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Presenting A Scientific Theory For The Fair Value Of Gold (With 88% Accuracy)
The greatest mystery in finance is and always will be what the fair value of gold is. Unlike stocks, where fair valuations are usually based on some multiple of cash income, earnings, or dividends, gold has no inherent dividend, nor a positive carry, and thus value is confined the realm of the intangible. Some pundits have considered the fair value for gold a price which covers the currency in circulation in a given country on a dollar for dollar basis. Others attribute a floating valuation to gold such that is convertible to any asset at a specific ratio, to account for inflation over the ages. Yet others dismiss any valuation attempts outright as hogwash, claiming that gold has any value to it solely due to insane and deluded gold bugs manipulating the gold market ever higher, contrary to the earnest attempts of shorters such as a JP Morgan and Sempra who are merely trying to keep gold priced as fairly (i.e., closely to zero) as possible. Due to the various (and numerous) conflicting opinions, we read the following paper from University of Albany professors Faugère and Van Erlach "The price of gold: a global required yield theory" closely. In it the authors observe that gold is priced to yield a constant after-tax real return related to long-term productivity as defined by real long-term GDP/capita growth.
While we sincerely recommend that anyone who has even a passing interest in gold read the paper in its entirety, we present the key sections.
Assessing the fair value of gold largely remains a mystery in Finance. While in some instances the existing literature has found empirical relationships between gold prices and macroeconomic variables such as inflation and exchange rates, little evidence has been offered for connections between gold and other asset classes. To date, there is no comprehensive theory of gold valuation showing how inflation, exchange rates and other asset classes may together affect gold pricing; or how gold and other asset classes may be affected by common underlying factors.
In this paper, we offer a gold asset pricing theory that treats gold as a store of wealth. We demonstrate a theoretical and empirical link between gold price, inflation, and foreign exchange rates and the general valuation of the stock market. Our approach is based on a generalization of Required Yield Theory (Faugere-Van Erlach [2003]). Required Yield Theory explains the valuation of financial assets via investors’ general requirement to earn a minimum expected after-tax real return equal to long-term GDP/capita growth.
We hold that since gold fulfills the unique function of a global store of value, its yield must vary inversely to the yield required by any financial asset class, thus providing a hedge in the case where such assets are losing value. Our theory explains about 88% of actual $USD gold prices and 92% of actual gold returns on a quarterly basis, including the peak prices of gold, over the 1979-2002 period.
The extant literature has well documented empirical relationships between gold price and global macroeconomic variables such as inflation and currency exchange rates. For example, Sjaastad and Scacciavillani [1996] show that after excluding the sharp rise in gold prices in the early 1980’s, about half of the variance in $USD gold prices during the period 1982-1990 appears to be accounted for by fluctuation in real exchange rates. Ghosh, Levin et al. [2002] find that gold is mostly an inflation hedge in the long run. They further attempt to justify short-term gold price volatility by appealing for example to changes in the real interest rate and $USD vs. rest of the world exchange rates fluctuations.
On the other hand, the empirical record weighs heavily on the side that gold pricing apparently is related neither to GDP growth nor to other asset classes. Lawrence [2003] concludes that there is no statistically significant correlation between real returns on gold and changes in macroeconomic variables such as GDP, inflation and interest rates, and that the return on gold is less correlated with returns on equity and bond indices than are the returns of other commodities. Standing in contrast to the above findings, Coyne [1976] focuses primarily on gold as a hedging instrument and finds that for periods in which the gold market was free to fluctuate, gold tended to move in a direction opposite to the price of other financial assets.
Sherman [1983] makes a noted theoretical attempt at demystifying the pricing of gold. He uses a linear regression model to estimate elasticities of demand for gold. The key explanatory factors are exchange rates and unanticipated inflation proxies. While several useful relationships are studied, these relationships are assumed a-priori and not theoretically derived.
Barsky and Summers [1988] focus on the Gold Standard period and develop a general gold valuation model that views gold as a non-monetary durable good providing a stream of “consumption” services over time, like Jewelry or objects of art. They theoretically show a relationship between the inverse of the log of gold price and the real interest rate, which seems to hold empirically over the period 1974-1984. In their model, gold is a non-depreciable asset earning a yield equal to a government bond yield.
However, by rooting their model in the Gold Standard era, and extending their approach to the current era, they are not addressing the nature of Gold as a store of value, that is, a hedging instrument against inflation and the collapse of the value of other asset classes. In this paper, on the other hand, we undertake the analysis of gold along this exact line.
A brief overview of the proposed Required Yield Theory.
Throughout the history of civilization, gold has been the single most important global store of value. To this day, it fulfills this unique function. For the purpose of extending Required Yield Theory to gold pricing, we postulate the following: 1) The global real price of gold essentially is a real P/E ratio for gold, where “earnings” represent purchasing power or a global price index. 2) The global real price of gold must vary inversely to all other main financial asset classes’ real P/E to preserve the real value of any investor’s capital against adverse movements in the values of financial asset classes.2 3) Law of One Price: exchange rate fluctuations must impact local currency-denominated gold prices to eliminate potential international gold arbitrages. 4) Mining supply must be stable in relation to supply movements in the aboveground stock and the worldwide stock of gold per capita should not increase in the long run.
Condition 1) recognizes that even though gold does not produce actual earnings, its primary purpose is to provide a stream of services by maintaining real purchasing power over time. The same unit of gold can serve to purchase a representative basket of economic goods repeatedly. We define the forward P/E for gold as the price of gold divided by expected next period’s GDP deflator. It is easy to check that the real price of gold is the same as the real forward gold P/E ratio.3 Condition 2) insures that gold behaves as a store of value, that is: capital flows to gold are dictated by changes in the minimum expected return achievable by other asset classes. It is important to emphasize that gold per-se does not require the same yield as other assets, as it stands outside of the conventional realm of investment goals, and acts mostly as a global hedging tool against financial downturns, and inflation.
Hence, our theory postulates that movements in the global real price occur because of the precautionary demand for gold, which largely depends on changes in the inverse real P/E (or required yield) of other assets classes combined. A consequence of this postulate is that a decline in the value of the stock market index does not necessarily entail flight to gold when, for example, expected stock earnings are also falling to maintain a constant real P/E ratio. On the other hand, flight to gold will happen when stock market prices are dropping faster than expected earnings due to acceleration of inflation for example.
In addition, since gold is a global homogenous durable commodity its price must be equalized across countries after currency conversion, which is stated in condition 3). Finally, condition 4) states that the supply of gold must be stable so that investors’ precautionary motive is fulfilled without major price movements driven by supply shocks. Indeed this condition seems to be characteristic of the precious metal mining industry. Later on, we provide a formal argument that shows that this must be the case under our theory.
The authors provide the following useful brief overview of the gold market (obviously the price/oz is as of the paper's writing ca. 2005. The current price is approximately 3x the $380/oz used in this calculation):
The total aboveground value of gold in the world is currently around $1.9 trillion at $380/Troy oz. ($380/Toz. x 32,150.7 Toz./Metric ton x 155,000 Mtons) compared with the approximately $15 trillion value of the US stock market and $22.4 trillion for US non-financial debt outstanding. Gold mining is a $31 billion per year industry with gold prices at $380/Toz. Given that the price volatility of gold is around 10% per year, it is easy to see why production companies heavily engage in hedging their future production. Ibbotson, Siegel and Love [1985] estimated that gold bullion represented 5% of total investable world wealth. Today, total world gold bullion represents 5.1% of the combined US stock and bond capitalization of $37.4 trillion; and a thus a much smaller proportion of total world wealth than the Ibbotson et al. study.
The rate of growth of gold extraction has essentially matched world population growth over the past 30 years. IMF data show that the more developed nations’ population grew a compounded 1.45% from 1972 – 2002, while total world population grew a compounded 1.89%. The global accumulated stock of gold grew from an estimated 98,000 tons in 1974 to 145,000 tons by mid-2001; implying a 1.46% growth rate. Thus, the world stock of gold per-capita has remained relatively stable over this period.
A preliminary empirical investigation of the price of gold reveals a non-trivial connection between real gold prices and the US stock market. Figure 1 below shows that gold’s real price varies inversely to the S&P 500 P/E, and thus with the earnings-to-price ratio. Figure 1 shows the high correlation between indexed USD real gold prices, inverse S&P 500 forward P/E ratio and 10-year T-Bond, over the period 1979-2002.
The theory we develop below predicts and explains this high level of correlation based on viewing gold as a global store of value.
Cutting to the conclusion, it appears that the authors' theory provides a valid basis for extrapolating gold prices, beyond mere voodoo and predicting prices based on cow manure patterns.
We have extended the Required Yield Theory (RYT) developed by Faugere-Van Erlach [2003] to value gold and to determine its return. RYT states that since global assets are priced to yield a global constant real return, and since gold is a global store of value, its price will vary directly with the global required yield and the global inflation rate. In the course of developing this asset valuation model we introduced a new exchange rule parity based on required yields comparisons across countries.
Specific predictions include: 1) the real price of gold varies proportionately to the change in long-term economic productivity as measured by GDP/capita growth. 2) Real gold prices vary proportionately to changes in the foreign exchange rate (direct quotation) when the domestic required yield is constant. 3) When the foreign exchange rate is constant and there are no major geopolitical or natural crises, real domestic gold price increases with domestic inflation. 4) When our new exchange rate parity rule holds, then effectively the real domestic price of gold is mostly determined by the domestic required yield. This entails that foreign exchange effects will impact the domestic real gold price to the extent that equalization of required yields is not taking place worldwide and/or that PPP is violated as well. 5) In the long-term, the gold per-capita supply remains constant. 6) The average long-term absolute price of gold is marked-up cost where the profit margin is given by the global average long-term per-capita rate of GDP growth.
While we suspect that central bank activities, hedging activities, supply/demand fluctuations, global real GDP growth changes or changes in global income and capital gains tax rates, affect gold prices as well, the valuation approach developed here performs very well absent these factors, with over 92% accuracy in predicting US Gold returns over a 23-year period. We leave an investigation of the role of these other factors for future research.
As for the practical implications of these findings:
In the long run, the gold mining industry’s real profit margin is constant and equals the real per capita productivity. The price of gold, on average, must be the average production cost plus a constant mark-up. Furthermore, in order for the real value of gold to be maintained on a per investor basis, the stock of gold has to grow at a rate that can be no greater than population growth in the long-term. If the supply of gold grew at a lesser rate than population growth for reasons other than depletion of the exhaustible ore, gold price would grow faster than inflation and the quantity demanded for gold would drop. Eventually the supply of mined gold will dwindle, which will drive prices up unless world population experiences zero growth in the foreseeable future. In that circumstance, far off in the future, a substitute medium of storing value may be discovered and used.
Another prediction of our theory of gold pricing is that the decrease in proportion of gold total value as compared to world wealth is explained by RYT in the fact that relative to financial assets, the long-term nominal value of gold must increase at the inflation rate, whereas the value of other assets rise with inflation plus real productivity. Thus, the proportion of investable wealth declines at an annual rate equal to real per share earnings growth or GDP/capita growth.
While we are certain that this paper's findings will not even bring the massive divide between gold fans and pessimists even an inch closer, having a solid, reproducible basis in which to reproduce the authors' results could be sufficient for some crazy quant to put together a HFT algo which will trade gold based on the postulates presented herein. And with an 88% prediction rate (absent major outliers events), we are confident that this could be an appropriate problem to reverse engineer (if it hasn't been already).
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utility value , lol
1 gold coin = power to make people feed me a good meal
10 gold coins = power to make people feed 10 people
100 gold bars = power to make people work for me earning me more gold bars
200,000 gold bars = power to make people steal for me
400,000,000 gold bars = power to redefine government
joe kelly
The correlation falls apart in the last ten years, doesn't it? So completely that if you had followed it in trading, you would be broke by now.
In fact, the 88% correlation depends completely on matching the long bear market in gold with the long decline in the ten year yield. Cause and effect? Perhaps. I have looked at this same correlation, and others, many times myself over the past ten years.
Since 2001 that correlation is completely off. Has something in the market place changed? Is the MARKET price for gold telling us something, that a long trend has changed? You know, the price determined by demand and supply.
Or perhaps one can just dismiss the message from the market as 'a mania.' An odd mania really, that has so little participation from the public even now.
If one does understand why the correlation of the professors has fallen apart over the last ten years, they will know something that these professors do not apparently know, or choose not to tell because it adds complexity and a twist to their neat little theory.
This is an old theory, with a little more frosting on it. It ignores key inputs to the model, exogenous to their assumptions about relationships.
Larry Summers paper about Gibson's Paradox is a little more meaningful, but again polluted by the same bad assumptions to an extent. It is kind of a modern alchemy, tied into the notion that if we tweak one end of a correlation, we can affect the direction of the other. Gold price and interest rates.
One may as well kill the canary in the mine, and rest easy knowing that the noxious gases will therefore not appear.
Excellent observation.
Larry Summers is the canary killer. Bad news for anybody who is a coal miner.
Here, for example, is a similar approach to the issue of pricing, in this case equities, published a year ago.
http://seekingalpha.com/article/113772-s-p-500-risk-and-cost-of-capital
The point I am making is this. Long relationships based on dollar assets from 1971 to 2000 are likely to be broken, and gold is signalling this with a vengance.
If only predicting prices was so easy.
"If only predicting prices was so easy."
Why whine about pricing on an article about value?
Actually, in looking it over yet again, I think the paper is moldly leftover cake, smeared with cheap frosting.
And I am disappointed with ZeroHedge in putting it forward with such a blatantly misleading headline.
Absolute rubbish.
Something interesting.
Somethings up in the Gold market, IMF & the treasury
Blogster ^ | 2-19-2010 | JoAnne Moretti
http://www.freerepublic.com/focus/f-bloggers/2455642/posts
As Gold is an international commodity why is the paper using the S&P? also a suit will cost a lot less in India as in Sawille Row. As and engineer using finite element modelling I can confirm that the output is only as good as the input.
Question for all of you gold bugs:
If I were to acquire some gold or silver for asset protection purposes and a hard asset to own in the event of a $USD collapse, what would be the proper demonination to own? (1/10 ounce, 1/4 ounce, 1/2 ounce or 1 ounce gold) It seems like it would be prudent to own smaller demoninations to use for purchases if needed, however, the commission of buying ten 1/10 ounce coins is substantially more than buying one 1 ounce coin. Thoughts? Or would it be better to own 1 ounce silver coins for this purpose or a sampling of all of the above...
Historically, one ounce silver rounds used for
month to month expenses. Even 1/10 ounce of gold
is worth over 100 bucks.
1 ounce gold coins used as a store of wealth.
In US, PM purchases over $1,000 not taxed, don't
know why
Try and get a good working relationship with a coin dealer
How much silver you buy generally depends on how much
money you will be investing. You probably don't
have room for a half million in silver,but a half
million in Gold fits in a large peanut butter jar
(don't do that though, first place thieves look)
Buy Silver!
In "survivalist" circles the gold standard, pardon the pun, is pre-1964 US silver coinage (often I've seen dimes recommended, but quarters seems to be what's out there if you're buying bags from a dealer.)
If you buy silver in $1,000 face value bags, the premium isn't too bad.
Check out http://www.coinflation.com/ for current valuations. It's pretty interesting that a quarter bought a gallon of gas or so in 1963 when they were last minted, and that same quarter, converted to FRN, buys a gallon of gas.
Thank you, Jesse, for your comments and your final conclusion.
I was going to come back and conclude according to your final comment (I was anon 238654). You did it for me.
(Am awaiting my ZH identifier . . .)
I am DoctoRx.
(Not as imposing a phrase as Chumba's!)
My vote is squarely in the good suit camp here, but I'm also partial to the gallons of gas/oz model someone else mentioned.
Gold is truly a most attractive store of value, being shiny and dense with a warmth that is tangible in hand.
I suggest to anyone to purchase at least a 1 oz coin and play with it all day. You'll want more.
-MobBarley
ps. Do you think 300 oz of gold for a Lamborghini is a fair trade?
Citi Bank is telling customers today ( 2-20-10 ) " if you want to pull a lot of cash out of our bank, it might take up to 7 days for you to get it.." this is big news... !!! It tells me they expect a
" run on the banks" sometime soon..
That is very interesting news. So, half hour ago I went and pulled another $500 from my (BofA) ATM.
Maybe Monday I will pull a few thousand out, then buy gold Tuesday! Could be a nice week!
the long and short of it.
on zero hedge some quality thinking
some clueless anal gold bashers ,
every time they open their mouth about gold .. they show forth a complete lack of understanding.
gold belongs to those who can both chew gum and walk
CENTRAL BANKS ARE ON THE DEFENSIVE | Gary North | February 20, 2010
quote
…On February 17, the President of the Federal Reserve Bank of Philadelphia gave a speech to the Philadelphia chapter of the World Affairs Council. Whenever an official gives a speech to a WAC chapter, we can be sure that the official regards this as an important speech.
The media do not talk about the World Affairs Council. There may be an occasional report about a speech at a WAC chapter, but there will be nothing said about the WAC: what it is, who belongs, and what influence it possesses.
The WAC has an important social function. It is the single most important membership organization for the nation's senior elite Establishment to communicate the latest perspective to the nation's elite.
…The President of the Philadelphia FED, Charles Plosser, titled his speech, "The Federal Reserve System: Balancing Independence and Accountability." This sounds boring. For those who understand the function of the Federal Reserve and its influence, the speech is not boring to read.
The target of the first half of the speech was Ron Paul. It was a warning against Ron Paul's bill in the House of Representatives that would authorize the Government Accountability Office to audit the FED. The House's leadership has kept the bill from coming to the floor for a vote, despite the fact that a majority of the membership has officially supported it, and despite the fact that a majority of the House Financial Services Committee voted for it, 43 to 26, in November 2009.
The FED has consistently opposed this bill. The official explanation is that this would in some way constitute interference with the FED's policy-making. This argument has never been clear. The fact that the General Accountability Office will verify the numbers in no way constitutes interference with FED policy, unless FED policy has been carried on under false numbers.
Nobody at the FED will say what is really at stake: an independent audit of the government's gold holdings, which are officially held for the government by the FED for safekeeping. If the gold is gone, or if there are legal claims against it by foreign central banks as a result of FED swaps, this would constitute fraud on a massive scale. (emphasis mine)
The real power in the FED has always been the Federal Reserve Bank of New York. In all textbook accounts of the years leading up to the Great Depression, the focus is on Benjamin Strong, the President of the New York FED. He set policy, not the Board of Governors.
The bulk of the world's gold holdings are stored in the vault of the New York FED. This includes most of the deliverable gold (99.9% fine) owned by the FED as trustee of the U.S. government's gold. The gold at Ft. Knox (probably coin melt, 90% fine) constitutes a second holding area, said to be 20% of the nation's gold. No one knows. It has not been audited since the early 1950's, not even by the private accounting firms that audit the FED on an annual rotation basis.
The FED demands secrecy. It proclaims that it pursues transparency, but it does not on any issue of substance.
Bloomberg News in November 2008 sued the Board of Governors under the Freedom of Information Act to find out which institutions received how much money in the October 2008 bailouts. The Board of Governors refused to comply on this legal basis: this would expose trade secrets of the recipient banks.
…From the point of view of economic analysis – the pursuit of self-interest – secrecy by the FED is required because the FED is the administrator of a cartel of government-protected commercial banks. The government has created barriers to entry, thus creating the cartel. Bankers do not want the government to police the cartel. They want their own agency to do this. They nominate the Presidents of the 12 Federal Reserve Banks. The big banks want to milk the cartel for all they can. They got the bailout money, and in their view, that ended any legitimate interest Congress may have in pursuing the matter…http://www.lewrockwell.com/north/north815.html
http://www.youtube.com/watch?v=MAyjNgcZgBY
http://www.youtube.com/watch?v=6IUIFrJlfwM&NR=1
This is digressing quite a bit, but I bet someone that is a member of ZH knows some Latin. So, how is the Latin phrase "celem dosce" pronounced? Sell-m dos-a?
Thanks in advance!
Quite some diligent work! My view: There is a common misconception as if gold had "risen" in price. Actually, the dollar (and other currencies) have "fallen in gold", see the twenty fold increase (inflation) in the Fed money supply. That said, gold is still much undervalued (or rather the dollar etc. OVERvalued, a simple rule of three). So there is surely no such thing as a gold bubble (http://crisismaven.wordpress.com/2010/01/24/do-we-see-a-gold-bubble/).
I offer the following to this discussion group other than my usual "Never underestimate the replacement power of equities within an inflationary spiral":
As an "old guy" (57) having joined the investment industry in the late 70's after a U.S. midwest education (St. Louis U.), I offer this: when all of the DATUM provided by a "tainted source" (government) is used simultaneously in order to create "concensus opinion", all conclusions are false and concensus is irrelevant.
Owning gold is a very personal choice and has nothing to do with "quant analysis" because when the lights get shut off and the furnace has no fuel, one needs to survive. Financial survival can be engineered only if one has been able to ascertain where one sits on the slope of the Pyramid of Needs. If you are in Asia with two million American dollars and three servants earning $3 per day, you are fine. If you are in NYC with two million American dollars, you have about a three-year mine life.
All you 30-something MIT quant wizards have to understand that the entire data spectrum is skewed beyond fucking belief. The Treasury is buying every auction since last year in the most incredibly massive Ponzi-scheme in world history. They caught Bernie because he was too tired to close that last sucker with the $2 trillion that would have let him to ride comfortably into another lifetime. The Fed and the Treasury AND the Bank of England and the EuroZone are ALL in one massive circle-jerk of deception and Ponzi-chain financial sexual acrobatics.
So do your discounted net present value analysis of gold and use Alpha and Beta and Gamma and Goofie and Minnie and Mickey with your borrowed Casio calculators and tell me what gold is worth.
I simple own gold as a crucifix. I also have Holy Water at my night table, in case a vampire squid visits me during the night. I love hockey; I love blond women; I love life. I dream of free markets and the Death of the Plunge Protection Team and the short squeeze of all-time for J.P. Morgan and the Comex Silver market. I have great admiration for Goldman Sacks while I have ZERO admiration for ANY politician in ANY country.
I also like this ZERO HEDGE forum as a means of venting.
So thanks.
right on brother!
Classic. The academics keep trying, often get a little closer, but whoosh - miss the target every time.
I've been watching those cash'fer'gold ads and short-lease shopfronts build up rapidly over the last six months, just waiting for that day when they have sucked every last gram out of the demented public and can no longer profit. When those ads stop running, you know the remaining gold in public hands is waiting for higher prices.
The scrap market won't be far behind on the road to exhaustion. Just try eBay for 'scrap gold' to see whats happening there. China and southeast Asia have noticed you can rip vintage gold-bearing chips out of pre-1990s equipment and sell them a piece at a time to small scale 'refiners' in the west. Only the older electronics yield gold in worthwhile quantities - gold was largely replaced in tech when the price started going up, so the supply of scrap is finite. If you don't believe that - try asking a refiner to process some 'recent' computer parts for you. They'll probably send you packing. Oh, and refiners won't sent you the gold from your junkpile. They keep that, and you get a cheque - a bit like cash'fer'gold.
When my friend calls our local bullion dealer (thats his idea of fun, no - really), they are always 'waiting for inventory' on at least half of their product line - and increasing. Importing is still an option - as response I've been met with more than once on this topic - but that's already getting into customs and fees territory. And our customs office really do like their fees. If things continue here on their current path, it may not be long before gold and other value stores receive a nasty import tax anyway, or we experience a free mandatory cash'fer'gold 'conversion' service at the border, to save us the bother.
Gold is slowly, slowly going into hiding. History repeats.
I dunno - what's the fair value of an insurance policy?
There's no literal value in money, but if there is, its in the eyes/minds of the beholder and her onlookers
Of course, this paper assumes that there are no "outlier" events. You could argue that we've had a small one or two in the last 10 years and are heading for several larger ones over the next 10 years...
Considering that GLD didn't launch until 2004 (the same year the Rothschilds withdrew from the London Gold Pool), much of this paper is based on an old paradigm that no longer exists. The alchemists will impose their will until they can't.
thanks again for great reading!!! shld we move to kinda 'gold opec' ?
what backs the value of gold? caesar's desire for it? it's utility as jewelry and electrical conductor? the desire of goldbugs to want it?
why not back currency with paintings? you can always give the painters the ability to create more wealth by giving it their best shot.
you could standardize exchange rates for the going value of a monet painting in each currency and get the relative value.
currency is a means of exchange. it is not a commodity. it's value should prevent inflation and deflation by managing the supply to meet demand (growing population, economic productivity). gold makes this difficult since you can't print it. furthermore, the people with gold get to create the wealth and charge interest on it.
gold fiat is like debt fiat. debt fiat allows the banks to profit and it's inflationary nature checks savings, destroying value in those who hold. gold fiat allows the gold bugs to profit and it's deflationary nature checks lending and wealth represented in capital goods and slowly prevents people from working at all. both gold fiat and debt fiat are a parasite on the economy.
paper fiat is the only solution though i have formulated a georgist land fiat which is exchanged on a bretton woods systems and originally backed by federal reserve notes until it is converted into real property by using federal reserve notes to buy real property and sell exclusive rights with the agreement that 80% of the land value would be paid in rent to a member bank. member banks would be non-profit and belong to a non-central central authority who would manage the fiat and provide centralized government functions. the member banks would represent and serve local economies with board and chair being elected by each person who has an account by popular vote for the chair and proportional representation for the board. the member banks would vote for chair and board of the central authority. member banks power would be based on number of accounts with responsibility for funding based on amount of deposits. they would provide local government functions as well. they would have full transparency except for private account activity.
funding would be provided by monetary expansion, 80% land rents, and a difference between the savings and loan rates. being non-profit, the difference between savings and loan rates would be minor.
the central authority would have a bill of rights written as by-laws. by-laws could only be changed of the central authority through both super majority vote of the governed and super majority vote of the member banks, thus limiting growth of the government and limiting influence of special interests and large campaign funding. member banks would be governed in the same manner with local by-laws requiring super majority vote of the governed, the board, and chair.
it would be a agorist, georgist, and rothschildist (!) method of bottom-up government through banking.
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