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Windmills, Paper Tigers, Straw Men and Fallacious Fallacies

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Published : January 04th, 2011
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Category : Gold and Silver





The essence of a straw man argument is the superficial misrepresentation of statements taken out of context. And here, frankly, there is a lot of context. This is one of the reasons I do not actively promote, submit or publish my posts anywhere but here.

There are a few spotlight sites that link or repost articles of their choosing, and I have granted permission to anyone who has asked. I also have not objected to those who don't ask, like Zero Hedge. But I do not put them out there myself because I believe my writing is something that you, the reader, should come here to read because you want to. It is not the type of writing that should be placed in front of your face.

I'm not out there tilting at windmills. When was the last time you saw me write "End the Fed," or "support this bill," or "support this movement," et cetera. Never? That's right, never. And that is because I am simply reporting on the choices the free market has already made – developments that may not be so obvious to the interested parties in our various "hard money tribes."

My argument is that the choice of gold over silver is a free market choice that has already been made (silverbugs notwithstanding). Mr. Market always wins in the end and the CBs are aware of this, and they have already prepared for it to be so. The direction (up) and the medium (gold) are already baked into the monetary cake. The only unknowns that remain are magnitude and timing. And the problems with today's monetary system and the global financial crisis can all be plausibly explained through the context presented in this blog.

I had to laugh at all the people who described my Focal Point post as too long, long-winded or verbose. Obviously they haven't read much FOFOA, and therefore have little context in which to understand my meaning. Yet at the same time, they felt it was a threat, a paper tiger that needed to be slain, a straw man that needed to be put down.

But can you see the difference in what I put out there? I don't sell my words. I have no advertising so I am not beholden to anyone else who has something to sell. I do not try to place my words in front of people who did not make the conscious choice to read it. I do not advocate any action that will affect or coerce someone else (like busting a commodity market).

The only action I advocate is personal action, like purchasing power preservation. I also advocate the personal action of expanding your understanding beyond the standard dogma you find everywhere else, which I suppose makes me quite unique.

Now let's quickly run through Mish's "FOFOA Fallacies." I'll try to keep the incomprehensible babbling less verbose and conflated in this one, so as not to waste too much of your valuable time.

FOFOA Fallacy #1: "So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

Mish says, "No we don’t." Then he quotes Murray Rothbard and sums it up with, "The key point above is that an increase in money supply confers no overall economic benefit. Over time, money simply buys less and less."

"Tolbiny" offers the following excellent rebuttal:

Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time- there is a basic minimum amount of money that is needed for something to even function as money. Take the quote that Mish uses from Rothbard and compare it to FOFOAs quote.

Rothbard Quote:
Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

FOFOA Quote:
"So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

There is no contradiction between the two. Mish is interpreting FOFOA as saying that we need money in UNLIMITED amounts, but FOFOA clearly says we need it in UNRESTRICTED amounts. The difference here is clear- for FOFOA the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy. This does not mean that expanding or contracting causes more economic growth, but that it allows for economic growth.

In my post I addressed "two simple, but seemingly, apparently impossible-to-comprehend concepts." The first was the splitting of the concept of "money" into separate units for separate roles. And in the medium of exchange role, I did use the term "unrestricted." But I also clarified it in this way: "Unrestricted by artificial constraints." A fixed, unilateral gold standard is an artificial constraint. A floating multilateral "gold standard" is a natural, free market constraint that allows for currency flexibility while, at the same time, exposing the exchange value (in gold) of a currency to the judgment of the marketplace.

FOFOA Fallacy #2: "Gold used as money represents debt."

Mish: "The statement is preposterous unless one allows the lending out of more gold than exists. That practice is clearly fraudulent."

Here, Mish misunderstood my meaning, which I clarified in my follow-up piece posted three days before Mish posted my "fallacies":

"Someone else said that I had money all wrong because I wrote that gold is debt. Perhaps I should have said that gold is "a credit" for future goods and services instead of using the loaded word "debt." (But, actually, I did that on purpose.)"

Again, "Tolbiny" sums it up well:

Mish again has no idea of FOFOAs point. Any money has to be "debt based" as FOFOA is using the concept. When I accept money as payment for a good I am only doing so with the expectation that I will be able to trade that money for something else in the future. This functions in the same way as debt does. I give you X and after time T has passed I expect to get Y in return. Savings is a deferment of consumption, but when you give your deferred goods to someone else and they are consumed by the 2nd party more goods have to be produced in order for you to enjoy your savings in the future. That is the debt part of money.

Had Mish understood my point, he would have noticed that he already posted a rebuttal under "FOFOA Fallacy #1," the Rothbard quote:

Murray Rothbard: "[Money] is not a useless token only good for exchanging. It is not a “claim on society”. It is not a guarantee of a fixed price level. It is simply a commodity."

I should probably parse this Rothbard quote in defense of my statement because even though Mish didn't use it in that context, it still fits. But first, here's a thought from Friedrich A. Hayek posted on the Mises Institute website:

"The gold standard is a mechanism which was intended and for a long time did successfully force governments to control the quantity of the money in an appropriate manner so as to keep its value equal with that of gold. But there are many historical instances which prove that it is certainly possible, if it is in the self-interest of the issuer, to control the quantity even of a token money in such a manner as to keep its value constant.
"I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value, provided both the issuer and the public understand that the demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind.
"I have no doubt, and I believe that most economists agree with me on that particular point, that it is technically possible so to control the value of any token money which is used in competition with other token monies as to fulfill the promise to keep its value stable."

An interesting thought from Hayek: A medium of exchange whose value comes from its ability to serve as a medium of exchange, independent of any backing or direct convertibility. Essentially a "useless token only good for exchanging." This is one half of Freegold, or "Reference Point Gold," by the way.

Now let's take a closer look at Mish's Rothbard quote and see if there is really any contradiction between it and "FOFOA Fallacy #2: Gold used as money represents debt."

FOFOA clarifying: "…gold is "a credit" for future goods and services…"

Rothbard: "[Money] is not a useless token only good for exchanging. It is not a “claim on society”. It is not a guarantee of a fixed price level. It is simply a commodity."

I am in full agreement with Murray given the chance to expand on his statement a little. Money should not be a useless token only good for exchanging if that same money is to carry the dual roles of currency and savings. Yet today it is. Money is not a fixed value claim on society. Of course not. It is a floating, "marked to market" claim. As is gold in the store of value and wealth reserve role.

Purchasing gold confers no economic or necessary benefit to you in the present, other than storing your deferred consumption for the future. It is a way to pass your earned claim (debt to you) into the future, even through generations. Calling this a fallacy is simply fallacious.

And while the word "commodity," when used along with "money," is often assumed to mean "a physical product of agriculture or mining," the more appropriate meaning here is "something of use, advantage, or profit." In the medium of exchange role, this can be anything, even, as Hayek says, "a token money."

FOFOA Fallacy #3: "Gold and only gold will fill the monetary store of value role. Not gold and silver. Not precious metals. Just gold."

Mish: "Like FOFOA I believe gold is money. However, unlike FOFOA I think money is whatever the free market says it is. The problem is, we do not have a free market we only have government decree mandating the use of dollars, Pounds, Yen, Renmimbi, Euros, and Francs as money."

Mish's handicap here is that he is not familiar with the body of my work that describes how the monetary roles historically came together and are now separating. The store of value role is always a free market choice while the medium of exchange is presently (and usually) issued under monopoly control. The monopoly's goal is to gain your confidence in the store of value role as well, but this is failing today after decades of excess.

Referring back to my Gold is Money series from 2009, here is the modern concept of money:

Now let's compare this to that Eurosystem report:

Notice that everything is reported in euro, even gold, and even dollar-denominated claims ("foreign currency") are reported in their euro-denominated value. So euro is the monetary unit of account on this form. The right side of the balance sheet represents the base of the medium of exchange within the Eurosystem. It includes euro notes as well as other liabilities of the central bank. And the left side represents both the de facto monetary store of value (claims denominated in foreign reserve currencies) as well as the alternative preferred store of value (gold).

The interesting thing about gold on this side of the balance sheet is that, not only is it not at risk from the (mis)management of foreign economies and currencies, but as those other stores of value fail, the gold portion is rising in value to keep the balance sheet full. This is the magic of a marked to market floating monetary store of value.

All the activist toy soldiers that want silver to become the monetary store of value "because the powers that be don't have any" are completely missing the big picture. TPTB don't have any because Mr. Market, that is those Giants with serious amounts of wealth to store, already selected gold in this role. The prominent presence of gold on the Eurosystem balance sheet is not TPTB forcing a store of value on the market. It is the exact opposite! As I have said many times, the store of value role cannot be dictated, decreed or legislated.

The prominent presence of gold on the balance sheets of the modern Central Banks is the CBs front running the market! Freegold (or "Reference Point Gold") is an unfolding market force creation. Mish says, "unlike FOFOA I think money is whatever the free market says it is." That's not "unlike" me. It is simply misunderstanding me. Gold IS the market choice. And the real market for this "store of value" is the Giants with "value to store." Luckily we shrimps can tag along for the ride. But we can no more override this market choice than we can crash the Treasury market by dumping our stockpile.

Alright, that's enough Mish. Now let's take a look at Trace Mayer, J.D. who followed Mish out of the gate slaying paper tigers and sodomizing a straw man or two of his own.

First of all, I'm not quite sure if Trace actually read my post, or if he is merely judging it based on hearsay evidence. For one thing, Trace seems to have latched onto Mish's misinterpretation of the word "unrestricted," apparently taking it to mean "unlimited" and thereby projecting me as a Chartalist. I had to laugh at that one, and I hope you did too. I guess Trace missed my comments to Greg, our resident MMT acolyte.

Anyway, Trace goes on and on reaming the 'FOFOA Chartalism' straw man:

"First, it should be noted that Greenspan implicitly admits the faulty argument behind Chartalism."

"This is the same reason Chartalism is philosophically flawed."

"A proper valuation set by whom, the State? Chartalist!"

"There is a reason Chapter One of my book The Great Credit Contraction is titled Word Games. In that chapter, I present the two competing theories of money, market versus Chartalism…"

Okay, now that Trace's poor scarecrow won't be walking right for a week, here's a little newsflash about FOFOA. Trace claims to present the two competing theories of money, market versus Chartalism. Well I, Another and FOA present ..... Option 3 - fiat currency that is dynamically priced though a floating (physical only) gold exchange rate in a free market.

More evidence that Trace either didn't read my post or was misrepresenting what he read (a bit of a faux pas for a lawyer) was this statement:

"But these individual preferences expressed through human and being revealed through the silver price does not constitute evidence of silver being overvalued as FOFOA asserts."

I can't seem to find my assertion that silver is overvalued. At least not in my post. Perhaps it is this:

To be honest, I really don't know if silver is overvalued or undervalued today at $30/ounce.

The context there was a discussion of the impact of paper markets on the value of industrial commodities. I argued that these commodities can be overvalued or undervalued. Or maybe it was this:

You see, silver needs its price propped up (huh? why?) while gold appears to need its price suppressed (see: The London Gold Pool).

The context there was a discussion of the history of bimetallism. Not quite as assertive as Trace made it sound, is it?

In fact, my position is that silver will rise just fine against a falling dollar. In fact, it may gain a little additional levitation over other commodities due to the lingering monetary sentimentality put forth by Trace and others. But it will also be limited by the economy. Where it will not follow gold is through the change in both market and function that will deliver a real, non-inflation-adjusted massive one-time return. The Freegold reset as the gold market turns physical and the gold function becomes the monetary store of value par excellence. A free market Giant event being front run by the Central Banks and a few small physical gold advocates.

Trace would probably have no idea what I'm talking about, since it doesn't seem like he has read much FOFOA. Well, if he, or any of you are interested, you should probably start
here and here.

On the Regression Theorem, Trace quoted this exchange:

Congressman Ron Paul: So it is hard to manage something you cannot define.

Dr. Greenspan: It is not possible to manage something you cannot define.

The implication is that the dollar's value cannot be managed if it cannot be defined (as a quantity of gold and/or silver presumably). Obviously you cannot define anything in a vacuum. You cannot define an ounce of gold as an ounce of gold, or a dollar as a dollar. Self-reference does not make for a good definition. But to define one thing as a fixed quantity of another creates a different problem, described by Gresham's law. However, to define one thing as its floating market value in something else, why, that's just a revolutionary concept! Isn't it?

Actually, it is an emergent, market-driven concept that has been unfolding since around the time Nixon closed the gold window, give or take a decade. And it is so extraordinary in its sweeping ramifications that it requires a whole new paradigm to understand. From Bob Murphy's
article linked by Trace:

""People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday... Thus the expected future purchasing power of money explains its current purchasing power."

Obviously this view assumes a dual role for money, store of value and medium of exchange (unit of account is implicit). But what is actually playing out today is something quite different. Trace frames the issue of money in terms of two models, "market versus Chartalism." "
Aristotle" describes Trace's perspective as a pendulum with "gold money idealists" on one side and "easy money idealists" on the other. And he calls Freegold the "perfect bottom." But he also points out that it is the most pragmatic and realistic point in an arc between two opposing idealisms, Trace's "market versus Chartalism." Read the entire description in my post, The Value of Gold.

In order to dive into this extraordinary new paradigm, we should probably shed some baggage. Here are a few bullet points to consider:

1. Freegold is a Floating Physical Gold Exchange Rate system for dynamically valuing fiat currencies. It is a floating reference value, not a fixed exchange rate "gold standard." In the new IMFS, currency pairs will be a function of the relative price of physical gold trading within their legal tender zones, rather than the race to the bottom with no benchmark as it is today.

2. "Money" is a dead, meaningless concept. If you want to use it, then define it. Circulating Currency has a concrete meaning. There are other terms that will suffice for other components of the "money" supply eg. Bank Credit E-currency (for the digital deposit created credits), reserve assets for the store of value, etc.

3. The term Precious Metals needs to go. There is gold and there are industrial metals. Sure there are high value industrial metals and there are low value metals but they are all commodities and we are way beyond commodity money. If the use of a metal in jewelry makes it "precious" then advocates for this term need to make their case.

4. The gold standard, bimetallism etc. are all topics for the history books. If you want them back then you need to explain how you plan to rehabilitate these terms for mainstream consumption and resurrect the dead systems that they describe.

Finally, if you would like to view this paradigm properly, you must have a clear understanding of the natural human factions at play. These factions are "the easy money camp" and "the hard money camp." Or as I like to call them,
The Debtors and the Savers. This may not seem like much, but it is a nuance that most all of my critics have wrong.

Please read the linked post. Government, commercial banks and central banks are the ménage à trois at the center of any IMFS, but they are not all in the same camp. In the correct paradigm, the government, the politicians and Wall Street (commercial bankers) are all in the Debtor's camp, while the Central Banks are in the Saver's camp along with the Giants.

But Freegold is not as simple as a one-camp solution. As I've said many times, Central Bankers are a different breed. They are not like commercial bankers or politicians. Hate them if you feel you must, but collectively they do think big picture and long term. And Freegold is an accommodation of BOTH camps! That's because it is the recognition and official CB front running of Mr. Market's eventual win.

This is just one small example of how the "Debtors v. Savers" factional paradigm differs from the "Bankers v. the rest of us" that drives all of these hard money guys into tilting at windmills. Or from the "haves v. the have-nots" paradigm that has infected the water supply in the easy money camp. It is a small difference, but a world apart.

Today we have arrived at the end of a long period in which the debtors have reaped immense amounts of real world goods from the savers. They have done so by issuing paper debt in exchange for real goods. Most of my critics confuse who the debtors and the savers actually are. They think "the American people" have been screwed over by the bankers for so long and now is the time to take it all back. What they don't realize is that "the American people" and "the bankers" (the commercial bankers) are in the same camp. So is the government. They are all "Debtors."

And as this pendulum swings, they should be (we all should be) very happy for the acceptance of Freegold by the Giants, the CBs, and the Savers. But my critics can't even see this paradigm, because they are stuck in a bad one. And their bad paradigm leads them to tilting at windmills like "buy silver, crash JPM," "end the fed," "the Kucinich easy money bill," "buy silver because TPTB only have gold," "the end of fiat is coming," "the euro is no different than the dollar," etc., etc...

What is actually coming down the tracks with the inertia of a massive locomotive pulling the Freegold party train is what Robert Zoellick has been
hinting at publicly, completely misunderstood by gold bugs and Chartalists alike. It is gold used internationally in a new monetary role, not seen in prior history. It is the next step in the evolution of the concept of money.

Gold is to become the floating, free market reference point for fiat currencies of all stripes. And to do this, it will shed the albatross that is its parity relationship with paper promises of gold from private institutions that are backed by more paper promises of gold from other private institutions in a perpetual loop of paper promises. This paper promise loop/"market" is not a stable benchmark, and it will have to go.

So now you have a choice. You can hop on the party train and buy some physical gold before the journey is complete. Or you can join the ranks of toy soldiers standing strong against the unstoppable force of time. The choice is yours.


Toy Commander: "It wasn't my intention to mislead you
It never should have been this way
What can I say
It's true, I did extend the invitation
I never knew how long you'd stay

When you hear temptation call
It's your heart that takes, takes the fall
Won't you come out and play with me

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers

It's getting hard to wake up in the morning
My head is spinning constantly
How can it be?
How could I be so blind to this addiction?
If I don't stop, the next one's gonna be me

Only emptiness remains
It replaces all, all the pain
Won't you come out and play with me

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers

We never win

Only emptiness remains
It replaces all, all the pain
Won't you come out and play with me

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers

Step by step
Heart to heart
Left, right, left
We all fall down
Like toy soldiers

Bit by bit
Torn apart
We never win
But the battle wages on
For toy soldiers"




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