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Mr. Denninger and Gold – Part Deux or: A Rebuttal to All Fiat Money Apologists

Gordon_Gekko's picture




 

via Gordon Gekko's Blog

The last post saw almost a holy war break out between the opposing camps of paper-bugs and the gold bugs (truth-bugs, really) resulting in a record number of comments1 (645 at last count) the highest for any post on ZH – ever (pending Marla’s confirmation of course. Where are you, Marla?). I wish to thank everybody who participated in the discussion for their insightful comments and feedback. 

In his rebuttal to my previous article - eloquently titled "Listen to the Hucksters, Lose Your A**" - Mr. Denninger raised certain points - ill-informed as they may be (not to mention classic fiat money apologists' arguments)- to which I wanted to respond. I hope that this response will dispel some of the myths and misinformation surrounding hyperinflation, Gold and our paper money system. I must warn you though: it’s going to be a bit longish read (although interesting, I hope), so sit down with your favorite cup of coffee and without further ado let’s get started.

 

On Anonymity

It appears that Mr. Denninger has an issue with anonymity, perhaps being irritated at not getting the opportunity to engage in ad hominem attacks, as is his custom. Karl conveniently forgets the fact that one of the websites he has frequently referred to, quoted and even praised ever since its inception – ZeroHedge – has the principle of anonymous speech at its very core. In ZH’s own words

Though often maligned (typically by those frustrated by an inability to engage in ad hominem attacks) anonymous speech has a long and storied history in the United States. Used by the likes of Mark Twain (aka Samuel Langhorne Clemens) to criticize common ignorance, and perhaps most famously by Alexander Hamilton, James Madison and John Jay (aka Publius) to write the federalist papers, we think ourselves in good company in using one or another nom de plume. Particularly in light of an emerging trend against vocalizing public dissent in the United States, we believe in the critical importance of anonymity and its role in dissident speech. Like the economist magazine, we also believe that keeping authorship anonymous moves the focus of discussion to the content of speech and away from the speaker- as it should be. We believe not only that you should be comfortable with anonymous speech in such an environment, but that you should be suspicious of any speech that isn't.

(All emphasis mine)

Indeed, anonymous speech is protected by the First Amendment to The United States Constitution, as has also been affirmed by the Supreme Court of the United States (McIntyre v. Ohio Elections Commission 514 U.S. 334 (1995)) – and with good reason:

Protections for anonymous speech are vital to democratic discourse. Allowing dissenters to shield their identities frees them to express critical, minority views . . . Anonymity is a shield from the tyranny of the majority. . . . It thus exemplifies the purpose behind the Bill of Rights, and of the First Amendment in particular: to protect unpopular individuals from retaliation . . . and their ideas from suppression… at the hand of an intolerant society.

(Emphasis mine)

The fact of the matter is that people care more for the ideas expressed rather than who is expressing them. Are you afraid to contest on the strength of ideas and facts alone, Mr. Denninger?

The Metals Forum
Specifically, I got tired (fast) of the incessant and mentally-deficient spamming of my forum with goldbug crap and thus have deemed it off-topic everywhere except in.... surprise.... the metals forum.
That's right, I have a specific place for all such discussions where they're perfectly welcome - even if I believe the people running their particular beliefs are wrong (or worse.)  
(Emphasis mine)

Just because you have a specific forum for the “metals” does not mean that you promote an open discussion regarding them or do not ban people who dare to have ideas different than yours. This is what one of the commenter’s on my blog (and, apparently, a former participant of your "metals forum") “George K” had to say about your “metal forum”:
I would like to note that I am one of the people who got banned from Denninger's forum for daring to question his judgment on gold. Although Karl has a subforum for metals, that does NOT change the fact that he created it precisely so that he could force "gold bugs" into his little gold ghetto, and so that Karl could point to it as a justification for banning anyone who dared to question his judgment on gold when he makes comments denigrating it in his "tickers" or elsewhere on the forum.
“Perfectly welcome”. Right.

On Hyperinflation

Worthless currency eh?  Hmmm... all I have to do is be able to obtain a return that exceeds the devaluation of the currency in question, assuming it does in fact devaluate.
Also, first you say:
Of course what really happened was that gold's price collapsed and the promised hyperinflation didn't occur.
But then you say:
Those who are looking for hyperinflation are about 20 years too late. We already had it. First in stock prices, and then in houses.  Anyone who cares to argue that taking the SPX from 100 to 1500 over a period of 20 years is not "hyperinflation" has rocks in their head.
(Emphasis mine)

Well, what is it Karl? Did the hyperinflation occur or not? Of course, it would help if you actually knew what hyperinflation is which clearly you don’t, or perhaps you deliberately choose to define terms according to your convenience. 

 

Seriously, I mean that has to be the first “hyperinflation” in history where only two asset classes rose. Not only that, these were financial assets (or investments) and they rose much higher than the commodities and goods needed for everyday living. I mean this has to be the most prosperous “hyperinflation” in the history of mankind! If this is what “hyperinflation” looks like, then I think every country should have one. I mean Zimbabwe should be a freakin’ world superpower right now! Yeah, somebody definitely has rocks in their head.

Clearly, this is NOT what hyperinflation is. Many people tend to think that hyperinflation is simply a higher rate of inflation. Not so. The only similarity between your everyday government-theft enabling inflation and hyperinflation is in the name. There is a phase transition that occurs going from simple inflation to hyperinflation, namely, a “crisis of confidence” which eventually renders the currency worthless. In a hyperinflation we are not dealing with linear functions anymore, but exponential ones. Now I’m not going to go into a detailed explanation of how and why a hyperinflation occurs, in general, and why it will occur in the US, in particular, because excellent discussions regarding both of these topics can be found on Wikipedia and FOFOA respectively, and I’m sure Mr. Denninger will be interested in going through them. Suffice to say that hyperinflation is a currency collapse which occurs when people lose confidence in the currency, i.e. people are not willing to hold the currency for any length of time and rush to exchange it for real goods as soon as they receive it. This results in not only a high inflation rate, but an exponentially increasing one where prices double every few weeks, days or – during the end stages of the currency - even hours.  The inflation rate is reported monthly, even daily, instead of annually. 

In real terms, a hyperinflation is, in fact, a deflationary depression, as even though the nominal amount of currency in circulation might reach multi-trillions, its real value is depreciating exponentially due to the high velocity and subsequent high (and increasing) inflation rate. Indeed, there is a shortage of currency in a hyperinflation as the demand for currency outstrips ability of the Central Bank to create it. Did you realize what just happened!? No matter how fast the CB prints (or digitally creates) currency, people are always one step ahead of the Central Bank2. So even though the CB can print currency, it can no longer steal! The people have finally realized the scam and will have no more of it. 

To give you an idea about what a hyperinflation looks like, here are some excerpts from The Nightmare German Inflation:
By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread….Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless….By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing….Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.
And to give an example as to what kind of inflation to expect during a “currency collapse” a.k.a. hyperinflation, here are inflation rates from some of the worst hyperinflations in history (via Wikipedia):

Is that what happened in the United States in the 20 year period that Mr. Denninger is referring to? No. But it sure as hell IS what’s in store.

Seriously, I would love for Karl to explain how he intends to outrun the exponential devaluation of the currency when prices are doubling every few days or even hours with…umm…LEAP Calls. Even if, for arguments sake, we assume that the rise in the value of your LEAP calls outpaces the devaluation of the currency, at some point you are going to have to cash out to realize the “gain” - assuming, of course, that the counterparty who wrote the calls is still solvent and is actually able to pay up (more likely the exchange will declare a force majure as counterparties go bust left and right due to the exponential increase in price, so now you are left with nothing instead of the rosy profits you had been dreaming about)- you’re still stuck with the damn currency - toilet-paper! What is your “out”? That which the government cannot create at will out of thin air - real goods and commodities, or whatever’s left of them for sale at that point. And what is the best “real good” to hold in a hyperinflation? The one which is the “most marketable”3 of them all - Gold! – which unfortunately won’t be available for sale anymore then. So you would have been better off if you just swallowed your hubris, bought Gold at the outset and gotten with the program [of protecting your savings].

Karl’s LEAP Call Profits - Now tell me this is something you [will] want more of!

(Courtesy Wikipedia)

Moreover, each and every hyperinflation in history – and there have been many, with the US itself having experienced one - has occurred simultaneously with a gold corner, i.e., Gold stopped being quoted in that currency – there was no Gold available at ANY price in the hyperinflating currency, whereas many other goods were (or whatever was left of them). Quite an interesting coincidence, don’t you think? Well, only if you don’t know (or refuse to accept) the fact that Gold is the only real money there is – a fact people quickly come to realize when the fire of hyperinflation starts burning.

Why You Should Stay OUT of the Stock Market in a Hyperinflation

Let’s take a look at what happened in the Weimar Stock Market:
We can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.

Many very sharp but brief advances and declines in the market led to widespread speculation, and well-intentioned investors often wound up as traders. Naturally most of them did as badly as amateur speculators generally do. Many decided that speculation was the only sensible approach; when the entire economy and financial structure was visibly crumbling, who could wait patiently with confidence in the long-range value of anything?

So to be sure, the stock market may rise tremendously during a hyperinflation but is not as straightforward as it seems. There is a lot of accompanying volatility – before the system finally becomes unhinged and collapses [into hyperinflation]- as is occurring in the US Stock Market right now –where one wrong move can destroy your life savings. We've already had two spectacular rises followed by two equally spectacular crashes (2000 and 2008) followed by another spectacular rise in 2009 – how many people were able to successfully trade around that? Very few. Buying “protection” with LEAP calls or any other instrument attached to the stock market during a hyperinflation is simply GAMBLING, and we all know how all gambling endeavors end up. Yes, you can buy and hold companies you think are solid, but you don’t know which companies will survive the hyperinflationary storm. Even worse, during times of economic distress when its own revenues are collapsing (again, in real terms), the government can confiscate any company it wants to – often the ones which are most profitable thus rendering your stock holdings in that company worthless. I really don’t understand is why you would risk your life savings gambling in the stock market CASINO when you have a much safer and better alternative which will not only preserve but increase your purchasing power when the government currency falls apart, as has been CONCLUSIVELY demonstrated throughout the various hyperinflations that have occurred in human history so far.

The Dollar, Gold and Exter’s Pyramid

Then Mr. Denninger points to the DXY chart which does not present a very accurate picture in my opinion as it simply reflects the different rates at which various fiat currencies are sinking in terms of real purchasing power. Moreover it is easily manipulated as Central Banks can and do intervene in currency markets all the time. But yes, the dollar has risen in terms of real purchasing power against a lot of things, although not all. Still, both of these phenomena are easily explained as the dollar is still the world reserve currency and is considered to be the most liquid asset i.e. “money” (for the time being anyways) by many people. As I already said:
Initially, of course, many people (such as Mr. Denninger) – mistakenly thinking the dollar to be “money” – will rush to its perceived safety causing the dollar to rise.
Which is what has happened “since the financial crisis in 2007”. But here is the thing – Gold has risen much more in terms of purchasing power than the dollar, i.e., you can buy a lot more real goods, commodities and services including “actual hard productive assets” - ounce for ounce - with Gold than with the dollar - dollar for dollar - since 2007. And this is not simply a coincidence. The model that best describes, in my opinion, what will happen – and is indeed happening - as we move along this [Gold] deflationary depression is Exter’s Pyramid.

Exter’s pyramid

As the higher layers are liquidated – indeed, evaporate (h/t Trace) as the market for them simply stops existing -  in search of the “most marketable good” or the most liquid asset, initially everything will fall against the dollar and Gold. In fact, as I’ve said before, this pyramid is the reason why - as capital accelerates its flow down the pyramid - we can expect more and more instances of the dollar and Gold going up together. Indeed, a final spectacular rise in the dollar – lulling many dollar-deflationists into a false sense of complacency - will be our signal that the show is about to end. It is this collapse of the second-last layer – the dollar or the “Federal Reserve Note” layer - that will manifest as hyperinflation. Many dollar deflationists who realize the truth about Gold think they can time this, trade around it and switch to Gold when the time comes. However, there is no guarantee that Gold will be available at anywhere near today’s prices – or indeed available at all – at that point. Much of it will happen too quickly for many people to even comprehend what hit them. 

Many people will go through the different layers of the pyramid losing chunks of their capital along the way, before they come to the conclusion that Gold is the ultimate “go to” asset – at which point they may not have anything left to preserve. Trading in the rigged paper markets casino will virtually assure that outcome. But those who know what’s really happening will go directly to Gold. They will be the ones who really hit it out of the park.

On “Lawbreaking”

Oh, so now "Gordon" advocates lawbreaking as a means of "safeguarding wealth"?
As far as “lawbreaking” is concerned, somehow I don’t think the people who fled Hitler’s Germany would appreciate your lecturing very much. I mean, after all discrimination against and even killing off certain sections of society was “the law” there, so you would be “lawbreaking” if you helped anybody flee. And guess what they used to hide and preserve whatever was left of their wealth – surprise! - Gold. (In fact, many of them were only able to flee by bribing officials with Gold as that was the only thing they would accept as payment). Slavery too was legal at one time right here in the US. Price controls are also legally enforced. How do those turn out? Empty shelves! You cannot decree people to sell below the cost of production. The point is that just because something is legal does not mean it’s right, neither does it mean that “the market” will accept its fiat as such. When the government’s greed and tyranny reaches a point where people are forced to choose between their own survival and the governments’, people almost always choose their own. This is how and why “black markets” (which are really “free markets” in disguise) arise, as they WILL in the US at some point. 

Legalized persecution was the very reason that the Founders fled Europe and their Central Banks and established this nation. They were also aware that governments can get tyrannical, which is precisely why the Second Amendment protects the right to keep and bear arms:

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.
If it were up to “obedient” people like Karl running scared of “getting boffed in a prison cell”, America would never have been founded. Rest assured, if the present state of affairs continues where only 21% of the people believe that the US Government has the consent of the governed, we WILL reach a point – if we’re not there already – where “lawbreaking” will be the ONLY means left for “safeguarding wealth”, liberty and perhaps even our lives. 
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You're awfully presumptive there "Mr. Gekko"
Am I? Time and again governments throughout history and in many different countries have shown that they will happily loot and pillage their citizens in order to ensure their own survival. You need look no farther than our own shores where FDR forcibly STOLE US Citizens’ Gold and then devoured half their wealth in a step devaluation of the currency. Or just look to the latest legalized daylight ROBBERY that was TARP where the government FORCIBLY took our money and gave to the banksters. Even today the government is considering STEALING retirement monies of American citizens by forcing them to invest in Government bonds and suspending mutual fund redemptions. So no, I’m definitely not being presumptive.
And as for "moving to another country", which one would that be, exactly?  It would certainly appear that the United States for all it's faults is better-situated than the alternatives reasonably available to most of us.  Certainly you cannot believe that any of the so-called "Western Nations" in the EU, for example, are a better choice, yes?
Looks like you don’t get out much Karl.
Gold is, however, a damn good geopolitical instability hedge.
And exactly why is that Karl? Have you thought about it? Why not platinum or silver or any other precious metal? I mean what difference does it make? I’ll tell you why – it is because of what you refuse to accept – that Gold IS Money – the ultimate wealth preserver. 

Perhaps that is why you conveniently ignore the high stocks to flow ratio phenomenon of Gold and the fact that the Central Banks of the world are one of the biggest hoarders of Gold. And to those with selective memories who say that, “Well, they are just part of the herd buying the top”, I will say that CB’s have been hoarding Gold ever since they came into existence. They continued hoarding it even when the dollar’s Gold backing was removed and – even though their overall holdings might have fluctuated over time - they continue to hoard large quantities of it TODAY. And the high stocks to flow ratio is not a recent phenomenon, neither is it solely on account of Central Bank hoarding. It is held by many people throughout the world (except, of course, the brainwashed populace in the US), i.e. it is a market phenomenon, and it has been that way for thousands of years. It was that way when Gold was confiscated in 1933; it was that way when the dollar was “delinked” from Gold (basically a euphemism for DEFAULTING on Gold obligations to other countries); it was that way when Gold “bottomed” in 2001; and it IS this way TODAY when, according to some misinformed people, it is a “bubble”. 

You have to be simply naïve to believe that that these “geopolitical instabilities” have nothing to do with our monetary system.
Prove it.  You conspiracy theorists on this topic have been ranting for three decades about the same tired song - that it's all "price suppression", that "the gold doesn't really exist", and on and on and on.
Prove what? I was simply pointing out the flaw in your reasoning there, not alleging anything – not in that sentence anyways. Perhaps you should actually bother to read/understand what you are responding to. 
Well, when is it going to happen?  Investment forecasts, to be actionable, must include both a price and a time or they are worthless - indeed, often worse than worthless.
Well, in case you didn’t notice, “it” is happening right now! In fact, it has been happening for the past decade. You would have been better off holding simply Gold than any other “investment” during the past ten years. And as time passes I can assure that “it” will continue to happen, only at an accelerating pace. The emperor will soon be fully naked for all to see. 
I also remember the people who were bankrupted by believing that gold was "money" and nothing else was…
Only if you were a casino patron who practiced “buy and hold” using leverage. Even if you bought the very peak, you lost only about 50%, considering the average price over the ensuing 20 years, and were not “bankrupted” as Karl claims. But if you had even half a brain and could see the massive inflation that what was coming down the line - what with the US Government spending money like a drunken sailor on the Vietnam war and the subsequent default on its Gold obligations – you bought Gold as soon as you saw Nixon LYING on national television. How did that turn out? Well, not only did Gold rise 24x during the ensuing decade, it remained levitated 11x (even after the “collapse” in 1980) for the next 20 years, and today is 34x that level, whereas the SPX is only 14x its 1970 level! Even if you go with the “market price” since 1974, Gold has risen 12x till date whereas stocks have risen only 8x.

The 20 Year Argument

Basically, the point Karl seems to be making is this:
The historical precedent is what it is… gold is not a particularly good hedge against inflation…during a period of serious inflation - from 1982 to 2002…gold's price was flat to down. It is thus a massive fail at it's claimed purpose.

First, aren’t you being a tad biased when your “historical precedent” consists of only the recent 20 year period while conveniently ignoring the “historical precedent” of thousands of years of fiat currency failures and of Gold’s acceptance as money? Second, there was a lot of inflation during the 1970-80 period with the CPI rocketing to 16% by 1980, but Gold performed extremely well during that period, whereas stocks essentially went nowhere. So you really can’t make generalized statements such as “gold is not a particularly good hedge against inflation”. But the question remains, what happened after 1980? Why did Gold do nothing while stocks rocketed? Two things: first, the US exported a lot of its inflation to other countries via the reserve currency mechanism. CPI remained flat to down after 1980, as exemplified in the following chart: 

Here is the gold price in Chinese Yuan and Indian rupee – two of Asia’s (and the world’s) largest economies. As you can see, they were experiencing a bull market in Gold even as the dollar price remained “flat to down”:

Second: outright manipulation. They started to gimmick the CPI massively in the 90’s at which point the “strong dollar” policy was instituted, i.e. manipulation of Gold prices (via massive naked shorting of futures as well as fractional reserve selling of bullion by the LBMA) in order to hide the true rate of monetary inflation. It is this manipulation which has started to unravel since the beginning of this decade resulting in rising Gold prices.

On Manipulation
Yes, I know, it's all manipulation.
Is that really so hard to believe? You yourself, along with many others, have extensively documented the shenanigans occurring in various markets today. I mean the Fed is now OPENLY manipulating the Treasury market via “QE”.  But the one market they decide to let trade “freely” – the one most important to maintain the illusion of a “strong dollar” no less - is the Gold market. Do you really expect us to believe that? Indeed, organizations like GATA have extensively documented the US Government/Fed supported long-term Gold price suppression. Alan Greenspan even admitted openly in 1998 that Central Banks intervene in the market to suppress Gold’s price:
Nor can private counterparties restrict supplies of gold…where central banks stand ready to lease gold in increasing quantities should the price rise.
The evidence is out there, if only you choose to look at it.

However, there is a fly in the ointment. The manipulation cannot last forever. In fact, the longer and more persistent the manipulation, the more spectacular the eventual opposing move will be. It is a testament to the sheer force of the market that despite record naked short position of the bullion banks against Gold, it continues to rise. The real rise will be witnessed when the bullion banks and the LBMA go bust. To put it another way, if you were patient enough to hold Gold through the period it went “sideways to down”, rest assured, you will be well rewarded.
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Let's define our terms.  "Money" is a convenient catch-all but it's also a bullshit term because it lacks precision.
I already did - precisely. I can’t help it if you choose not to understand it. 

Karl then – instead of looking at the simple facts staring him right in the face - goes into a confused and disjointed theory about money with subjective terms like “wealth”, “credit”, “intrinsic value”, “speculative premium”, “value” etc. and ultimately ends up justifying that “money is debt” (or credit – after all, one man’s credit is another man’s debt); that you need credit (or debt) in order to trade. This is the very same propaganda that the banksters have sold us that “money is debt” – the way it is created in our system today – and Karl seems to have bought it hook, line and sinker. 
The hell it is. Every man has the ability to create wealth and most can create credit, which is the essence of money. When Wimpy promises to pay for that hamburger next Tuesday he has created, in point of fact, both credit and (by common definition) money.
We can? Have the legal tender laws been repealed? Phew! Good thing– I guess we can get rid of all the banks now. Who the hell needs “loans” from Fed-controlled banks when you can pay off stuff with a promise to pay it off tomorrow? Sweet. Seriously though, unless you are telling me that you can print Legal Tender (or dollars) out of your basement, you are WRONG. Every man can create “wealth”, but needs to bend over in front of the banksters to obtain the legal tender denominated “credit”. 
But only government has the authority to use force to extract both from you - that is, to force you not only to turn over current production but to compel you to produce in the future as well.
So what you’re essentially saying is that we are all born indentured SLAVES to the government. And here I was thinking slavery had been abolished in America. BTW, did you think about who controls our government today – that’s right – the banksters. So, in other words, we are all slaves to the banksters. Which is EXACTLY what I meant when I said “ultimate power”.
The convertibility by law was disposed of by Richard Nixon.  The dollar did not "instantly collapse" (although many said it would.)  In addition there was no right of exchange during the period after FDR's confiscation through the repeal of those regulations and laws, and again, the dollar did not "instantly collapse."  This claim is utter and pure horsecrap as the dollar was maintained through forty years of being non-convertible.
First of all, as long as Gold was/is available on the open market in exchange for dollars, it was/is “convertible”. Period. It doesn’t matter if it’s a fixed or floating rate. Sure, the government tried to “dispose of convertibility” (and pretended it was in charge in order to hide the fact that they were defaulting on their Gold obligations), but really it was the market that forced their hand. They simply could not afford to redeem all the flood of dollars coming in Gold at the artificial fixed price! Indeed, if Gold was only money by government decree then it should have collapsed instantly, as many paper-money apologists claimed even then. Instead it rose 24x over the next decade and even after “the collapse” in 1980, it remained almost 11x its decreed price in 1970. The market showed everybody which one was the real money. Also, you conveniently “forget” the fact that even though US citizens were not allowed to own Gold or redeem their dollars for Gold, internationally the dollar remained redeemable which is why it did not collapse. Yes, somebody is definitely spewing “horsecrap” and it is you, sir.
The founders based our monetary system on silver, not gold.
Umm…No.  They based it on both Gold and Silver. Perhaps it’s time you took a look at the US Constitution:
Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
(Emphasis mine)
Even today the banksters would love a gold standard, as it would play directly into their hands.  With the vast majority of production being tied to a handful of suppliers absolute control would vest in just a few easily-bribed persons and corporations.  By being able to control gold supply through such a corrupt system they could easily cause deflationary collapses any time they wished, thus escheating all property carrying debt to themselves literally on demand.  Such was common practice prior to the abandonment of gold-backed currencies.

Gold-backed currency is a banking cartel member's wet dream.

So why don’t we have it now? I mean the banksters practically control Congress and the White House right now and they literally OWN the Federal Reserve – would you agree? So what’s there to stop them? I mean if they can get a law like TARP passed – they can get ANY law passed. Clearly the people of the United States cannot stop them. Or are they just not doing it out of the goodness of their hearts?

Do you really believe that the bankers would want something that is limited in supply by nature to be money over something they fully control the issuance of i.e. paper money? Not only that, Gold’s above ground stockpile is extremely large (compared to its annual production) and distributed widely enough that controlling a “handful of suppliers” would not amount to controlling much. This is the very reason why they engage in all sorts of frauds and misinformation campaigns against Gold. As Ayn Rand said:
“Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'”
If you think they want Gold so they need to cause a “deflationary collapse” to own everything, I suggest you take a look around – they ALREADY own EVERYTHING. I mean the level of ignorance you display here is actually quite astounding. I guess that is what happens when you surround yourself with sycophantic “yes-men” and instantly “banning” anybody who dares to have a shred of different opinion. Why even bother having a “forum” when all you want is listen to your own voice. At least try to do some independent thinking and research before blindly accepting anti-Gold propaganda.
Gecko then presents the following outright fraudulent chart. Why is it fraudulent?  Look at his starting point - the end of Kondratieff Autumn in 2000!
Perhaps you should actually read what you are responding to. I clearly mentioned the period I was referring to when I presented that chart. Moreover, is the Kondratieff Cycle an exact science? No! What is exact are the facts and I was simply observing them.
The goldbugs are after a laudable goal - the ability to simply save money (production) over time, take zero risk and wind up with the sum of the purchasing power saved. 
That's the goal that the bugs have, but the goal is unachievable through hard-backed money.  The bugs often point to the period before the 1930s as one where over time purchasing power didn't change much, but they ignore the outrageous swings that took place in the interim, often resulting in 30-50% price changes in the space of just a year or two's time - in both directions!  Catch that wrong and you're bankrupted.
I am not advocating any sort of “backed” money as backed money is always some sort of fraudulent fractional-reserve scheme used by the government/banksters to engage in stealth confiscation - which is also the reason why you get the violent swings you are referring to (even so, I don’t see how losing 99% of your purchasing power over a 100 years is preferable to a short lived violent swing, where if you simply sat it out, you’d still be preserving all your purchasing power!). Gold in the hands of the public freely circulating as money is sufficient to achieve the “laudable goal”, without any interference from the government. I mean I already took the risk when I engaged in my particular occupation and earned that money. Why should I have to take risk it all again simply to preserve my purchasing power?

In fact, Gold doesn’t only preserve your purchasing power, but increases it over time. Let me explain. Contrary to what paper money advocates will have you believe, deflation in itself is not “bad”. In fact, in a society with increasing productivity this will be the de-facto state of affairs because as the production of goods and services in the economy increases and the money supply remains relatively constant – a feature of Gold as it cannot be created out of thin air unlike paper money – the purchasing power of your existing savings increases, which is what matters ultimately. Most people focus on the nominal amount of Gold or currency in their possession. It simply does not matter! The purchasing power of what you hold does. 

Inflation is not the “natural” state of affairs as the statists would like everyone to believe. Imagine not having to gamble in the paper market casinos just to keep even, and instead spending your time and increased purchasing power on doing what you do best further enhancing the overall productivity of the society. This, in fact, would be the de facto state of affairs in the absence of disguised looting and pillaging (via the inflation tax) by the government/banksters in a fiat money system. 

So yes Mr. Denninger, we’re not only after that “laudable” goal, but one better.

On the Federal Reserve System

Also, Mr. Denninger also appears to be an ardent fan of The Federal Reserve System, which is neither Federal nor a Reserve but a private banking cartel monopoly. If it is such a great and beneficial law why was it passed stealthily through Congress in the middle of the night after a secret meeting between the bankster kingpins of those days on Jekyll Island? Indeed, the video “The Creature From Jekyll Island” by G. Edward Griffin explains the truth behind the Federal Reserve. 

He then goes on to quote the Federal Reserve Act:
The Federal Reserve Act says:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Really? How about Unicorns s**tting Gold bars (or dollars, if you prefer) while we’re at it? If central planning worked, the Soviet Union would be the wealthiest country on earth right now. The fact of the matter is that central planning has never worked. The Fed does not – indeed cannot – know what “the economy’s long run potential” is and therefore it cannot “maintain long run growth of the monetary and credit aggregates commensurate” with it. In fact, nobody can know what this “optimal” rate of growth of economy or the money supply is; only the market does. The fallacy that Karl (and whoever wrote this idiotic law) is engaging in is that we need “stable prices”, therefore we need a money supply that increases with the growth of the economy. We don’t need “stable prices”; falling ones – as I explained above - are better! 
This [the Federal Reserve Act], if followed defacto, results in zero inflation (stable prices) across the intermediate term… 
A law which has not been followed once since its inception, can be argued, was not meant to be followed (not to mention, the way it is written, cannot be followed). They wrote a bunch of BS platitudes in there to fool the public but, like they say - watch what they do, not what they say. This is what has happened throughout the entirety of the period that the Fed has been in existence:

US Dollar Purchasing Power Since the Creation of the Federal Reserve in 1913

Theft via inflation was their intention from the very beginning and that is, in fact, what they did.  
The failure is not in the structure of the system, but rather is found in the corruption thereof and the utter refusal of the people to hold those elected and appointed officials to account under their black letter legal responsibilities.
So how do you suggest we fix this? By putting everybody in prison? You’ve already blamed everyone – everyone except yourself, that is. Perhaps we should make you in charge of the whole shebang, right? The fact of the matter is that shouting online and elsewhere that corrupt politicians, regulators and law-enforcement personnel be prosecuted and jailed while at the same time promoting the very system that is at the root of the corruption is ignorance at best, and hypocrisy at worst. You want government appropriation that funds your social security checks to continue, yet you want the looting to stop. You simply can’t have it both ways Karl.

Of course, I realize that no matter what I say or what evidence I present, it will never be good enough – especially those who believe in paper money enabled wealth-redistribution schemes. Or perhaps people like Karl are simply envious that those they derided and opposed so vehemently are being proven right by the market. 

The proof of any hypothesis/theory is in what actually transpires in the real world. Events will eventually prove who is right. As Another said:
Time will prove all things.

1. H/t Akak
2. Now many will say, “But currency is created digitally today”. So what? If the CB can print digitally, the people can spend digitally!
3. For an explanation of the “most marketable good” please refer to my previous article.

 

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Thu, 06/17/2010 - 00:25 | 418759 Gordon_Gekko
Gordon_Gekko's picture

Denninger claims links not working:

Incidentally, the first rule of linking someone somewhere is that you actually have to make sure that the web address you link to works.  My billing rate is $300/hour if "Gordon" is incapable of managing to get his blog to work on his own, as the link on Zerohedge, along with the links on his site themselves, all say "go here" but when you do you go back where you started... but I digress.

Anyone having any issues? Seems to be working fine for me.

Thu, 06/17/2010 - 07:43 | 419022 breezer1
breezer1's picture

yes, congrats gordo. excellent response. don't keep me waiting so long next time. by the way do you have an agent? i can make some time.

by the way i have tried to reply on your blog but put my failure down to big fingers. not a problem since you always show up here. +10

Thu, 06/17/2010 - 01:09 | 418813 AVP
AVP's picture

No problems here GG. Just more lies from Denninger!

 

 

Thu, 06/17/2010 - 01:07 | 418809 Capitalist Man
Capitalist Man's picture

 

Actually, I just read his newest "rebuke”, and his link to your above post didn't work for me. Do I have to be a pontificating douche to collect a fee for his link not working? Since clearly his was arbitrarily set, my going rate is 1 troy oz for him wasting my time. 

The bulk of his refutation (or at least the second half - full disclosure: started skimming at this point) seems to be using math to dispel common sense vis a vis MV=PT. If you would like to take a breather, Henry Hazlitt has an excellent summation on the error of Mr. Denniger's ways. http://mises.org/daily/2916

 

 

 

Thu, 06/17/2010 - 01:32 | 418832 Gordon_Gekko
Gordon_Gekko's picture

Clearly, anything above $0/hour is too high a rate for Mr. Denninger's "expertise".

Thu, 06/17/2010 - 01:56 | 418851 akak
akak's picture

Gordon, I eagerly await your next decimation of one of the public gold-hating central bank lackies!

May I suggest you go after Jon Nadler next?  I even have a working title that you are welcome to use: "Jon Nadler: The Baghdad Bob of Gold"

Sat, 06/19/2010 - 04:16 | 422464 GoldmanSux
GoldmanSux's picture

Gordon, can I suck your cock? Please, pretty please?

Sat, 06/19/2010 - 11:47 | 422617 akak
akak's picture

Troll much?

(That was a rhetoric question, asswipe --- the answer is self-evident.)

Thu, 06/17/2010 - 11:33 | 419452 Bay of Pigs
Bay of Pigs's picture

The Nadlers, Gartmans, and Christians, are all on the run. Their credibility has been shot to pieces.  I can only assume Nadler bashes gold because his outfit KITCO is short of the metal in their allocated pools. I know when silver went down (from 20 to 9) he wouldn't respond to my inquiries as to why MORE metal wasn't available. It's just "a delay, not a shortage" he told me. LMAO even today at that one! 

Amazing writers on gold here. Bay of Pigs says "oink" to that. You guys rock. I've been over at Mish's site banging away for a couple of years with little progress to convince people there to buy and hold some gold. Even Mish (who likes gold) refuses to engage on the manipulation of the PM's. He calls it "conspiracy theory". Sad.

 

Thu, 06/17/2010 - 12:37 | 419582 MsCreant
MsCreant's picture

You and Queen Bee helped me buy my first 10 Krugs @ 800. Been adding ever since listening to Gordon and others here. No regrets. I posted as They Stole my Country. Some of us listen.

Thu, 06/17/2010 - 21:54 | 420641 Hephasteus
Hephasteus's picture

I remember when you got your first rush as it rose up past what you paid and then how you got nervous when it fell below your buy price. Now you are a steely eyed gold bug. LOL

Fri, 06/18/2010 - 09:13 | 421082 MsCreant
MsCreant's picture

I started out as a Silver Belle. Naturally I bought in at 21.00 the first time I bought so I am still under water on a few of my PMs. Today's drama should help and on the whole, I am way up (better than CDs).

All of us should have nosebleeds today.

Hope you are well Heph. I enjoy your brain on here. Quirky, funny, scary smart, and insightful. 

Fri, 06/18/2010 - 14:55 | 421743 Hephasteus
Hephasteus's picture

That's funny that you are worried about the silver.

http://www.youtube.com/watch?v=UcqX-e9cOSs&feature=related

Hope makes sweet unjust deserts.

But despair has always been and always will be the master baker.

 

Thu, 06/17/2010 - 14:40 | 419873 Bay of Pigs
Bay of Pigs's picture

MsCreant, Wow. Thanks. I really appreciate that. I just found another bunch of silver in a safe deposit box. I reckon around $20K worth. LOL. Life can throw you a bone every now and then. Best wishes...

Thu, 06/17/2010 - 00:11 | 418737 trav7777
trav7777's picture

Douchinger also expounds on the "confiscation" meme repeatedly which is something I had been meaning to talk about for some time now, and so here goes.

Confiscation in 1933 and the de facto confiscation in 1973 with the end of Bretton Woods, did not serve to "fuck" gold bugs or little people.  They were to protect the FEDERAL RESERVE from a bank run.

If people recall back to the 1930s, there were bank runs all over the place.  The Federal Reserve Note came into legal existence in 1913. And, if one recalls, ALL notes at that time were *backed* by silver or gold.

Fearing a bank run on the "dollar," FDR simply confiscated the gold and in actuality forced its delivery to the Fed in exchange for FRNs.  Simple as that.  The fear was a run on the Fed's holdings, the exposure of a massive fractional lending operation, and the consequent collapse of the dollar.  It was to protect the FED, not to screw people.

The 1933 seizure really WAS just that simple...it was no different from what got usury clan goldsmiths lynched throughout the middle ages for doing the same thing, lending what they did not have, circulating unbacked notes purporting to be backed.

When Nixon closed the BW gold window, it was the same thing, effective seizure of gold, the notes went from backed to unbacked, bye bye gold you thought you were entitled to.  Again, the reserves had to be protected from a run - the period leading up to that closure are very clear in a historical sense as far as what was going on in the Gold Pool, what France was up to, etc. 

The Fed very much IS the dollar now, it's a FRN.  But at this point there's little than can be run on...wtf does the Fed promise in redemption for its notes?  NOTHING.

Another seizure event at this point or an attempt thereon, would simply show that the jig is up, because it would a desperate measure to try to move the FRN to some pseudo-backed status, essentially announcing to the world that it was at or near a point of collapse as a true fiat instrument.  I would expect dollar collapse rather than orderly turning in of private gold.  Kleptocratic governments full of corrupt bureaucrats cannot expect orderly and patriotic citizens to do what they're told.  This ISN'T 1933 anymore, it's not even 1973.  And the hands the gold is in...let's look at that as well.  Is it your average sheeple that is out there sitting on krugerrands or is it more the Don't Tread on Me type?

If they come for something, it will be pensions and 401ks, not gold.  Nations only try to back currencies when they have to and are on their last legs...to try to give value to the valueless.

Thu, 06/17/2010 - 05:12 | 418950 EscapeKey
EscapeKey's picture

Excellent post.

Sat, 06/19/2010 - 05:25 | 422476 GoldmanSux
GoldmanSux's picture

Why? cuz Gordon told you to say that? You loyal acolyte whose being paid money to waste my time?

Thu, 06/17/2010 - 01:03 | 418804 Apostate
Apostate's picture

It's not the little people that the Feds are terribly afraid of, these days.

It's the big boys in the private sector sitting on more tons of gold than could fit in Fort Knox.

He who owns the gold makes the rules. 

Thu, 06/17/2010 - 00:22 | 418752 Gordon_Gekko
Gordon_Gekko's picture

Extremely well put trav777.

+100000

Thu, 06/17/2010 - 00:29 | 418767 DoChenRollingBearing
DoChenRollingBearing's picture

Or should that be:

+ $100,000

Thu, 06/17/2010 - 00:26 | 418763 steve from virginia
steve from virginia's picture

You've been reading Murray Rothbard again, haven't you?

Thu, 06/17/2010 - 00:07 | 418733 hotkarlandthecl...
hotkarlandtheclevelandsteamers's picture

Anyone thing Denniger has gotten laid in the last decade.  I wonder if he ever covered his 930 short he boasted of on CNBC when Kudlow gave him his 5 minutes of fame awhile back.

Thu, 06/17/2010 - 00:16 | 418713 steve from virginia
steve from virginia's picture

Interesting article, like Denninger's rant, too long and too many hypotheticals.

 - Gold obviously has been a good investment since 2000, anyone holding gold since that time has made (fiat) money ... oops!

 - Willem Buiter pointed out last fall the obvious, that all forms of exchange are 'fiat' to the degree that there must be acceptance of value by more than one person. Acceptance is cultural, a form of tradition. (In the end all things are subjective.) Is gold money? Why not Palladium?

 - Conflating gold as currency v. gold as an investment is easy to do but isn't representative of reality. Gold is not a currency. It does not and would not circulate. It is too valuable to be used as 'money'. Would you exchange gold for .. gasoline? A can of beans?

 - Gold is no more or less inflationary than other means of exchange, see people buy bread for $10 - in gold:

http://www.youtube.com/watch?v=7ubJp6rmUYM

 - Gold as an investment exists within two conceptual frameworks: a) the creditworthiness of gold holders, and b) liquidity 'value' of gold.

http://www.oftwominds.com/blogjun10/trickster-gold06-10.html

 a) As gold holders' portfolios are liquidated (you notice I said 'As') gold will be sold to meet margin calls elsewhere.

 b) At the same time, gold is more liquid in some ways than cash currency! Try to take $20 or 30,000 in cash out of a bank. There are forms to fill out, weeks- notice given, an armored car hired, and a place to put the paper money when you take it home. Gold? $30,000 is about 24 oz. less than a large book, ordered online and shipped by FEDEX no questions asked. After it's home, paint it black with latex paint and stick it on the mantlepiece next to Dear Ol' Dad (ashes). How liquid will gold be in the future?

 - People pitching gold ... are selling gold! (I'm not selling my gold, btw.) Take what is said by gold salesmen with a grain of salt!

 - Buying gold - and just about anything else - is easy. For what and when do you sell it? Ours is not a 'temporary' crisis, the nature of establishment reactions to it speak more eloquently than words do. There will be no point in any forseable future when gold can be swapped for some 'new dollar' (at a fat profit) and business will return to 'normal. We  have run out of cheap energy which our economies need to function. There is no more normal. The economic consequences of unremediable depletion will be amplified; all the delay and denial of the present makes the future unwinding that much more painful and permanent. The increased costs of energy have warped the credit system to the breaking point; credit gets the attention but our energy dénouement is permanent. The bottom line is if you buy gold at the high price you may be stuck with it for a long time, or ...

 - Demand for gold was very high during the beginning of the Great Depression. Gaining gold was the only form of economy in the developed world - the gold preference pulled investment capital away from production (consumption as Keynes observed). (Gold- backed) money disappeared from circulation, the tactic to best obtain gold was for gold holders with more reserves to simply wait for those with less reserves to market their gold out of desperation. In desperate times, the waits were often short ... while the long waits eroded economies and banking systems. Does this sound familiar? Keep this in mind because it is important: during the depths of the Depression, the discretionary selling of gold was abandoned and with it any semblance of commerce. Coercive selling is not an economy but is robbery.

 - Damaging hyperinflation is a currency rather than a credit phenomenon. Current finance regime relies on credit created by business itself (or business' banks) rather than on paper money printed by treasuries. Our cash money supply - M0 or base money has risen to $2 trillion; from $800 billion and much of this is out of circulation as forex reserves in China, Japan, Germany, as the national currency in countries such as Ecuador and Panama, as 'super- currency in the underground economies of the world such as in Iraq, Colombia, Mexico, Afghanistan, Pakistan, as well as and in the cash hoards of the wealthy (some are buying gold with it, for sure!) This increase in base money is certainly not evident in the economy as a whole otherwise there would be more employment (putting more money and credit into circulation. Base money has increased but is not evident in circulation):

http://research.stlouisfed.org/fred2/series/BASE

See Steve Keen's interesting observation about base money and unemployment:

http://www.debtdeflation.com/blogs/2010/06/13/empirical-and-theoretical-...

 - There are too many assets, computer 'money', various forms of credit 'hedges' available to hedge agains inflation for it to take place. In a manner of speaking, 'credit (hyper)inflation' has already taken place in dollar-landia: within inflation- hedging asset classes; residential real estate and the S&P. China - with large amounts of cash in savings and fewer investment assets - is a more likely hyperinflation candidate. All of the hyperinflation experiences have taken place in cash- currency economies, not in finance- debt economies such as ours. The talk of hyperinflation is glib, not reasonable. This is not to say that our current finance system is 'hyperinflation proof', but the structure - with its instant hedging capabilities - does not really allow for it unless the majority of participants are willing to abide it. I can, for instance, invest $100k in about 5 minutes in a REIT stock - or buy Swiss francs and put the funds in another country. A person in Argentina or Zimbabwe (or the Weimar Republic) during their periods of default needed to go somewhere and get (increasing amounts) of cash daily; a physical chore that was - and is - inherent to currency inflations.

 - Finally, the US already has a hard currency, the dollar, which is freely exchangeable on demand for a valuable (invaluable) physical good, crude oil. All the characteristics - the evil - of hard currencies will be visited upon those who have a) no experience with hard currencies and b) are not careful of what they wish for. Hard currencies (and inflation, too) are matters of public perception. The hard currency operating schema is simple; money is valuable (and less to be found in the future than currently) so it will be hoarded (for a rainy day). As money vanishes from circulation, business  collapses. Demand for goods and inputs decline (crude oil), prices decline adding more reason to hoard and the cycle amplifies itself. Central banks cannot print their way out of deflation as the issue is either hoarded (by banks and companies) or the appearance of currency triggers runs (Roosevelt added currency to the US banking system by declaring a week- long band holiday and the currency transfer was done in secret). Hard currencies are deflationary. A little bit of dollar scarcity goes a long way; note the effects of dollar preference in Europe. It is the euro and pound that are 'trash'. Since the dollar is the pathway to crude oil, the maintenance of modern economies requires dollars.

It's not that I'm an ideological dollar bull, please substitute another currency for dollars in the oil transaction or gold. The outcome is the identical. Scarcity of oil drives the value connection between crude oil and a currency - any currency, in this case dollars. As crude/dollars become more scarce their values increase, more will be taken out of circulation; the world's economy will devolve into the buying and selling of currencies to obtain dollars thence oil. As the dollar/crude pair becomes too expensive in real terms the waste- based industrialized economies of the world will simply grind to a halt.

This is the 'logical conclusion' of the process that began in 2000, (when crude prices more than doubled from $12 a barrel) and the business dependent upon cheap oil for profits began to  implode. The implosion has not ceased, is still continuing and there is no way to stop it (outside of putting four Saudi Arabias into production by next year or so). Gold here is no panacea. As in the early 1930's there is only one way out; back then economies went 'off gold' and eliminated gold exchange. We must do the same, go 'off oil'. Or, oil will 'off us'.

It's ironic that the empire will be destroyed by its currency.

Thu, 06/17/2010 - 03:13 | 418891 Arm
Arm's picture

Finally!  Sensible arguments.

I agree with most of what you say.  Would just challenge your perception that gold is money.  We would of course have to define money/currency.

Basically I see gold not producing any physical benefit.  Its value as a widely accepted means of exchange that cannot be inflated and that is resistant to destruction so it cannot deflate or decay either.  In a very real sense gold is like poker chips.  Its purchasing power is solely derived from at how many poker chips people want to price goods and services (which are true wealth). 

Of course, these are rather academic points.  The key insight which you also stated is that gold is priced in fiatco's.  People buy goods and services in fiatco's, so any gold holdings will have to be traded in and out.  This makes gold prices subject to fiatco availability.

I think by June next year a lot of the goldbugs will find the unpleasant surprise that their gold is priced 30% less in fiatco terms, eg. their brokerage statement.  They will of course still have the same amount of gold and may retain most of the purchasing power, but it will still be a shock

Thu, 06/17/2010 - 17:01 | 420218 trav7777
trav7777's picture

HUH?

GFD man, is u stupid?  Brokerage statement?  Who owns gold in a brokerage?

Money is whatever people agree it is, anyhow.

Gold is a real commodity, no more no less.  If I were to hold it it would be because I assessed the probability that someone would give me something for it to be high.  And because other commodities are harder to store (oil)

Thu, 06/17/2010 - 18:39 | 420399 Arm
Arm's picture

Actually, we agree.  That is precisely what I said.  Gold is not money.  Money is anything that people will agree to use.  Thus poker chips are money.  My personal IOU can be money if people believe in my credit.

And yes most every single retail investor holds gold in ETF/mutual fund form. Minted gold is a niche market.  Minted gold is held basically by three types of people:

a) Money launderers trying to keep their wealth away from formal financial channels

b) Investors who do not trust custodial arrangements at banks (or trust banks in general)

c) Collectors, but they only hold a couple of coins of each type.  We can neglect mentioning them

Thu, 06/17/2010 - 08:43 | 419080 Al Gorerhythm
Al Gorerhythm's picture

Gold is like poker chips? 

Please explain how the poker chips came into being and how gold coins come into being. Is wealth created when a dollar is printed?

I just came across a picture book for kids on the history of money and the life cycle of an Aussie $10 bill/note/credit.note/iou,. It shows the note being borrowed into existence by the government, being printed by the RBA and then delivered to a bank in an armored car. After being borrowed by a debtor it is then spent into circulation. The note is used for numerous transactions, lost in the street, blown by the wind and rain, found and spent numerous times again, until it is worn beyond acceptance and returned to the bank by one of the holders. On returning the note; he receives a brand spanker in exchange ( as there is no redemption. The bank earmarks the note for destruction. 

THE USED NOTE IS SHREDDED AND CHIPPED, THEN MELTED AND RECYCLED INTO ...... WAIT FOR IT......... A GARBAGE CAN. THE HORROR.

POKER CHIPS WOULD FOLLOW A LESS CIRCUITOUS PATH BUT HYPOTHETICALLY COULD END UP IN THE SAME PLASTIC MOULDING MACHINE. Ooops. Caps lock, but it works for me.

P.S. I would imagine that a paper/plastic bug would claim that the note was virtually indestructible, as it can so easily be replaced with a new one. (conveniently leaving out the destruction of purchasing power of all the preceding notes borrowed into existence.

Too many holes in your thesis, Arm. Keep reading. Keep learning. At some stage the penny will drop, as it did for me. 

Signing off. 

Regards.. Ex government believer and ex paper bug.

Al.

PPS As you state: Yes we do have to define what money/currency is.

What is your definition of a currency and what is your definition of money?

What is your yardstick? You numeraire?

You identifed the crucial question of our time but didn't follow through.

Thu, 06/17/2010 - 12:08 | 419530 Arm
Arm's picture

I don't have a gold pro or con bias.  For me gold is an investment not the holly asset goldbugs hold it out to be.

In academia the definition of money is contentious.  Some use the the term currency to denote the means of exchange, while reserving money to the underlying wealth.

I hold gold to be very much like poker chips in a casino.  Like gold there is a limited supply and it is also a tangible asset.  Also similarly, you cannot eat poker chips, and you cannot use them to build anything useful.  They have very little value in use.  However, poker chips are very valuable, because they are a socially recognized means of exchange (eg. currency).  In Las Vegas you can trade them for goods and services.  You can for example pay a hooker with chips.  The hooker prices her services based on the availability of chips.  You can easily reprice all the services of the casino based on the availibilty of this currency.  Thus, even though the poker chip is a  completely useless piece of plastic, it is still desirable because of other humans are willing to transact for it.  Poker chips also are "money".

 

Continuing the money analogy.  Imagine the casino was dishonest and saw that it was a defacto central bank (they are actually legally prohibited from doing).  It could decide to print new chips without having people deposit dollars for them.  The casino increased the number of chips, but the underlying wealth of goods and services would not change.  There would be the same amount of coca-cola behind the bar and the hooker can only service the same limited amount of customer per hour.  As the wealth base is unchanged you get inflation as the natural market reaction to the increase of chips without a corresponding increase in goods and services.

Poker chips, cacao nuts, and any good can be transformed into currency.  The advantage of gold as a currency is that it prevents there being a corrupt casino covertly printing more chips.  However, this is the ONLY difference.  Gold is not a special, quasi religious, asset. It is not the only means of exchange.  It has been historically used as currency ONLY because its supply cannot be easily increased and because it is relatively indestructible. 

When you understand this, you will see that gold can disappoint you because it is very much possible to buy it at a point in time when the exchange rate is not favourable (eg. gold IS subject to bubbles)

Thu, 06/17/2010 - 03:36 | 418896 akak
akak's picture

Even world central banks, almost all of which hold gold, and none of which hold ANY other asset aside from fiat currencies, would tend to disagree with you about gold not being money. 

Gold is NOT just useful as a means of exchange that cannot be inflated at whim by governments, but as a store of value as well, and also as a numeraire, a measure of value itself.  All three characteristics define the classic meaning of money.

And just what precisely is the basis of your doom-mongering call on the fall in the price of gold, by 30% no less, over the next year?  I will be surprised if its price rises less than 20% in that timeframe, myself, short of a fundamental reform of governmental finances and the monetary system --- but don't hold your breath waiting for either one of those to happen with the current crop of corrupt politicians and oligarchic kleptocrats in charge.

You have the Nadleresque knack for poormouthing gold and its price prospects even while  presenting yourself as ostensibly objective on the subject.  Clearly, you have an anti-gold bias that is impossible for you to hide.

Thu, 06/17/2010 - 00:18 | 418746 trav7777
trav7777's picture

I agree.  But you recognize that there is a paradox inherent?  Both the Fed and the USG *need* inflation.  Without it, both collapse.  To maintain the dollar's hardness will destroy the entities that promulgate the dollar.  These two outcomes are orthologous.

The dollar/oil peg will have to be broken, because the decline in oil supply *forces* deflation fatal to the credit base.   Even if everyone wanted to, there is no way to borrow more dollars to create more oil.

Thu, 06/17/2010 - 00:24 | 418756 steve from virginia
steve from virginia's picture

Of course, they operate upon a constantly shrinking base. What it the Xero Hedge world view?

"It's all a Ponzi, folks!"

BTW ... if you can think of a way to break the dollar/oil peg, I would love to hear it!

Thu, 06/17/2010 - 16:57 | 420204 trav7777
trav7777's picture

It will eventually be repudiated.

Real Bills will become the manner in which real commodities are traded.  At some point, for whatever reason, Ayrabs will start demanding something other than dollars.

As things stand, the SOLE thing maintaining the oil/dollar peg is the House of Saud.  If that falls, it is over in a hyperinflationary supernova.  Think about that for a second:  our entire petrodollar rests on the existence of a bunch of degenerate royals in the ME desert.  That is its achilles heel

Wed, 06/16/2010 - 23:54 | 418712 Kina
Kina's picture

I wonder how shares in a large solid (known reserves and production schedule) gold miner would go during hyperinflation?

 

Wed, 06/16/2010 - 23:47 | 418702 dumpster
dumpster's picture

we live in a world of what is

most seem not to be able to chew gum and walk at the same time

the fact  those that bought gold at 325  and silver at 4.25  are doing just fine

in the future keeping the eye on the ball,, will be important . just like any investment in the markets

those that pretend  that gold is a relic... just missed a real wealth building opportunity ,

and dennenger postulates that Sinclair is way off on his 1600 gold call for Jan 2011,, we have date and time .  so lets see who wins the bet , until then do not count your chickens before they hatch .

keep your little green backs ,, see what transpires

until then your whistling into the wind. and sucking the big pickle  

 

Thu, 06/17/2010 - 00:24 | 418755 DoChenRollingBearing
DoChenRollingBearing's picture

akak, LeP, dumpster,

We're pretty much on the same page here.  Although, dumpster, I do keep a righteous amount of FRNs in case they holiday the banks and for buying anything urgent (airline tickets, ammo, etc.).

Nadler screeches 10% gold is too much!  Well, I do not know what is the "right" amount.  But, for me 6% - 7% seems about right.  I have a lot going on...

I have been buying gold for a long time, but alas my buying over the last few years has been bigger than my buying when gold was $300 - $500.

So, Mr. IRS man, my average cost on buying my gold (plus premium remember) is about $1100...  If gold goes up to $1650, well then the average is $1400, sir.  If it goes to $5000, well then my average is $4200, sir.

Thu, 06/17/2010 - 00:51 | 418798 LePetomane
LePetomane's picture

In the short term, I'm more interested in oil.    Which offends my environmentalist dogoodnik senses.  While at the same time, are bashed to bits by the daily affirmation that the convenience places a hefty premium on any commodity.

Wed, 06/16/2010 - 23:46 | 418697 trav7777
trav7777's picture

You can't go BANKRUPT owning gold...it is an ASSET, STUPID, not a fucking LIABILITY.  WTF is Douchinger's problem?  Oh right, he's a leverage casino gambler.

So HE could go BK SPECULATING on the PAPER price of gold using leverage.  Anyone who REALLY buys gold CANNOT go bankrupt even if the price drops to 0.

Wed, 06/16/2010 - 23:44 | 418691 Kreditanstalt
Kreditanstalt's picture

KD has now responded to this post.  But he is mistaken about the nature of the coming FRN collapse...he says...

 [The currency you have now (dollars, in the case of the US) will collapse. - Gekko] 

"Again, if you're going to predict this, you must both predict an event and a time or your prediction is not actionable."

But the collapse is a PROCESS, not an EVENT, and it behooves us to prepare along the way.  I did this morning: I bought three 37.5g USB bars at a 6% commission.  That's $1310 gold.  That's how certain I am that this PROCESS will continue.

Incidentally, why is "GOLD" under "metals" in his forums?  It's MONEY, not "a metal"...Then shouldn't the US dollar be under "paper"?

Thu, 06/17/2010 - 08:55 | 419105 casey13
casey13's picture

Predicting the exact time of the event is not possible as it relies on human psychology. When do the majority of the people decide that there money is no longer worth anything? When it happens the economy will go from deflation to hyperinflation faster than the majority of people can get out of their fiat currency. That is the big surprise throughout history. How fast it happens. It may not be prudent to have all your money in gold but it can be a (living on the streets) disaster for those that do not plan for this.   

Wed, 06/16/2010 - 23:11 | 418640 AVP
AVP's picture

GG: that was a most excellent read!

 

 

 

Wed, 06/16/2010 - 23:31 | 418677 Gordon_Gekko
Gordon_Gekko's picture

Thank you for your kind words.

Wed, 06/16/2010 - 23:04 | 418624 DoChenRollingBearing
DoChenRollingBearing's picture

The anti-gold people have never successfully (at least that I have read) said what is wrong with holding a portion of one's wealth in gold.

Anyone who has got some chips should diversify, I think we can all agree on that.

I don't know what is going to happen tomorrow.  I have some assets, and you bet I have some gold.  Am I saying you should have ONLY gold?  Not at all.  Although Chumba (110% in for gold) might claw me for that...

I just cannot understand why people would not take out some insurance against .gov misbehavior or a currency catastrophe.

Wed, 06/16/2010 - 23:37 | 418680 LePetomane
LePetomane's picture

Hi.  I've been wrestling with this question for a couple of months as well.  The smart money has either been made back starting back in 2002 and the dumb money from the last peak in the 80s traded out by the mid 00s.   On an inflation adjusted basis, it makes sense to accumulate gold.  But a 20% correction as the result of profit taking / Central Bank Dump (think BofE 1999-2000) is possible.

Wed, 06/16/2010 - 23:39 | 418663 akak
akak's picture

Your argument is an utterly sound one, DCRB.  To take it in another form, it reminds me of the vapid and limp "10% in gold" (but no more!) rote advice given by Jon Nadler --- who then has frequently gone on to malevolently and hyperbolically attack those who publicly advocate putting more than that into gold over the last three or so years.  Left unsaid in his weak-knee'ed "advice" was what to do with the remaining 90% of one's assets in this time of financial and monetary upheaval.  Nor do I hear him, or others, attacking those financial gurus today or in the past who advised their clients to hold most or all of their assets in equities or bonds --- those are "OK", and apparently officially-approved assets, but anyone who would DARE hold 30% or 50% of their assets in gold at any time are "Radical Goldbug Extremists" who are fair game to be mocked and ridiculed at great length and on an almost daily basis by the mouthpieces for TPTB.

Why is it "Only 10%, maximum, in gold", and never "Only 10% in equities", or "Only 10% in bonds"?  What authority has made that determination for all time, in all places, for all people?  I frankly find anyone who has 50% or 75% of their net assets in equities or bonds today to be insane.

Thu, 06/17/2010 - 17:15 | 420245 Island_Dweller
Island_Dweller's picture

If you're supposed to just buy 10% and forget about it as Nadler always says, then why does Kitco need a Precious Metals Analyst? er Shill?

Thu, 06/17/2010 - 17:27 | 420275 akak
akak's picture

Another excellent point.

Furthermore, aside from Nadler's bland admonishment to buy and hold up to 10% of one's assets in gold, he has NEVER, not once in four years, been either brave or honest enough to even halfway suggest that anyone consider buying more than that, in the face of a decade-long bull market in gold that he still adamantly denies is even occuring!

Why does ANYONE give that pro-bankster bastard even a shred of credibility at this point?  Yet the corporate-controlled media continue to trot him out every time they want to publish a piece slamming gold, its owners, its advocates and its prospects.  Come to think of it, I guess I just answered my own question.

Wed, 06/16/2010 - 23:15 | 418614 Gully Foyle
Gully Foyle's picture

Jesus can't these bitches just have a slap fight and get it over with? Really I can't picture financial types as anything more than Bugs Bunny stereotypical bankers. Prissy little men with coke bottle glasses who stutter and can barely look you in the eye. Michael Douglas in Wall Street was the dream of manhood illusion they embrace. Except maybe the guy from Economic Disconnect who is Boxing these days.

As far as Gold goes, if every other market is being brazenly manipulated why the fuck assume Gold is not?

Eventually we ALL will be fucked. It doesn't matter if you have Gold or Pigshit. None of this will end well.

Wed, 06/16/2010 - 22:52 | 418592 Rusty_Shackleford
Rusty_Shackleford's picture

Nailed it again GG.

Kudos.

Wed, 06/16/2010 - 23:30 | 418676 Gordon_Gekko
Gordon_Gekko's picture

Thanks Rusty.

Thu, 06/17/2010 - 08:35 | 419069 Snidley Whipsnae
Snidley Whipsnae's picture

Gordy, you are doing a great job.

Denninger's weakness is his belief that MV=PQ being an absolute truth and beyond question. The 'quantity theory of money' is very questionable, and resorts to such assumptions as 'rationality of markets' and disregards the history that people and markets often do irrational things. If all people had the same information and acted on it in a rational manner, markets would not exist because all would place the same bet on the same asset!

Denninger is a fair math guy (left brain function) but does not seem to grasp that people and markets are not always rational (right brain function).

If people and markets were always rational then the Fed, Treasury, all governments and some people, would not write CDSs that would pay if a soverign, a bank, a corporation, are destroyed...neither would they allow the manufacturing base of the US to be destroyed in favor of enlarging the FIRE sector of the US economy...The enrichment of a few at the cost of the many.

Denninger's basic arguement/premis is that all people and markets should conform to MV=PQ and that all people and markets should act in the interest of the greater good, all the time. His rants continually lambast those who do not conform to his view of rational behavior.

Denninger is on a fool's errand. 

 

 

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