can see my saving in gold is the most benign way I can possibly do so, given my views on what is coming.

      TF

      Delete
  21. "...which is driven at least in part by its trade deficit arising from the dollar's status as international reserve currency. They call this status an "exorbitant privilege" and claim that it has been used to enable the US to borrow higher amounts, at lower interest rates, than any other country."

    This part, on its own, is probably true.

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    1. Yes. Actually this is the one part of the whole argument that I agree with. Keynes was right to suggest a different currency for international trade settlement, and I expect that some time fairly soon the world will create this. The likeliest candidate is the SDR, I think. I really don't think the Euro is a sensible choice, not just because of its instability but because it is the national currency of 17 countries. The yuan is not a contender because of its lack of convertibility, and adopting that would simply move the Triffin problem elsewhere.

      Delete
  22. 'I expect that some time fairly soon the world will create this. The likeliest candidate is the SDR, I think. I really don't think the Euro is a sensible choice, not just because of its instability but because it is the national currency of 17 countries. The yuan is not a contender because of its lack of convertibility, and adopting that would simply move the Triffin problem elsewhere.'

    No need to create it Frances, it exists, and it is gold!

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    1. No, Paul. That is not a foregone conclusion. The SDR also already exists and the IMF is well down the road with plans for it to become the international reserve currency:

      http://www.imf.org/external/np/pp/eng/2011/010711.pdf

      Where I think FOFOA could usefully concentrate his attention is in separating out the three distinct roles identified by the IMF for the SDR, one of which already exists - namely its current function as a composite (not tradeable) reserve asset. In particular, it might not be sensible for the SDR to be both the unit of account for international trade AND the main global reserve asset. FOFOA seems to recognise no role at all for the SDR, since he has identified the Euro as the prime candidate for the international unit of account and gold as the prime reserve asset. I think this view of the Euro is mistaken, and FOFOA would do better to push for SDR as the international unit of account and gold as the reserve asset. The principle of splitting the reserve asset from the unit of account is I think quite sensible.

      Delete
  23. This comment has been removed by the author.

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  24. Thought I should write up some of what I said to you on Twitter so others can read it:

    I agree hoarding is somewhat immoral, although I don't think we can (or should) completely disincentivise immoral activities.

    Especially given the excessive level of fraud and unproductivity in the global financial system, it is no surprise that people will want a hedge against systemic fragility and counter-party risk (which as I have written, is gold's main function today: http://azizonomics.com/2012/04/27/golds-value-today/)

    Buying gold is less hoardy than mattress stuffing. It can be a fairly productive activity; gold miners do create some jobs, and do have some multiplier effect — as Keynes demonstrated, digging stuff up out of the ground is a good stimulus. At the very worst we can say it is only as hoardy as buying treasuries in the second market. The more demand there

    Humans have forever been somewhat enamoured with gold. I think that it is possible that the thing that takes us to the stars could be hunger for greater amounts of precious and industrial metals in asteroids. That could be a beginning for a serious program of asteroid mining and colonisation.

    ReplyDelete
  25. Whack jobs are go! Rules for future posting - mention gold and you'll get loons posting drivel. Leaves you with interesting problem. Does the increased loon factor outweigh the increased comments?

    ReplyDelete
  26. Frances,

    Just like there's over-consumption, there's also over-production yes?

    I see it as an arbitrage at the individual level when a person makes a choice of what fraction to save in hard assets (not just gold - fine art, old furniture etc.) and what fraction to invest in productive businesses. The need for this arbitrage stems from the cyclical nature of the economy.

    While you claim that saving in hard assets is akin to hoarding, I don't think you can call it hoarding to buy jewellery or fine art, which have timeless value. Obviously you wouldn't want to deploy these valuable items under a crisis -- because then you'd be stupid! you want these valuable items to help you shuttle through a crisis, a hedge if you will.

    The collective human super-organism's choice is thus expressed as a cumulative of all individual preferences expressed at the micro level. So I see this saving vs. investing arbitrage as a form of individual expression at the collective level. It is a self-similar structure of expressing risk-preference. Viewed this way, do you see that the act of saving in assets that are simply valuable is not immoral, but simply financial prudence?

    ReplyDelete
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    1. Value is always subjective. There aren't any assets that are "simply valuable".

      Here's an illustration. Suppose you have an antique diamond necklace that you bought for $50,000. Then the financial Armageddon that the Freegolders anticipate comes, and suddenly all currency is worthless, all production collapses, power fails and there is very little food. You have no food stored and no means of lighting or heating your house or cooking food. All you have is your diamond necklace. How much is it worth now? It is worth only as much as the supplies of food, candles, matches and wood that you can obtain with it - which as everyone will be selling their hard assets for food, candles, matches and wood, won't be very much, will it?

      In the kind of economic collapse the Freegolders think is on the horizon, the value of hard assets would collapse. A gold bar would be worth less than a loaf of bread. So no, if the fear is economic collapse, I don't regard hoarding gold as prudent. It's a crap hedge against starvation.

      Delete
    2. If you read what FOFOA has to say, he agrees with you. Anyone who has to sell their gold DURING the crisis is an unprepared fool. You don't save gold to help you get through a crisis. You save gold so that you will have something of value coming out of the crisis, after the system resets.

      Delete
    3. Frances,

      I think you are knocking down a strawman.

      Here's why:

      Value is of course subjective. Here's Carl Menger: value does not exist outside the consciousness of mankind .

      From this axiom of value, emerges the concept of marginal utility. It is the boundary use of a good that determines the value of that good.

      Take for example water. Quenching thirst would be first boundary use, followed by quenching a pet's thirst, watering plants, washing windows and so on.

      With the dollars one receives, Obviously one has to take care of the basic necessities first - food, shelter, clothing, electricity etc. After all basic needs are taken care of, the surplus savings can be stored in items of value or invested in productive businesses.

      One should not plan to use the items of value during a crisis. If a person does that, clearly that person did not plan very well. Which is why your diamond case is a strawman. You are showing a person who has not got their priorities straight.

      Think of a intelligent peson with reasonable net worth. Having taken care of all their basic necessities, they would then make a risk-assessed choice of what fraction to save vs. invest.

      So obviously your example is to just show that gold is a poor hedge during a financial collapse, and sure I agree -- if you planned poorly.

      Also very long term, say like 200 years or something -- risk of investing in productive businesses tend to zero, but not over a lifespan of productive work (say 20 to 30 years). To say that the risk is zero over this shorter timeframe is being quite dishonest, don't you think?

      Delete
    4. You don't know how long a crisis will last. The Freegolders assume it will only be a matter of months - but if it is as comprehensive as they think, it would be years, not months. In which case you WOULD sell your necklace for whatever you can get. As indeed happened in the Weimar collapse - I do recommend you read "when Money Dies", it really is excellent.

      It is the search for zero risk that is a lot of the problem in my view. Seeking to eliminate risk is seeking to disengage. Living involves taking risks.

      Delete
    5. but if it is as comprehensive as I think they think, it would be years, not months #FYP

      Delete
    6. Frances -

      I think you are making unclarified assumptions. Nobody can predict timing of these tail risk events. But that doesn't mean these tail risk event probabilities are zero. The very definition of a tail risk event is that you can't measure its probability.

      It is the search for zero risk that is a lot of the problem in my view. Seeking to eliminate risk is seeking to disengage. Living involves taking risks.

      If I may suggest, I think the modern financial system is completely disconnected from reality. A quadrillion in financial derivative instruments in a centralized, highly interconnected financial system is a disaster waiting to happen at any time.

      You think avoiding some risk is a problem, why don't you tell that to a person who lost all his/her segregated funds due to the MF Global / PFG Best fiasco?

      You are saying that buying a real item that can store value is disengaging from reality, whereas buying a financial instrument that cannot be meaningfully serviced in real terms is not?

      Also, you are arguing 100% all in at the extreme end of the risk spectrum (zero risk), while all I'm saying is it's perfectly normal to hedge onself with some zero risk assets.

      I think you have to comprehend the real risks of the modern financial system at least to a reasonable degree to do some hedging. But the way you are writing, it does look like you think things are absolutely peachy and trust has not been breached.

      Very well then, as a wise man once said: Time will prove all things.

      Delete
    7. Where in this discourse did I EVER recommend buying financial instruments? Please read what I actually said before commenting.

      I have repeatedly said that the future lies in investing in productive activities, and in other comments I gave examples of what I meant by that. I've been very clear that financial market paper investments are just as much hoarding as buying gold or stuffing mattresses. Securities are only productive investments in their primary offering: after that it is just financial market churn. Derivatives are never productive investments as far as the real economy is concerned, although they can be useful hedges.

      I do understand the real risks of the modern financial system very well. But I don't think it is going to collapse catastrophically in a hyperinflationary meltdown.

      Delete
    8. Are you saying that farmers who had futures accounts at PFG Best were not doing productive work?

      Some modern financial instruments are used for productive work. Equities of companies that produce useful goods, futures market used by farmers being two examples.

      Once again, you are knocking down strawmen because you are assuming that the financial market failures have happened in non-productive activities, when clearly they have affected productive businesses.

      But I don't think it is going to collapse catastrophically in a hyperinflationary meltdown.

      Glad to hear that you think the risk is zero, when mathematically nobody can even measure the risk. Technically speaking, the humble thing to say in this situation is "I don't know" and "risk is zero" is called normalcy bias.

      the future lies in investing in productive activities

      We agree there completely, it is the undermining of confidence in the financial system to act as a proper intermediary for productive activities, that is the problem. Financial firms have become parasites of the system that they are a part of.

      Delete
    9. Re farmers: of course their work is productive, and I do feel for the farmers who lost their money. I did say that derivatives (including futures) do have a use as a hedge, which is effectively how farmers use them. But those farmers' productive work is not the same as their money.

      I have not made any assumptions that failures have only been in unproductive markets. Nor would I. Productive ventures can and do fail. That's not a reason not to invest in them. Proper diversification of investment portfolios would minimise the risk of serious losses - and investment should be for the long-term, not the short term. I do want to make it clear that my opposition to "hoarding" doesn't apply to short-term "rainy day" savings.

      Throughout this incredibly long set of comments there has been MAJOR confusion between production and money. Productive work and money are NOT THE SAME THING. It is entirely possible to do very productive work and receive no money at all for it. I've mentioned the changing nature of work in other places, but for the moment you might want to consider two key points: 1) our most valuable resource is our time 2) "work" and "earn" are not the same thing. So people who do large amounts of highly productive work may actually be in deficit from a monetary point of view, whereas people who do hardly any productive work at all can have considerable financial surpluses. Do you think it unreasonable that I should seek to encourage the latter to invest their surpluses in the work of the former so that they can continue to do it, rather than hoarding their surpluses and forcing the former to seek funding from the state (or paid work, if they can find it)? The link between "work" (production) and "money" is broken.

      I did not say that the risk of hyperinflation meltdown was zero. However, I think it is extremely unlikely. Stagnation, gradual capital erosion and hysteresis is a much larger risk.

      Delete
  27. Read "When Money Dies" to learn how that is not true.

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    Replies
    1. Umm, I have. At the height of the hyperinflation, people sold their furniture, their jewellery and all their hard assets for food. In relation to Austria, which suffered first, there is a reference in chapter 2 of "When Money Dies" to someone selling their gold watch for four sacks of potatoes, and someone else selling their piano for a sack of wheat flour. They were only able to sell their hard assets because there were foreigners willing to buy them, and the prices were FAR below the "intrinsic" value of those assets.

      Delete
    2. Frances

      You're making the point for me. The woman you're referring to in the book described dealings AFTER the inflation had already taken place, for people who DID NOT convert their soon to be inflated kronen into hard assets or harder currency. For those people, who held nothing but hyperinflated kronen, they were reduced to a position of desperation, in which they had to sell whatever hard assets they DID have (gold jewelry, furniture, silverware etc) for food. If they had converted to harder currencies or gold BEFORE the inflation, they would still have had money worth something and would not have resorted to selling personal belongings or furniture just to survive.

      It's akin to someone going into your bank account and taking all of your money, and all of your savings. What would you do? You would sell the things in your house for food and basic necessities, far below the 'intrinsic' value of those assets.

      You are trying to say that even if someone purchased gold now and there was a massive inflation, that individual would be in the same plight, selling gold for a sack of potatoes. That is true, because we all need to eat. But how much gold would I be spending relative to my entire net worth would that be? How comfortable a position would I be in?

      The Austrian krone devalued from 35 krone to the pound to roughly 35,000 krone to the pound. If a gold watch was worth 35 krone before, it would have been worth 35,000 krone after. At the onset, a 35,000 krone savings account could have bought 1,000 gold watches. After the inflation, it could only buy 1 gold watch. That is the position the woman from the book was in. She had nothing but 1 gold watch, whereas before she owned 1,000 gold watches worth of value. But because she kept krone, she lost all her value and was down to 1 watch. Surely her position would have been vastly different had she had preserved her value and had 1,000 gold watches in that environment instead of just one.

      Delete
    3. Yes, true. But this is consistent with the argument I made in the post, that if you believe in the Hyperinflation Armageddon Fantasy then hoarding gold and other hard assets is understandable. My criticism is:

      1) that there is little basis for the Hyperinflation Armageddon Fantasy and the bigger risk by far is economic stagnation, unemployment and hysteresis

      2) that therefore hoarding (anything) is the OPPOSITE of what is needed to get us out of this mess.

      This post is not only a criticism of GOLD hoarding, though I vehemently oppose the fear-mongers who promote gold hoarding. It is a criticism of ALL large-scale hoarding, firstly because in the current circumstances it is economically disastrous, and secondly because (as I explained) I do consider it fundamentally immoral.

      Delete
    4. You started your previous reply there with the premise that hyperinflation happened though. And then tried to say that even then the woman had traded her gold watch for a sack of potatoes. You have to stay consistent with your givens.

      This is not to say you haven't in your original post, but this particular reply started with the assumption hyperinflation happened

      Delete
    5. It did, because I was replying to someone who was talking about a REAL occasion of hyperinflation, namely Weimar. "When Money Dies" is the story of the Weimar hyperinflationary collapse and it is very good - I strongly recommend it.

      Mind you, people in the American Mid-West in 1933 also sold hard assets for food. That was because of depression, not hyperinflation.

      Delete
  28. I'm nowhere near as eloquent as many of the FOFOA bloggers, and my understanding is probably more crude and instinctual than intellectual, but from my viewpoint (of someone of modest means who is trying to do their best to prepare for an increasingly uncertain future), that if you don't recognize that something is seriously different (if not wrong) with the global economy and financial affairs over the past four years, you aren't paying close enough attention (perhaps because you have more than enough wealth set aside to protect you).

    The status quo is failing despite herculean efforts to sustain it - US government deficits have increased 3 fold since the financial crisis began (and at current rates will triple in another 3.5 years) yet GDP is treading water.

    The core of the problem is that trust in the US government its financial management (that has been looked to by other countries to lead the world for most of the past 100 years) is collapsing.

    From the massive bailouts of TBTF banks (that allowed them to continue to pay obscene bonuses), to MF Global & PFG scandals, where money in customer accounts simply "vanished" while regulators asleep on their watch, supposedly try to figure out what happened, to the LIBOR scandal, which should wipe out the remaining equity of most of the large banks, should justice actually prevail, I don't see how anyone can not be deeply troubled by what is going on.

    By rescuing big banks instead of holding them to account for the sub-prime crisis, the US government has effectively socialized the banks' massive losses to taxpayers, increasing their burden which thereby reduces their productiveness...but I get the distinct impression this is not only condoned, but doing our "civic duty". I find this suggestion to be complete nonsensical.

    This may not lead to a financial (or the real life) armageddon, but frankly this looks to me like it we are certainly heading in that direction & closer than a lot of people would like to think.

    My reasons for owning gold are simple - it has proven itself as a protecting of purchasing power - to see that all you need to look at is how much purchasing power the $US has lost over time and the prospect for much greater devaluation in the near future with growing deficits & debt & a shrinking productive tax base to pay them off.

    With physical gold there is also no counterparty risk - I don't have to worry about having my money (or gold investment) in the next MF Global - yea, there may be other risks to holding it personally, but they are smaller than trusting someone else to hold it for me.

    Bottom line - Gold is simply a hedge against the justifiable increasing lack of trust & faith in government(s) to do the right thing - in the end gold will not save me - my faith in Christ does that, which also prevents me from being deluded into believing a lie (see 2 Thessalonians).

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    1. If you have faith in Christ, then you will surely agree with the many, many statements made by Jesus that worrying about the future and storing physical assets is unnecessary, because God will provide? Have a look at Mark 10:17-25 and Luke 12:13-34 - there are plenty more, but that will do to start with.

      Delete
  29. FC,

    Congrats on what appears to be your highest comment total to date(I only looked back a few months), courtesy of a single link placed in the comments at fofoa.blogspot.com

    Cheers

    PS: Robert & Chico Hawk - amen

    ReplyDelete
  30. Hey Frances. You wrote:

    'No, Paul. That is not a foregone conclusion. The SDR also already exists and the IMF is well down the road with plans for it to become the international reserve currency:

    http://www.imf.org/external/np/pp/eng/2011/010711.pdf

    Where I think FOFOA could usefully concentrate his attention is in separating out the three distinct roles identified by the IMF for the SDR, one of which already exists - namely its current function as a composite (not tradeable) reserve asset. In particular, it might not be sensible for the SDR to be both the unit of account for international trade AND the main global reserve asset.'

    Do you think a contrived basket of paper currencies, all of which can be manipulated in many ways, but normally downwards....is that better than something real that naturally would act as a balancing item? Gold is so much better than SDRs as a reserve asset.

    Any currency can be used as a unit of account, as is the case today. Many bilateral trade agreements are announced week by week, none need the dollar.

    So, the world will choose gold, is choosing gold. SDRs don't do the job.

    ReplyDelete
    Replies
    1. Frances: In particular, it might not be sensible for the SDR to be both the unit of account for international trade AND the main global reserve asset.

      Paul: Any currency can be used as a unit of account, as is the case today. Many bilateral trade agreements are announced week by week, none need the dollar.

      Exactly!

      The SDR is something you cannot possess. When you agree a deal denominated in SDR, say for delivery in 12 months when the ship is built or whatever, you will as the purchaser ideally wish to remove FX risk. You will acrue for the purchase and work towards ensuring you have the medium of exchange ready to go on the payment date. Why would you want to agree to pay in something that (a) you cannot possess directly, and (b) fluctuates in exchange value against what you can possess?

      When a trade deal is denominated in SDR, a non-existent currency composite, how are you going to have confidence you can settle the bill?

      I suppose you fix it by creating more derivative bets that investment banks can eat out on.

      There's an easy way. The world loves an easy way.

      Delete
    2. Paul,

      You didn't read what I said. I did say that gold as the primary international reserve asset wasn't a bad idea. But if it is both the international reserve asset AND the unit of account for international trade, we have effectively adopted gold as the international medium of trade - in other words, an international gold standard currency. I may have misunderstood FOFOA on this, but my understanding was that he thinks that the Euro should be the international unit of account (currency). It's that that I disagree with, because the Euro is the national currency of 17 countries - it is not separated from national states as Freegolders seem to think; and it is structurally deeply flawed.

      The world ALWAYS "chooses gold" when everyone's scared witless.

      Delete
    3. Clyde Frog

      What you are recommending is gold as an international currency of trade - an international gold standard. That destroys its Freegold purpose as a pure store of value.

      If you read the IMF proposals you will note that they are suggesting that the SDR should not remain in its current form but should become a true international currency, separated from nation states. To support it, the IMF would become a bank. This is in effect Keynes' original proposal.

      Delete
    4. No, I am agreeing with Paul, that bilateral trade will be denominated in one of the currencies of the trade counterparties involved.

      Periodically, trade imbalances between the counterparty states will be settled up by a transfer of title to physical gold.

      Trade will predominantly still take place using credit denominated in currency. The difference between now and then is just the settlement of imbalances using gold. This will encourage balanced trade, rather than piles of paper claims on the future of the deficit economy moving continually in one direction towards the trade surplus economy.

      As you can see, this is nothing like a "gold standard".

      Delete
    5. Umm, actually it's exactly like a gold standard. The UK reneged on its international gold claims when it came off the gold standard in 1931, as did the US when it suspended Bretton Woods in 1971. Those claims remain unsettled.

      Delete
    6. The difference lies in the value of gold not being set by edict and let to float freely. I subtle difference with remarkable consequences.

      Delete
    7. It's still a gold standard though - just in a different form.

      Delete
    8. There is good reason for being precise with words. A gold standard means a fixed weight of gold has a fixed price. If it does not accede to that description it is not a 'gold standard'.

      The gold standard itself is flawed.

      Delete
  31. Frances,

    If you agree that gold is worthy of being used as the primary reserve asset then we essentially agree on that issue. I also agree it should be JUST a reserve asset, and countries can trade in whatever unit of account they see fit!

    I do also disagree that saving in gold is a bad thing morally. So many people the world over just want to preserve their buying power, they don't want to take on risk in shares etc.

    Gold is great for this role, as it sits outside of banking, outside of currencies, and saving it doesn't hurt any other entity. I moved to saving in gold a while back.

    It is the savers (rather than investors) that need gold, and freegold just means gold is fairly valued in its physical-only form, without any paper/futures mechanisms to distort supply and prices.

    Anyhow, the good thing is, we don't need to agree on this, as nature will take its course in the next few years, and we will all see some serious changes in the world. The UK's trillion pound deficit (not to mention household debts) will surely prove to be an insurmountable problem to resolve, so a depression is certain. I just hope the BoE don't totally trash sterling to prolong the mirage we are ok.

    Imagine the horrors of a sterling collapse.

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    1. Paul,

      Yes, there are two quite different issues here. In the post I concentrated on the PERSONAL saving issue and chose not to address the international reserve question. I've now addressed that in the comments, and you will note that broadly I have no objection to the use of gold as an international reserve asset, but I do object to an international gold standard. I do agree the use of the dollar has to change, though.

      Interestingly China are strongly in favour of there being a new, independent international currency and reserve asset, and they aren't suggesting the yuan (because as I said that simply shifts the Triffin dilemma to them). I believe they are actually suggesting a completely new currency, and as far as I know they have NOT suggested gold as the reserve: so far the proposal is for the international currency (Bancor) to be both unit of account/medium of exchange and reserve asset, and as no-one really wants to go back to a Bretton Woods-style gold standard, that joint usage rules out gold.

      I do not agree with you about the "morality" of saving in gold, for the reasons that I have explained both in the post itself and - extensively - in the comments. Disegagement with society to benefit self is in my view morally indefensible. You've benefited from the good times: now the lean times are here, you are unwilling to share. I'm sorry, but in my book that is selfish.

      I do not accept the disaster story either. Yes, there will be changes in the world - but I don't think there will be the sort of collapse that FOFOA predicts. He's scaring people witless in order to persuade them to buy gold. Wonder why?

      "Most of the Dooms Day arguments are used in order to sell metals." (Bunny, above)

      Delete
  32. Well, on the morality issue Frances, I don't see the morality in engaging with banks (via savings) that use the capital to make foolish bets, such as on sub-prime loans. And when those bets go bad, I don't see the morality in the taxpayer stumping up to save the banks. I'm happy enough to pay my taxes, but the system can take a flying leap if they think they can take more than that via the hidden inflation tax.

    But then I'm an old-fashioned free market, small government kind-of-guy, whereas you are clearly of another persuasion! Each to their own, but I don't think the socialist/interventionist approach is working out too well around the world at the moment is it? We will see it collapse in a heap, as it has down throughout history.

    Again, in due course these issues will be resolved for all to see.

    And it isn't doomsday Frances, it's just facing reality (go ask a Spanish youth about reality!). Once the world has reckoned up to its problems and the debts are defaulted via currency crises, then we can move on to a brighter fairer future, but one where there is no such thing as free money for governments to dole out.

    (Note to Bunny...most of the non-doomsday arguments are used to sell complex financial investments!).

    Yes, it is a bright future!

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    Replies
    1. Invoking the "banks/financial instruments/stuffed mattresses are even worse" argument doesn't address my point, does it? Throughout this discourse I have repeatedly stressed DIRECT investment in productive activities. Putting your money in a government-insured bank savings account doesn't do that.

      You misunderstand me completely if you think that I am advocating large state solutions. Far from it. I am asking people to act cooperatively and support each other's productive activities, rather than sitting on their hoards while other people struggle. The reality for Spanish youth is they can't get work, not that they are about to lose their surpluses. If, by investing my surplus in productive new enterprises I can enable those Spanish youths to get jobs, then it is a good use of my surplus - and if their enterprises are successful I may well benefit from that use in the future as well. Those new enterprises are most likely to be private sector micro-businesses. You see how much you have misunderstood me?

      Of course, if you'd rather sit in your gold-lined bunker and wait for the cataclysm, that's up to you. Personally I'd rather engage with society and with the future - especially supporting young people, who are our future.

      Delete
  33. Yes, I can see that I did misunderstand you there.

    Interestingly, I once directly loaned a young golf pro funds to go to tour qualifying, so I do believe in helping out where one feels comfortable.

    However, that was a relatively small sum.

    For my 'savings' and my pension funds, I do not feel comfortable taking the risks your approach would entail.

    So, I am then faced with gold, cash, gilts, or similar low-risk assets for a safe return.

    I choose gold as the safest.

    What of the 70 year old retiree, who has worked all his life, and now needs to eke out his retirement on a pension and some savings? Should he risk his capital in these ventures you describe?

    No, your approach is laudable, but it will not be suitable for many, or for much more than a proportion of one's funds. The rest is better off in gold than in the bank or in a shoe-box.

    Perhaps we can agree on a mix Frances, some speculative to help society, some in cash, some in gold? Is that reasonable?

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    1. The retiree is drawing on his savings. He is also living off the taxes of younger people - I'm sorry, but that is how all state pensions work. Why should they work to support him if he is unwilling to give anything back?

      Delete
    2. Hmm, you seem to forget that the 70 year old has worked/saved/invested all his days to fund retirement. The retiree has paid taxes and national insurance and pension contributions all his working days to fund his retirement. He's no doubt still paying taxes, and yet you want him to risk his capital on some local youth employment venture capital scheme? Nah, that really is a mad concept Frances.

      Next you'll be saying euthanasia is the only moral way to stop the elderly from being a drain on the taxes of the young.

      I conclude you are definitely 'way out there' in your thinking if you believe a 70 year old should not be careful with their savings.

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    3. If you think people's taxes and national insurance contributions pay for their own pensions you REALLY don't understand the situation. Do you know what "unfunded" means? Retirees ARE dependent on younger people's taxes. The elderly are also the heaviest users of state healthcare services, by a long way. Our retiree's savings merely top up his drawings from other people's taxes - so if he is paying taxes, he is at least to some extent funding his own state pension and medical needs. So unless our retiree has so much saved that he doesn't need his pensions and can pay for all his own healthcare and social support, our retiree is DEPENDENT on young people being able to work, earn and pay taxes. If he is unwilling to help improve the employment prospects for young people he is really not being very sensible. I know that sounds unfair but it is reality.

      Savings that are being drawn need to be liquid assets. Therefore for me - since I don't subscribe to the Armadeddon fantasy - savings that are BEING DRAWN should be in insured bank accounts.

      I don't support euthanasia. However, we have not yet thought through the ethical implications of our ability to extend the quantity of life but not its quality.

      Delete
    4. Oh yes, I know all about unfunded, I was merely making the point that the retiree has already paid his dues, to help some other retiree before him.

      Pretty much everything is unfunded, hence these 'insured' banks you mention exhausted the insurance pot in 2008, meaning the govt had to borrow to save them, great insurance, robbing the taxpayer and the nation to save a bank.

      In my world banks could do what they like, gamble to their hearts content, and if they get into trouble then tough luck, they fail. Capitalism working both ways. Perhaps then savers would be a bit more careful with their savings.

      One day soon they will learn the hard way.

      Good to see you are a supporter of the hidden inflation tax too.

      Delete
    5. You're missing the point. You claim the retiree has "paid his dues", but if the young people can't support him because they aren't earning enough, whatever he paid to support previous generations is irrelevant. "Paid his dues" is meaningless when pensions, healthcare, social care etc. are unfunded.

      Interesting that you don't like the inflation tax but you don't like deposit insurance either. The inflation tax is the price that savers pay for being rescued. Reduction of debt to a sustainable level requires reduction of the savings that back it, too. They either take the losses when the debts go sour or they suffer capital erosion through inflation or - more likely, I think - negative interest rates. It is that capital erosion that the holders of the wealth built up as a consequence of the credit bubble are seeking to avoid by investing in gold.

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    6. The whole world is currently a bubble, hence anyone chucking money at young folk in the hope of them creating a new business venture is not facing reality.

      To suggest retirees do so is plainly mad, the road to ruin. We will endure the depression, and eventually the world will grow again from a lower base.

      Sadly, for much of the developed world, their capital base will be wiped out by currency collapses, so the socially responsible thing to do is hold one's savings somewhere safe until the storm passes.

      Only two things create wealth: savings and production. We don't have much production left, so let's at least try to save the savers. But no, you seem happy for them to be fleeced in many ways.

      Under the current poor system the govt should have saved the savers when the banks failed, but EVERYONE ELSE (workers, directors, bond holders, equity holders) should have been wiped out.

      You wrote:

      'Reduction of debt to a sustainable level requires reduction of the savings that back it, too. They either take the losses when the debts go sour or they suffer capital erosion through inflation or - more likely, I think - negative interest rates. It is that capital erosion that the holders of the wealth built up as a consequence of the credit bubble are seeking to avoid by investing in gold.'

      Yes, spot on. I don't care if you meant it as a criticism, that is correct. Luckily we live in a free(ish) country where I can make that choice, and apart from protecting my wealth, I will hopefully hasten the demise of the current system.

      You will be one of the people I think of when 'it' happens, in London I suspect, no food, your savings destroyed, your pension too. But at least you'll feel you have done your bit to help matters.

      And gold owners who expect some turbulent times plan for them, so we won't need to touch our gold until the storm has passed.

      Been an interesting chat, but I will say goodbye there Frances, and good luck!

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    7. Paul,

      Two major fallacies here.

      1). It is not possible to protect savers while wiping out debt. Either savers take the losses, or the debt simply moves elsewhere. At present it has moved to government and central bank balance sheets. But you don't seem to like that either. Are you prepared to relinquish your savings so that the debt can be REALLY wiped out? No? I didn't think so. You would rather expect the young people of the future to pay the debt. Nice.

      If you think that government debt can be reduced without private sector savings also falling, you don't understand basic economics. Especially as you seem to think we don't have much production, so we can't expand exports. If you are right - and at a national level you may be - then for public sector debt to reduce, private sector savings must also reduce. Which brings me to my second fallacy.

      2) "We don't have much production left". If by this you mean domestic heavy industry, you are right. But "production" in a global economic sense is far more than this. As Izzy pointed out in the "Beyond Scarcity" series to which I linked, global production is actually producing an abundance of goods; our problem is the availability and distribution of money, not the availability of goods. We haven't even begun to address the implications of this age of over-production, but one of the issues is that what we call "work" is changing as more and more production is automated. A second issue is that if over-production is a permanent change, savings will become redundant. I really recommend that you read Izabella's writing on this, and her work on the future of banking.

      Delete
    8. Frances, you may have problems with your spectacles, as I already wrote:

      'Under the current poor system the govt should have saved the savers when the banks failed, but EVERYONE ELSE (workers, directors, bond holders, equity holders) should have been wiped out.'

      I suspect you ignored that comment given your banking background. I'll add to it that I would have clawed back all bonuses paid to employees for the previous 10 years, and force them into bankruptcy if they've blown it already.

      Re Izzy, she is mad as a hatter if she thinks surplus production is going to be given away, literally mad. As the bubble bursts companies facing lack of demand will go bust, and surpluses will disappear. They will not continue to produce free stuff, that is impossible (in the real world anyway).

      It is a sign of how wharped the world has become that I even have to explain that, and that you believe Kaminski's communist fairytale nonsense.

      You will all wake up soon, rest assured.

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    9. No, Peter, you do not understand. If the government saves savers it must take on the debts that are the savings of those savers. This is basic accounting.

      I am also astounded at the cruelty in your statements. You would wipe out everyone whose livelihood depends on banking except savers like yourself. Oh, and not even all savers. Bond and equity holders are also savers of course - the biggest holders of bank shares and bonds are pension funds. You would destroy all their savings - but not yours.

      I don't think I have anything more to say to you. I am, frankly, appalled at your selfishness.

      Delete
    10. Again, you confuse 'savers' with investors, totally different kettles of fish.

      Life is cruel Frances, capitalism is cruel too. Any business that becomes insolvent deserves to fail, and any that have invested in it deserve to lose their money, bondholders and shareholders especially. But no, I wouldn't be wiping them out of course, that would be a self-inflicted wiping out caused by bad decisions from those running the banks, I'd just let financial justice run its natural course. Capitalism, not communism Frances. I know which I prefer, and I know which you prefer.

      Sad thing for you is that history proves that socialists always go bust, and take the country with them. Look around you, Labour did it again didn't they (not so new after all)!

      Only an ex-banker could defend the banks so vigorously. In truth it is selfish to want the foolish greedy bankers and their investors to be bailed out by the taxpayer, and all impartial readers here can see your true colours now.

      Delete
    11. You accuse me of defending the banks? How wrong you are! You have not read my other posts or you would know that I have REPEATEDLY said that they should have been allowed to fail.

      But unlike you, I do not consider the pensions and life savings of ordinary folks fair game for wipeout. Tell the people who lost their pensions in the Equitable Life disaster that that was ok because they were "investments". Explain to them why depositors in banks should be protected but people who have put their life savings into pensions should be wiped out. Explain to ORDINARY PEOPLE why your savings should be protected but theirs should not - just because you keep them as bank deposits whereas they have (prudently, they thought) put them in long-term pension & life investments.

      You talk about my "true colours"? Well, readers of this post are very welcome to read back through my posts going back to early 2011 to discover what I think about banks. But it is very plain what YOUR true colours are. You sicken me.

      Delete
  34. A unit of account is an standard unit of measure for value in the same way that a kilogramme is a standard unit of measure for weight and a metre is a standard unit of measure for length.

    You can never run out of metres, kilogrammes or monetary units of account.

    Unfortunately we are accustomed to thinking that a unit of account must necessarily be the same thing as a unit of currency (or 'money's worth' as I think of it).

    But you only have to look at the Swiss WIR (or any other) barter system to see that the two units may be distinct.

    In these systems, money's worth of goods and services change hands on credit terms (credit or 'time to pay' is integral to the monetary relationship) not IN EXCHANGE FOR Swiss Francs as fiat currency, but BY REFERENCE TO the Swiss Franc as a unit of account.

    In my view, the networked global monetary system of the future will see units of national currency based upon the use value of land/location over time. Note here that over two thirds of dollars in existence are deficit-based (ie created by banks) but land/location value backed by mortgage claims.

    The global reserve currency will IMHO be energy-based, initially for a transitional phase through generally acceptable units of currency returnable in payment for natural gas.

    These units of currency - which are based upon use value or utility over time of location and energy - will change hands within a framework of trust or 'clearing union' whereby people individually and collectively will extend each other 'peer to peer' credit (not loans) based upon their capacity to provide goods and services.

    These transactions will in my view take place by reference to the only absolute unit there is - a unit of energy - and note here that this 'energy standard' unit is NOT the same thing as the different forms of energy and other currency which will changes hands by reference to it.

    It is possible for any currency to be put onto an 'energy standard' tomorrow simply by agreement of the currency users.

    At that point the paradigm - and all value judgements - change.

    More here

    http://www.slideshare.net/ChrisJCook/economic-systems-thinking230710

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  35. Oh, and returning to the subject of gold, my problem with it is that its price has lost touch with its use value - a classic bubble.

    I can't live in it; heat my house with it; fuel my car with it; eat it; or type e-mails on it, and I'd rather make investment in such utility value than in gold.

    It does look pretty for a million years, and is a useful conductor but otherwise I don't see the point of it.

    It's quite evident from the comments of the majority of gold enthusiasts that they don't own gold: gold owns them.

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    1. But you can't live in paper currency either. Or eat it, or type your emails on it, or fuel your car with it. You might be able to heat your house with it, but it would only provide a few seconds of heat before it turned into ashes.

      And a class bubble is not defined as when "price has lost touch with its use value." A classic bubble is when people euphorically overbid for something whose supply can easily be ramped up more than enough to meet demand: tulips, internet companies, McMansions, etc.

      Besides, with gold the "use value" is its use as a glittery store of value with no other better uses. It can be used as a conductor, but it is not the best conductor, and it was never a cost effective conductor even when the price was much lower.

      I don't see the point of a $100 bill. It wears out. It gets dirty. It can easily be lost or destoyed. It won't last for a million years, and it is a terrible conductor. I don't understand the point of it. Why do people surrender valuable goods for a worthless piece of cotton? I don't see the point of it.^^

      Delete
  36. I planned to comment on this here, but my points became so lengthy and drawn out that I turned it into a two part response on my blog. Part 1 is more of a general view about money and money systems, while part 2 looks at the morality and economic growth issue. I would hope this elevates the discussion a bit, and apologies for the length.

    http://thedismaloperator.wordpress.com/2012/08/01/gold-wealth-production-and-immorality-part-1/

    http://thedismaloperator.wordpress.com/2012/08/02/gold-wealth-production-and-immorality-part-2/

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  37. Frances,

    Re: our Twitter discussion earlier, I asked you to define what you meant by 'churns' with repsect to financial markets and you said:

    "It (money) goes round & round and never leaves the markets - repeatedly traded...that is known as "churning" and it is the greater part of financial mkts activity these days"

    You said this to try and validate your stance that trading is unproductive because it starves businesses from investment. This isn't true because financial markets don't exist in a vacuum, they are a subset of the economy as a whole. Even if I trade an asset with one guy who trades it back to me and we do this all day every day, the money that we exchange with each other in this manner is money that doesn't get spent buying other things. This causes the prices of other things to drop (less demand), and thanks to the existence of lower price points, costs of doing business drop and therefore investment opportunities become viable.

    That is an extreme example. The reality though is that money does not 'stay trapped' in financial markets. All that a market does is enable exchange. NO MONEY IS 'LOST' IN THIS EXCHANGE, MERELY TRANSFERRED FROM ONE PARTY TO THE NEXT IN EXCHANGE FOR ASSETS.

    If I buy some shares of stock, the seller could be a retiring woman who needs my cash in order to go on her merry way to enjoy retirement. I might need the shares because I think it's a good investment. Again, no money has been lost. If I sell later, but this time to another speculator, he gives me his cash, I give him my stock. Say I made a profit, I can take the profit and go use it to buy other things I might want. I told you that as a trader, I do this often. You replied:

    'you don't take the MAJORITY of money you trade out of the markets, do you? neither does anyone else'

    Of course I don't take ALL of my money out, because I need some money to do my job - trading. That money is my capital. Just like a construction worker does not sell his bulldozer or jackhammer whenever he wants to buy something, because he too needs that capital to do his job. If he wants to buy something, he uses his capital to build something to earn money. If i want to buy something, I use my money to trade profitably in markets. It's the same concept.

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    1. (continued)

      You are continually hung up on the idea that not giving money for direct investment in some enterprise is unproductive, and therefore all 'risk off' (and even certain 'risk on') activity is wrong. This is absurd because you continually ignore the fact that there are costs and risks involved in any and all investments. When I put it to you that capital isn't being deployed in the way you like because investment opportunities are by and large too expensive, you said:

      'it is not about "expensive" it is about general "risk-off" attitude at the mo. Zero-risk investments are the most expensive'

      It ALWAYS is about 'expensive.' I made this point in my response (If anyone hasn't seen it http://thedismaloperator.wordpress.com/2012/08/02/gold-wealth-production-and-immorality-part-2/)

      If the investment opportunity presenting itself is one that is not on solid footing such that it will prove to be a losing investment, society as a whole loses out because that capital could have been used for another venture that DOES rest on solid footing and will produce wealth. The fact that we have scarce resources on this earth means that we have to allocate them as best we can, properly balancing costs and returns for each action.

      Lets say I were to today propose a horse and buggy enterprise with a view to challenging the auto and needed $1 million investment, and some investor backs me. I start my business and it predictably fails. All I have done here is waste resources. The office space, wood, labor, horses, fabric, etc and most importantly time could have been used for something that actually increases society's wealth. But, according to your 'risk on direct investment at all times, for the sake of risk on direct investment' ethos, the investor was doing right to fund me. He was really engaging in unproductive activity.

      Again, extreme example so you get the point. Even a legit business idea may not come off because its too costly. For example, to get a taxi license medallion in NYC costs over $1 million per car. Even if a rich investor has the money to back the taxi outfit, it is not very likely that a one cab outfit can generate the revenue in order to cover the costs of fuel, maintenance, fees, taxes and regulation, leaving a margin of safety on top. Mind, in an environment in which everyone (foolishly) thinks we need more inflation, those costs will rise, making it less likely that the one man outfit can gain enough in revenues by raising fares on customers who are struggling in the first place. This investment is 'expensive' in that it will not succeed in efficiently producing a product so it won't get funded. This is a common theme in the West today, which is why there are less and less opportunities and smaller business finds itself unable to get off the ground, let alone compete.

      But you ignore all of this and want society to effectively stand blindfolded from 100m away and throw darts at a 1m wide dartboard in the middle of a thunderstorm. Maybe a few darts will hit, but the vast majority will miss and that ultimately represents waste for, and a loss to society. I would prefer people to at least take the blindfolds off and wait until it stops raining to get a better look at the dartboard. But that takes time.

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    2. But we do have the ability to assess investment opportunities properly, do due diligence etc. We don't do that because we are too lazy so we buy securities on the secondary markets where we don't have to bother to investigate the risks and potential returns properly.

      We don't have time to wait for the rain to stop. Fear of loss is paralysing economic activity, and the financial markets aren't helping. All the financial markets do is move assets and money around, and in so doing - because they act principally for savers (in the broadest sense) - they fuel the risk-aversion that is paralysing investment. Enabling investors to manage their assets is a useful function, but it is not "productive" in the sense of benefiting the businesses that are the bedrock of our economy. Most businesses can't get funding from the financial markets - they are dependent on banks which aren't lending because they are trying to de-risk their balance sheets. There are new non-bank forms of business finance being developed - peer2peer lending, crowdfunding for example - but as long as what people immediately think of when someone says "investment" is either securities bought on the secondary market or hard assets, it will be very hard for these initiatives to get off the ground. So no, I don't think financial markets' activities are particularly productive or useful as far as the economy as a whole is concerned.

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    3. When I first think of 'investment' I actually think of the same things you do, and it is good that there are institutions being set up to perform more 'vanilla' banking - we need more of that. However, you are STILL playing down the costs and risks side of the equation. Fear of loss is a healthy thing, it ensures that people make the best decisions with the knowledge available to them. Don't you wish bankers had a 'fear of loss' when they were expanding the CDS market all those years ago?

      As I said on my blog the only thing that determines whether an investment gets funded is its viability with respect to its costs. Risk averse environments are symptoms of periods that feature a dearth of viable options relative to costs, they aren't the cause. You work from the premise that every single business is viable, which is jsut wrong.

      And I think it's wide off the mark to say that its just laziness that prevents people from assessing opportunities. How likely is it that a random person on the street can read a financial statement properly, understand it and make a decision? How likely is it that they fully understand the risks and costs involved? According to you everyone who was alive in the early 80s that didnt invest in Apple or Microsoft are lazy. Its like an architect saying that anyone who can't understand or properly construct an architectural plan is lazy. That notion is strange.

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    4. You are now guilty of inconsistency yourself. On the one hand you argue that investors are operating from fear of loss - and I agree that some fear of loss is a good thing, since it encourages people to assess investment opportunities properly: however, too much fear of loss is as bad as too little, since it discourages healthy risk-taking. Then in the next paragraph you argue that the reason for risk aversion is lack of cost-effective investment opportunities. This is not consistent with your first statement.

      I do not agree with your notion that risk aversion exists because there aren't sufficient cost-effective investment opportunities. In my view your first statement is closer to the truth. People are SCARED OF LOSING THEIR MONEY so they are trying to find "safe" places to put it. The investment opportunities are no less cost-effective than they were before, but people are now looking for zero risk. It is the attitude of investors that has changed, not the investment opportunities.

      No, I do not work from the premise that every single business is viable. If I did, I wouldn't have suggested that due diligence was necessary, would I?

      Throughout this post I have REPEATEDLY said that my comments apply to large investors, not to small savers. And yet people like you REPEATEDLY use small saver examples to support your arguments. Small savers aren't going to be able to evaluate investment opportunities - but their fund managers can, and should. That they don't is because it is easier for them to buy quoted securities on the secondary markets, using external credit ratings instead of doing their own due diligence, and then lend those securities to hedge funds for cash fees. Hence my indictment of them as lazy.

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    5. There is no inconsistency in what I said, the sticking point is your use of 'too much fear.' You cannot decide what 'too much fear of loss' means for someone else, that is only a decision that an individual can make for his or herself. We are all at different points in our lives and have different tolerances for risky behaviour. A pension fund (since I can't use small investors, but throughout the comments you speak of small/local business) can't put their money in certain investments because that money needs to be kept relatively secure since it is meant to last to retirement. An venture capital firm however is of a completely different mindset and can take more risk.

      The threshold of 'too much risk' for the pension fund is going to be hit before the venture capital firm. However, this doesn't mean that an environment can't exist where the venture capital firm's threshold is hit as well. The VC can tolerate more risk than the pension fund, but it isn't unlimited. That's where we are now. Your statement that the opportunities that existed before now are no less cost effective now is totally untrue. What has changed is that after the bursting of the bubble, people are not able to pay the same prices for end products as they could before. This means that costs of production must also drop such that a profitable margin can still be achieved. By and large these costs (input costs, wages, taxes, regulatory requirements) are not falling and are in fact being actively propped up. Read recent earnings reports from major companies and you'll see their concerns about their costs when guiding for the future.

      This fall in the cost of goods being sold combined with an unchanged or even rising unit cost of goods FUNDAMENTALLY reduces the cost-effectiveness of business opportunities. The fear is a byproduct of that fact, not the cause. Can it be 'overdone?' Yes, but not for any substantial period of time, because those who are best positioned to see real, fundamental value will start buying and that checks the fear (think the Warren Buffets of the world). But they won't do it a moment before real value presents itself. And you can't make that appear by magic, nor can you dictate exactly what 'value' means to someone else.

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    6. To further clarify on the 'inconsistency.' Operating from fear of loss means just wishing to avoid an absolute sum of loss.

      Risk aversion is just a measure of how much that absolute sum is, and varies from person to person. My statements aren't inconsistent with one another because an environment can exist where the 'absolute sum that can be lost' is large enough that it discourages the people with even the smallest aversion to risk from investing.

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    7. But the "fear" is not necessarily rational. Take the Hyperinflation Armageddon Fantasy, for example. People buy into this on the basis of very little evidence, scare themselves witless and run for the hills. There is a similar problem with the stagnation/hysteresis belief, though there is far more justification for it: people scare themselves witless and run for the hills. Don't tell me this is about rational decision-making on the basis of expected costs versus return. It's about good old-fashioned panic.

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    8. When the wealthy fear Armageddon, they DON'T INVEST. That has nothing to do with what return they might get and everything to do with fear of losing their capital - which as interfluidity points out in this post, is essential to their survival.

      http://www.interfluidity.com/v2/3487.html

      The greater the belief in Armageddon, the more incentive the wealthy have to disinvest and hoard in unproductive assets.

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    9. I mentioned the existence of irrational fear above. To the extent there is any it doesn't last for a very long period of time because irrational fear creates such a clear and pronounced dislocation from fundamental conditions that it is a no brainer to buy and there is quick resolution as people take advantage.

      Fall 2008 was a panic, in which there probably was some irrational fear even though the reasons it began at all were totally rational. Since 2008, we have not seen a full blown panic (apart from Southern Europe), instead we have been in a constant state of depression. Those are two different things.

      You claim that the current state of depression is totally a result of irrational behavior. If irratinal behavior really is the culprit, it would have to hold that the fundamental state of the economy has not changed since fall 2008, such that investors are wrong to act differently to the pre 2008 time. Specifically, you are effectively arguing that the debt driven consumer spending model for economic growth is exactly the same as it was prior to 2008.

      Again the basis for irrationality is extreme dislocation from fundamental conditions. Unquestionably, fundamental conditions HAVE changed; the subsequent change in investor attitudes is warranted. These fundamental conditions ultimately boil down to costs versus returns.

      If you're going to prove your case, you are going to have to show that the fundamental state of the economy has not been altered since 2008 in any way.

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    10. Umm, I think the burden of proof rests with you to prove that the fundamental economic state HAS changed as far as the causes of panic are concerned. And you also need to provide evidence for your assertion that irrational behaviour is short-lived. Keynes commented that "markets can remain irrational longer than you can remain solvent". That doesn't seem short-lived to me.

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    11. All I need is one word: Deleveraging. I shouldn't have to expand beyond that, but at this point you seem hell bent on ignoring reality that I very well may have to.

      And as for Keynes, there is a difference between the absolute height of panics when babies are being thrown out with the bathwater and the periods before panics when people are sanguinely prancing around on thin ice. In other words a difference between irrational behavior based on fear, and irrational behavior based on ignorance, faulty paradigms and things of that nature. Keynes referred to the latter, I the former.

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    12. Irrational behaviour is still irrational, whatever the cause. You may only be referring to irrational behaviour arising from extreme panic. I'm referring to irrational behaviour caused by illogical beliefs (like the ones promoted by the anonymous blogger I criticise in this post) and fear of the unknown.

      I'm certainly not unaware of the effects of deleveraging, thank you. My point is that investors trying to hold on to their precious wealth by squirrelling it away when it is being eroded by the effects of deleveraging is like trying to hold back the tide. Their best security is actually productive investment, but that involves taking risks.

      Delete
  38. Frances

    In these comments I have seen a lot of suggestions on books for you to read, and from your responses you seem to be quite well read.

    I am curious, have you read Economics in one lesson By Henry Hazlitt ?

    If not, you may find it interesting.

    TF

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    1. I haven't read that one, I admit. However, I've just read the first chapter. I think at the time he was writing he was indeed correct that there was too much focus on the short-term and on the interests of particular groups. But I think we've gone too far the other way now.

      Here in the UK we're so busy doing "fiscal adjustment" for long-term sustainability that we are ignoring the immediate and very serious risk of economic depression. This is exactly the mistake that was made by the US at the start of the Great Depression, when it raised interest rates and adopted austerity measures, thereby making it worse. Germany did something very similar under Chancellor Bruning, and this was the DIRECT cause of the rise of Hitler - not the Weimar hyperinflation as they think.

      This time around - perhaps because of the experience of the Depression, which was undoubtedly much more severe in the US - the US has not made that mistake. But the UK is driving its economy deeper into recession, and as for Europe - the cruelty towards people in deficit countries beggars belief.

      I will read the rest of the book. But I do caution against trying to extend the arguments of the 1950s to now. Our situation is much more like the early 1930s.

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    2. Now I've read more of it, I think he allows his belief that market forces is always best to cloud his judgement. You might like to remember that the 1950s was a big-state, high-tax, high inflation period - much more so than now. On a long-term horizon pure "survival of the fittest" doesn't necessarily give the most desirable outcome from a social point of view, and as Hazlitt himself notes, it is the long-term benefit of society as a whole that really matters, not the interests of particular groups. Can I suggest you read my article "The necessary arrogance of elites" for a discussion of the long-term effects of State-protected elite activities running in parallel with free market forces.

      http://coppolacomment.blogspot.co.uk/2012/07/the-necessary-arrogance-of-elites.html

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    3. Hey

      I think the caution goes both ways, that one should be mindful of both the short and the long term impacts. I would say he advises balance. The more you read though the clearer his use of this differentiation should become, as he applies it.

      His arguments were not written in the 1950's. The general disclaimer at the start says he has simply rewritten what was written about by others long before.

      Most of those arguments come from the period of 1850-1900, long before the rise of big government.

      Assumptions are dangerous. ;)

      I have read your article.

      Peace

      TF

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    4. The date of Hazlitt's book is 1952. Yes, he refers to earlier writings, but he is writing from the perspective of the post-World War II American economy and many of his examples are very much to do with problems of the post-war economy - such as what to do with returning troops, for example.

      I agree with him about a lot of things - the damaging effect of tariffs, make-work schemes, farm support, restrictive labour practices, subsidies for dying industries: the beneficial effect of technological innovation even though it causes short-term unemployment: the need for a diversified (mixed) economy, which is best ensured by allowing private enterprise to operate as freely as possible.

      I've alluded in this post to the changing nature of what we consider "work", and Hazlitt addresses this issue too: the fact is that automation does reduce employment in the industries being automated, but it also reduces production costs and therefore enables prices to customers to fall. Hazlitt correctly argues that in the past that has enabled children to be relieved of the need to work. However, the problem we have now is that it is not children who are being relieved of work - it is young adults, who are entering the workforce later and later. This is a worldwide phenomenon, not limited to Western countries - the World Bank's survey of youth unemployment is fascinating and instructive. I think we need to rethink the nature of "work" and perhaps for the first time recognise that the link between "work" and "earn" is no longer reliable. Izzy's stuff on over-production and free goods is the logical consequence of extreme automation.

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    5. As you say, extreme automation is likely affecting younger workers and we may need to rethink these terms.

      However, I would point out that the wants of any one human is almost infinite. What may be made cheaper by technology, eg. computers, leaves more surplus for expending on other wants. As baser desires are filled so we move up in Maslow's hierarchy of needs.

      Very few people these days can fill all their desires, for all of us we have to make choices. As production increases more choice becomes available.

      Information, self-improvement, psychological help are some few examples of where new expenditures of time and resources may be invested, to the betterment of mankind, as bare survival becomes less of a pressing issue and we actually have the resources for these.

      TF

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    6. |That's exactly what I mean by the changing nature of work. I don't see increasing automation as a long-term problem at all, though in the short-term it is increasing youth unemployment. I see it as an exciting opportunity: for the first time we really can meet our survival needs without wearing our minds and bodies out in boring, repetitive and physically debilitating jobs. We just haven't thought through the implications for distribution of the fruits of production, that's all - including what constitutes "paid employment" in future and even what role there is for money.

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  40. Long before the rise of big government in the United States, I should have said.

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  41. Frances - As religion is important to you, have you ever looked into the Islamic teachings regarding money? They seem right up your alley. This 9-minute radio spot says a lot of what you say here.

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    1. I haven't, but as Islamic and Christian teachings on life and morality generally come from the same source it wouldn't be surprising if their teaching on money is similar to my beliefs. I don't think we should automatically associate Western attitudes to money with Christianity. Much of Jesus' teaching seems diametrically opposed to the Western cultural virtues of thrift and saving.

      Delete
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  44. I've been led here by the link in comments on FOFOA blog and been reading through this discussion since yesterday.

    I would like to thank you for provoking this discussion and taking your time to engage in arguments with the likes of Motley Fool and Dr. Octagon. I found this exchange very interesting and somewhat enlightening.

    I must admit that at first I was like: "why does she not understand?", which you might find familiar :) Silly reaction, I know, but the reason for it is that this is not a matter of understanding. It looks to me like this is a clash of beliefs. You hold a certain set of beliefs that make up your morality in this regard and no argument will sway you away from them.

    And I will not even try to argue with you on your principles. However, I'd like to offer you my perspective and a little story.

    First of all, from where I stand, your morality is insane. There is nothing moral, righteous or noble about starving in the gutter. And basically this is the result for those that subscribe to your morality.

    I think I do understand where it comes from, thought. It is a product of the world you have lived in. And this is apparently a different world than the one I'm living in.

    In my world, a single person had experienced:
    - an introduction of a national currency
    - a "monetary reform" that was an outright confiscation of 2/3 of people's savings
    - soon followed by high inflation
    - followed by short period of deflation
    - a period of stability that allowed for increase in life style and accumulation of some savings
    - that were severely affected by a decade of high inflation (ranging from 15% to 100%)
    - that was followed by hyperinflation that completely wiped out all savers and drove most of them into poverty
    - and then this person retired and is now completely dependent on a pension that is not enough to keep her clothed and sheltered if not for a support of the family. There are millions of such people in my world.

    Tell me how does your morality work for that person? Tell me what kind of morality would you expect emerging from living in such world? Tell me what this person could have done to avoid dying dirt poor, being a burden for the family and society?

    To be clear, I'm not interested in changing you views on what's right or wrong regarding saving/surpluses etc. I just wanted to point out that your morality is not an absolute.

    Oh and about those measures to discourage those "immoral" forms of saving. Can you guess what those were during the lifetime of this person?

    Thanks again for your postings and take care.

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    1. You have not understood my moral beliefs at all.

      You describe a gospel of selfishness, in which those who "have" will not help those who, through no fault of their own, end up - as you put it - "starving in the gutter".

      You describe a gospel of pride, in which those who through no fault of their own fall on hard times regard themselves as a "burden" on others and so will not ask for help.

      You describe a world in which everyone is responsible for their own survival and if they fail to provide for themselves, they starve.

      None of these are anything like my beliefs or my world.

      My world - the world I would like to see - is one in which people help each other, so that NO-ONE ends up starving in the gutter. The whole point of this post is that attempting to hold on to your wealth when others are starving is fundamentally immoral. I do not wish government to confiscate your wealth, as some have suggested: I would much rather that you saw the needs of others and gave it voluntarily to relieve their sufferings.

      Nor do I recommend any form of pride. If people need help they should feel able to ask for help from others and be confident that they will receive that help without condition or condemnation. I do not wish people's needs to be met through bureaucratic intervention: I would much rather that the people of this world genuinely cared for each other and were prepared at times both to support, and be supported by, others.

      THAT is my world. The present world is very, very different from that, which is a matter of sorrow to me and something that I would like to see change. But your world is no better, because it is still founded on the fundamental "sins" of selfishness and pride.

      Delete
    2. I see you have not even tried to answer my questions. Instead, you wrote:

      "You describe a world in which everyone is responsible for their own survival and if they fail to provide for themselves, they starve."

      I have not done that. The only thing I described was a life story of my grandmother (and most of her generation), who was unfortunate to have lived in the world that forced your kind of morality upon people. Obligations to society, immorality of storing wealth and all that crap was the official doctrine here, and it was enforced by all means necessary. During those times, there were hardly any charitable or noble endeavors that would promote mutual sharing, social responsibility and things like that.

      It all ended with hyperinflation that wiped out all savings and pushed large chunks of society into poverty. But at that point, your kind of morality was no longer forced upon people. And guess what? Suddenly, there was an explosion of social and economic interactions and behaviors that were not seen before. Somehow, people did not decide to keep all to themselves and let less unfortunate die out. I think our society did pass this test pretty well, considering what it went through. Most people did help others. But with a tragedy of this magnitude, it is impossible to help all in need.

      But what next? Imagine you are 60, and had provided your savings for productive enterprises that you deem moral and just. There comes a bone crushing event that wipes out those enterprises and leaves your whole society impoverished. When the dust settles, what then? You start over from scratch? At that age? What of the young ones? You cannot help them, as you have nothing. They have nothing as well and struggle to help you. Pretty grim picture if you ask me.

      Now imagine that you did in fact saved some of your surplus outside the system. Once the dust settles, it is available to be used for rebuilding what has been lost. You are actually able to do the noble thing and help those youngsters build a new world for themselves. With your surplus that you managed to protect. I refuse to believe that protecting the future is immoral thing to do.

      I know this will fall on deaf ears as you do not believe in "financial armageddon". Which is not strange considering you have not experienced such event yourself. But if history of my family is any indication, I will experience wiping out of everything I worked for before I die. I do not want myself and my family to go through all those hardships again.

      And hence, for me, the moral thing to do is:
      - not to feed the beast that is today's financial system, that promotes malinvestment and non-productive activities, I have lost trust
      - live within my means
      - not depriving others of necessities like food
      - storing part of my surplus in the form that will protect it from being wiped out
      - if need arises, employing this stored surplus in economic activity that I deem worthy

      And a small side-note. Where's hoarding, there's dishoarding. So those that are hoarding gold enable those that are dishoarding it to engage in economic activity that benefits all. Gold must flow.

      I think I have said what I wanted and will not push this further. Take care.

      Over and out.

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    3. You are clearly very angry about the wrongs suffered by your grandmother. And your lack of trust in anyone but yourself is very evident. But I do not defend the present system - it is as immoral as the one you promote. It certainly is not "my kind of morality". And nor is the world you say your grandmother inhabited (you don't say where that was). I am no supporter of totalitarianism.

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  45. Frances,

    Tripper describes a world where people help each other, because that is what people do. A world in which those who have share with those who do not.

    then this person retired and is now completely dependent on a pension that is not enough to keep her clothed and sheltered if not for a support of the family. There are millions of such people in my world.

    To share, you have to first "have" that which you can share. Perhaps one of the most famous parables in the Bible makes this abundantly clear - save so you can not only provide for yourself, but others. Be a good samaritan:

    Luke 10:30-37

    30 Jesus replied, “A man was going down from Jerusalem to Jericho, and he fell among robbers, who stripped him and beat him and departed, leaving him half dead. 31 Now by chance a priest was going down that road, and when he saw him he passed by on the other side. 32 So likewise a Levite, when he came to the place and saw him, passed by on the other side. 33 But a Samaritan, as he journeyed, came to where he was, and when he saw him, he had compassion.34 He went to him and bound up his wounds, pouring on oil and wine. Then he set him on his own animal and brought him to an inn and took care of him. 35 And the next day he took out two denarii[a] and gave them to the innkeeper, saying, ‘Take care of him, and whatever more you spend, I will repay you when I come back.’ 36 Which of these three, do you think, proved to be a neighbor to the man who fell among the robbers?” 37 He said, “The one who showed him mercy.” And Jesus said to him, “You go, and do likewise.”


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    1. You share what you have earned through productive activity.

      The Good Samaritan did not provide for the man out of his savings. He had money with him - the medium of exchange. People would not carry money they did not need (i.e. savings) with them on what was known to be a dangerous road. He provided for the man out of money he had brought with him for his own expenses. To help the man, therefore, he went without something himself. He did not have to go and sell some assets to obtain the money to provide for the injured man, did he?

      Tripper describes a world in which people DON'T help other people unless they are family. If you don't have savings, and you don't have family, you starve. That is not my world, and it is not Jesus's world either. The Good Samaritan was not "family" - he was a stranger. Nor is it the world of the Old Testament: the "tithe" was used to support widows and orphans, and the Levites, none of whom could support themselves.

      Jesus is absolutely critical of people who hoard their surpluses and don't share them.

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  46. Dear Frances,

    This is a warning from Blogger: Several users have reported that you are insulting your readers and the readers of other blogs. Blogger takes self-esteem issues very seriously. We do not tolerate language that makes other feel bad about themselves.

    Further, it was reported that you've had the audacity to complain extensively and vociferously about the rather mild insults of others while using extremely severe language yourself. You have been accused of calling others "hoarders", "cultists", and "immoral" among other names.

    You may not be aware of this but the use of certain terms in the sphere of economic policy has been demonstrated historically to reveal authoritarian and fascist tendencies in political leaders. The use of such intemperate language in conjunction with other fascist tendencies (such as deleting the trenchant, witty, erudite, and illuminating comments of your readers when you don't like them) has caused us to elevate the harassment monitoring level of your blog. Further misdeeds may result in the complete revocation of your comment privileges across the Blogiverse.

    Sincerely,
    Blogger

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    1. And you are a troll. Your comment is the equivalent of the "phishing" letters that purport to be from real companies but are actually scams.

      Delete

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