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Does this strike you as a curious title for an FOFOA blog post? I'll bet some
of you are saying yes while others are thinking "huh? What kind of a
stupid question is that?" Onward...
One of the greatest compliments I receive is when people say that I write in
a way that anyone can understand. But one of the reasons my posts come across
this way is that I really try to avoid stereotypical and dogmatic words. I especially
try to avoid words deeply embedded in our elite academia. The problem is that
these words carry so much baggage. They carry a standardized mental picture
that is often wrong. In fact, some words carry multiple images specific to
different factions of belief.
This "word problem" creates confusion and often stirs misguided
debate founded on different definitions. "Inflation" versus
"deflation" is a perfect example. So to avoid misunderstandings, I
try to explain my Thoughts through descriptions rather than dogmatic words.
Hyperinflation, however, is one word I do use, because I think it portrays
the best visualization I can deliver as to how the dollar's collapse will
unfold. At the same time, I am careful to explain that I believe gold's price
explosion is a totally separate event that is coming. It is not DEPENDENT on
hyperinflation. In fact, hyperinflation could theoretically be avoided while
gold's price explosion cannot.
Along these same lines, explaining myself descriptively, I state that my
position is "deflation in real terms"... in terms of gold!
What makes it so difficult for traditional "deflationists" to grasp
this concept is that deflation (my description of deflation) will end in
hyperinflation! "Hyperinflation", as I have shown, has much more in
common with their understanding of "deflation" than it does with
the common understanding of "inflation". As I like to say,
the only thing hyperinflation and inflation have in common is nine letters.
And I also like to say that in the end we will have hyper-DE-flation in all
things measured against gold, and hyper-IN-flation in all things measured
against dollars.
I am opening with this long prelude only to demonstrate my
"descriptive" intentions as I now tackle the most dogmatic and
divisive word of all... MONEY! What is money? Answer this question
honestly and I think a lot of what I write may suddenly come into clearer
focus.
Gold is Money
This is the dogma among most in our crowd, is it not? Gold is money!
Who on earth can dispute this (practically) divine statement? Well, I'm not
here to stir up trouble, so I will leave this one alone for the moment. But I
hope we can all agree on at least one thing for the moment. How about this
one?... "Gold is a form of wealth!" Hopefully we can at least agree
on this statement as we proceed. Gold is a form of wealth.
Functions of Money
"Money", as it is understood today, has three main roles. The late
Dr. Willem F. Duisenberg, former President of the ECB, in his famous
acceptance speech for the International Charlemagne Prize in 2002 stated it
well...
What is money?
Economists know that money is defined by the functions it performs, as a
means of exchange, a unit of account and a store of value.
Our modern understanding of money is that it has three roles or functions: 1)
A medium of exchange, our TRANSACTIONAL currency, 2) a unit of account, a
"number" used for comparing relative values, held in each person's
memory AND on paper for bookkeeping (and legerdemain), and 3) a store of
value, or wealth.
What I would like to do now is to take a broader view of money. A thought
experiment that will transcend the last 38 years of our monetary experience.
I hope to transcend even the last century, the last 233 years of our United
States, perhaps even the last millennium. Let us think about money in terms
of the last 2,500 years. And perhaps then we can gain a new perspective that
yields a fresh understanding of what the heck is going on right now!
Etymology
Etymology is the study of the history of words. Now I am no expert, but I
would like to point out what the dictionary says about 'money' and
'currency'. From my post, On Hyperinflation:
Two definitions
are important in this discussion. These are from Webster’s Dictionary:
Currency (1699) 1 a: circulation as a medium of exchange b: general use,
acceptance, or prevalence 2 a: something (as coins, government notes, and
bank notes) that is in circulation as a medium of exchange b: paper money in
circulation c: a common article for bartering d: a medium of verbal or
intellectual expression
Money (13c) 1 : something generally accepted as a medium of exchange, a
measure of value, or a means of payment
Note that the first known use of the word Money in the English language was
in the 13th century. The word Currency didn't make it into the English
language until more than 400 years later.
Note also that the appearance of the word 'money' in the English language
came 800 years after the fall of the Roman Empire.
Thought Experiment
Now on to our Thought experiment. This comes to us courtesy of FOA on The Gold Trail. I
have edited the length of FOA's presentation for the purpose of this post,
but will keep it in blue to differentiate the source. The entire post can be
found at the link above.
Owning wealth aside from official money units is nothing new. Building up
one's storehouse of a wealth of things is the way societies have advanced
their kind from the beginning. What is new is that this is the first time we
have used a non wealth fiat for so long without destroying it through price
inflation. Again, a process of using an unbacked fiat to function as money
and building up real assets on the side. Almost as if two forms of wealth
were circulating next to each other; one in the concept of money and the
other in the concept of real wealth.
This trend is intact today and I doubt mankind will ever pull back from fiat
use again. Fiat used solely in the function of a money concept that I
will explain in a moment.
Understanding all of this money evolution, in its correct context, is vital
to grasping gold's eventual place in the world. A place where it once proudly
stood long ago.
All of this transition is killing off our Gold Bug dream of official
governments declaring gold to be money again and reinstitution some arbitrary
gold price. Most of the death, on that hand, is in the form of leveraged bets
on gold's price as the evolution of gold from official money to a wealth
holding bleeds away any credible currency pricing of gold's value in the
short run.
To understand gold we must understand money in its purest form; apart from
its manmade convoluted function of being something you save. Money in its
purest form is a mental association of values in trade; a concept in
memory, not a real item. In proper vernacular; a 1930's style US gold
coin was stamped in the act of applying the money concept to a real piece of
tradable wealth. Not the best way to use gold, considering our human nature.
By accepting and using dollars today that have no inherent value, we are
reverting to simple barter by value association. Assigning value to dollar
units that can only have worth in what we can complete a trade for. In
effect, refining modern man's sophisticated money thoughts back into the
plain money concept as it first began; a value stored in your head!
So you think we have come a long way from the ancient barter system? Where
uneducated peoples simply traded different items of value for what they
thought they were worth? Crude, slow and demanding, these forms of commerce
would never work today because we are just too busy, right? Think again!
Lean back and think of all the items you can remember the dollar price for.
Quite a few, yes? Now, run through your mind every item in your house; wall
pictures, clothes, pots and pans, furniture, TVs, etc... Mechanics can think
about all the things in the garage, tools, oil, mowers. If one thinks hard
enough they can remember quite well what they paid for each of these. Even
think of things you used at work. Now try harder; think of every item you can
remember and try to guess the dollar value of it within, say, 30%. Wow, that
is a bunch to remember, but we all do it!
I have seen studies where, on average, a person can associate the value of
over 1,000 items between unlike kinds by simply equating the dollar price per
unit. Some people can even do two or three thousand items. The very best were
some construction cost estimators that could reach 10,000 or more price
associations!
Still think we have come a long way from trading a gallon of milk for two
loves of bread? In function, yes; in thought no! Aside from the saving/investing
aspects of money, our process of buying and selling daily use items hasn't
changed all that much. You use the currency as a unit to value associate the
worth of everything. Not far from rating everything between a value of one to
ten; only our currency numbers are infinite! Now, those numbers between one
and ten have no value, do they? That's right, the value is in your
association abilities. This is the money concept, my friends.
Unlike the efficient market theory that was jammed down our throats in school,
we all still use value associations to grasp what things are worth to
us. Yes, the market may dictate a different price, but we use our own
associations to judge whether something is trading too high or too low for
our terms. We then choose to buy or sell at market anyway, if we want to.
In this, we have moved little from basic barter. In this, we are
understanding that an unbacked fiat works because we are returning to mostly
bartering with one another. A fiat trading unit works today because we make
it take on the associated value of what we trade it for; it becomes the very
money concept that always resided in our brains from the beginnings of time.
In this, a controlled fiat unit works as a trading medium; even as it fails
miserably as the retainer of wealth the bankers and lenders so want it to be.
So how did your Thought experiment go? Did you come to the conclusion that
the concept of "money" in its most pure and primal form is the
mental association of values in trade? That it is the actual thought process
inside of our minds that we use to associate the relative value of real
things? "Money is just a book keeping accounting of real wealth!"
"Why do we need to save this stuff anyway?"
So, to assign this concept to one of the three "functions" of
modern money, the pure money concept fits best within the unit of
account function.
Modern fiat currency, our modern physical transactional medium fits best in
the means of exchange function. And real wealth, with gold as the most liquid,
durable and portable example par excellence, fits best in the store of value
function.
History
Now let us take our Thought experiment back in time, before the words money
and currency entered the lexicon. In those times, gold was just another form
of wealth that was traded in simple barter. But gold had certain qualities
that made it especially convenient to trade. And it also had qualities that
made it especially good to hold as wealth! For one thing, it was not needed
for other functions, so one could hold as much as possible without infringing
on anyone else!
A hat was also wealth. So was a pig. A hat could be traded for a pig just as
easily as a piece of gold. But pigs were for eating and hats were for
wearing. And if one man became wealthy enough to hoard all the hats, there
might have been an outbreak of sunburned heads! :)
The point is that gold was not "the pure concept of money" any more
than hats were, or any more than paper dollars are "the pure concept of
wealth"! When the ancients stamped gold into coins, they were simply
making a true barter item, a wealth item more recognizable and easier to use.
Even without any legal tender laws, this barter item, coined or not, still
carried its value in its weight.
But as "the pure money concept" (the unit of account function)
crept in and attached itself to the numbers stamped on gold coins, the door
was opened to the debasing of wealth and public theft through the clipping
and diluting the metal content of the coins. Enter the appearance of Gresham's
Law!
Even still, was gold really what we think of as "money" back then?
According to FOA, the answer may well be no:
We were first alerted to the "gold is money" flaw years ago. When
considering the many references to gold being money in ancient texts, several
things stood out. We began to suspect that those translations were somewhat
slanted. I saw many areas in old texts where gold was actually referenced
more in a context of; "his money was in account of gold",
or; "the money account was gold", or; "traded his money
in gold". The more one searches the more one finds that in
ancient times gold was simply one item that could account for your
money values. To expand the reality of this thought; everything we trade
is in account of associated money values; nothing we trade is money!
Well, I put it off at the beginning of this post, but I'll ask it again
now... Gold is money! Who on earth can dispute this (practically) divine
statement?
I ask this again only as a rhetorical question. Because as I pointed out in
my long prelude, this post is all about confusing and misleading dogma
presented through the use of stereotyped words. Money being the worst of all!
Are we using Wim Duisenberg's definition of money, consisting of three roles?
Or are we using our own newly discovered "pure concept of money"
definition, consisting of only one of those roles? Or are we suggesting, when
we say "gold is money", some NEW definition based on a hybrid role
assignment? What is "honest money"? And what does someone mean when
they say "gold is money"?
Can you see how common words that different people define differently can
cause great confusion and disagreement, even when it is not really warranted?
And can we now agree on these three statements at least? 1) Gold is a form of
wealth. 2) The pure concept of money fits best within the unit of
account function. 3) The word currency best describes what we currently use
in the medium of exchange role.
Okay, with this newfound partial agreement in place, let us take a look at
where we are heading. And let's see if we have gained any new understanding.
Here is a little more from FOA:
Today's talk is, once again, a more detailed continuation of our theme: the
evolving message of gold. I'll begin now.
Our modern gold market price illusion is little more than a product of the
fiat dollar system; a design that denominates gold credits in a contract
form. Is it a free market? Why yes, very free. But... TOO free, in the sense
that contract supply is totally unlimited. Investors bought into this market
even though they fully well knew 90% of the volume was represented by only
cash equity on the other side. Knowing that, they somehow expected that those
contracts were limited in creation by the fixed amount of gold in the world.
Their mistake, not the market's.
Clearly, anyone schooled in classic hard money Thought should have known that
this was just another gold inflation; a transitory era between money
systems. This was a time to gather gold over the years, not invest in the
leveraged aspects of gold's new fiat versions. Nor, to buy into the gold
industry that owed its life and cash profits to the maintenance of such a
system; transitory as it was. The expanding fiat universe was best used to
gather real wealth each time the transactional fiat currency cycled through
your domain.
Anyone that understood this knew that this is how you handle an evolving
process. For myself and others, knowing that gold's inherent value could not
change much and was historically undervalued in its comparative value to all
things, we bought gold in quantity. We tossed aside Western concerns about
shifting currency prices of gold.
This entire paper-gold trading realm represents the conclusion of a
convoluted, decades long attempt by mankind to tie his fiat money concepts to
physical gold. These centuries of gold/money tie-ins will end in a colossal
breakup of the entire fiat money-plus-gold concept; leaving gold and fiat to
trade independently of each other.
Unfortunately, it's on the dollar's watch this will all end as this gold
failure is running in parallel to the dollar ending its position as a world
reserve currency.
The above is a good summary of FOA's message. I am sure that some of you have
read The Gold Trail, but I'm curious if you felt a slightly deeper meaning in
it now that we have discussed the pure concept of money. And if so, you
should try reading the whole of A/FOA again! It can be found at the top of my
favorite links to the right.
You know, I often visit websites and forums that proclaim, "Gold is
Money!" I have no argument with them. Obviously they are talking about
the store of value function in Wim Duisenberg's definition of money. I mean,
clearly gold is not our currency nor unit of account. And sometimes I visit
sites that proclaim "We must return to honest money!" And again I
have no argument. I understand that they are simply fed up with the built-in
inflation in our modern medium of exchange that infringes on their store of
value concept. I couldn't agree more.
Yet here I am to tell you that gold is now becoming completely demonetized!
That the odds of us going back on the old gold standard are right around
zero! That the inflating paper gold contract market has kept gold in a
monetized state, even though we left the gold standard. But that is now
coming to an abrupt end. I am here to tell you that even if we get some sort
of new super sovereign global reserve currency with a certain
"portion" held in gold, this will not mean the remonetization of
gold!
Look no further than the political stylings of the Euro to see how this new
super sovereign currency would work. Gold may be a portion of its reserves,
just like the Euro. But also, just like the Euro, that gold will be marked to
market! (See: Your Own, Personal, Freegold)
Indeed, Duisenberg also had this to say in his famous speech:
[The Euro] is the
first currency that has not only severed its link to gold, but also
its link to the nation-state. It is not backed by the durability of the metal
or by the authority of the state.
Yet somehow its required 15% gold reserves have risen to 55.6% in ten years!
And for some reason its gold reserves are still on LINE 1 of its financial statement!
Hmm...
But current global confidence is too shaken for a new reserve currency to
work just yet. Gold may end up being the single object that restores
confidence enough for a new reserve system shared by many nations, but not at
today's gold price. Not anywhere even close to it!
The human concept of money is changing whether we like it or not. It is being
torn apart. Gold, as a wealth reserve and wealth asset, will exist and trade
parallel to the world of fiat, the world of credit and debt. Producers and
savers will finally have the option to switch tracks so to speak. To get on a
parallel track that avoids the inevitable collision with the debt-hungry
collective their savings have always faced.
And as we pass through this phase transition, as gold switches from the
transactional track to the wealth-reserve track, it will take on a whole new
meaning... and a whole new value! The non-dollar part of the world already
knows this. This is why they are buying gold now! You see, as a truly
demonetized wealth asset, gold has a much much higher value to mankind than
it does as a transactional money. To get an idea of the difference, just
compare the basic transactional money supply with the vast quantity of
so-called "paper wealth dollar derivatives". This should give you
an idea of what is coming!
Sincerely,
FOFOA
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