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Allow me to start by beating a dead horse. There is a vital difference
between what may in fact be the ideal, perfect monetary system and what are
the real monetary changes we are heading straight into today. My purpose for
writing this blog is to share with you, and in return to receive your
feedback on my own discovery and understanding of the latter. There are
plenty of other sites that discuss the former.
If we can discover together where we are heading financially, economically
and monetarily, and why we are heading there, then perhaps we can know, in
advance, how the understanding of the global consciousness will evolve and
unfold in the coming weeks, months and years. And, with this understanding,
hopefully we can gain a certain peace of mind with regard to our own
financial decisions, positions and future as we head into very stormy waters.
I know from my own experience that a little peace of mind is a priceless
asset. It is one worth sharing, and one worth growing. Sharing and growing
this asset together with you is my goal. Onward...
Our Understanding of
Money
Let us quickly run through an assortment of common understandings of the term
'money'. The most common, mainstream understanding of money is that of a
device bearing three functions. The three functions are 1) medium of
exchange, 2) unit of account and 3) store of value.
A more purist understanding states that money is only a medium of exchange.
And that the usability of money in other roles flows from its declared form.
For example, if our common medium of exchange is physical gold only, then it
is also an excellent store of value.
In fact, as a medium of exchange, money is only one half of a full barter
exchange. The other half is when you change your money into that item you
desire. But when physical gold is the common medium of exchange, then it is
possible that the concept of a "medium" (or middleman) is
incorrectly applied, because if gold was what you were after (for its store
of value function), then the exchange is completed in only one step! Direct
barter!
Finally, there is our new understanding of "the pure concept of
money" which is our innate human ability to associate relative values.
And within this understanding of 'money', it became clear that in order for
our ability to function properly and efficiently in the way it has evolved
over millennia, gold must be free for each of us to impute value to it.
Gold Exchange
Standard
Our most recent experiment with gold as the conceptual medium of exchange
ended badly. The purist understanding of money, the common medium of
exchange, longs for it to be a real commodity, or at least linked to a
commodity so that the actual medium can have a relatively stable value and
double as a store of wealth. But when we lock a finite commodity into a
parity relationship with an inflating paper currency, we only drag down that
commodity's relative value compared to the rest of the real world as the related
currency is inflated.
Over time, pressure builds up in this relationship set at par, the same as
pressure builds between two business partners where one is lazy and
unproductive and the other must carry the business through hard work. Sooner
or later some of that pressure must be released and parity must be broken.
Perhaps the lazy partner's equity position in the business is cut or reduced
to reflect his lack of contribution, buying the ill fated relationship a
little more time. This is what Roosevelt did with the dollar/gold
relationship in 1933. But eventually these mismatched partners will have to
part company once and for all. Just as gold and the dollar did in 1971.
In 1971 official parity was broken, but not forgotten. In the years since, an
unofficial parity of sorts has been maintained through the paper gold market.
Paper gold, like dollars, can be expanded and inflated while being locked at
a par with the real thing. This is still going on today. But the pressure has
been building for a long time now. This pressure held in the parity
relationship between paper and physical gold is about to blow.
Gold Coin Standard
Even the gold coin standard we had leading up to the creation of the Federal
Reserve System ended badly. You see, people put their gold coins into the
banks and the banks lent them out. And then when confidence suffered a shock
and the banks faced a run on gold, the system collapsed, many banks failed,
and people lost their gold.
Human people want to be able to borrow money in the present that they plan to
earn in the future. Not all people want to do this, but enough to influence
the system certainly do. And this practice, by its very nature, expands the
money supply beyond its physical commodity limits, even in a pure gold coin
standard.
During the late nineteenth century, all the major nations of the world moved
toward a gold coin standard, wherein the gold coin itself was the common
currency and medium of exchange. Between 1873 and 1912 some forty nations
used it. [Answers.com]
The following is a post by Randy (@ The Tower) describing the end of the gold
coin standard and the dawn of the Federal Reserve System (in blue).
Continuing our investigation into the
meaning/essence of "money"... In 1907 America was on the Gold
standard and WITHOUT any central bank. Many modern goldbugs might be inclined
to yearn for those "good ol’ days" when "money was money
and banking was as it should be!"
However, that year is best known by the Panic of 1907 in which the people's
economy was plagued by runs on trust companies, banking panics, and a bear
market in stocks. Across the nation, banks were unable (and refused) to
deliver gold coins and currency to satisfy the requests of depositors for
withdrawals of money from their own accounts -- and 246 banks collapsed. It
is not difficult to see how the frustration of depositors unable to obtain
currency from banks (even solvent ones!) holding their deposits would lead to
pressure for political intervention and change.
For a quick exercise in perspective, imagine what you would do today if faced
with the same situation in which your bank could not give you any currency
($1s, $5s, $10s, $20s $50 or $100s) to carry away with you as a
representation of the money residing in your bank account. No problem. You
would simply write a personal check to meet your spending needs, or perhaps
ask for a bank draft, or wire the money wherever it needed to go. Amazing!
What IS money??? How did you get yours; where did it come from? How do you
know what its value is?? Ponder that, and now we return to our glimpse at
history...
In the wake of this banking panic, a National Monetary Commission was formed
to undertake a scholarly look at the failings of America's financial system.
Of these, the four major flaws cited were that the banks were decentralized,
clearing methods were inefficient, the huge cash holdings of the federal government
were not distributed where most needed, and the currency supply was
inelastic. (Please ponder for a moment how or why the CURRENCY supply would
ever be an issue if the amount of MONEY found in banks were at a one-to-one
ratio with the currency (gold) that represented it. Surely, in this absence
of a central bank there couldn't be more money than gold coin! That's
impossible!! ) By 1911, the Commission had recommended a plan for a
"Reserve Association of America" as the solution to these defects,
giving rise two years later to what became our central bank -- The Federal
Reserve System. However, that's another story for another time.
Through the coordinated stabilizing actions of three prominent NY bankers to
arrest the banking panic [J.P. Morgan, George F. Baker (First National Bank),
and James Stillman (National City Bank / Citibank)], their wealth and power
was perhaps made more conspicuous in the eyes of the nation than perhaps it
would otherwise have been. A prominent Wall Street lawyer named Samuel Untermyer
suggested that there was a "Money Trust", and The Wall Street
Journal also took notice of affairs and wrote, "So long as Congress will
not give us what every other civilized country possesses, a central bank, it
forces Wall Street to improvise something of the kind itself."
The House Banking and Currency Committee formed an investigative subcommittee
to determine whether a Money Trust existed in NY. The chief counsel was Sam
Untermyer, and I think you might gain some insights about the true nature of
money from the testimony delivered by Morgan and Baker before the committee
in Washington DC at the beginning of 1913.
In questioning Baker about the proposal for banking reform regarding expanded
disclosure of bank assets and investments, Untermyer probed, "Why should
not the assets, and the detailed assets, be a matter of public
knowledge?"
Baker replied, "Business would come to rather a standstill."
Untermyer demanded, "I want you to explain to the committee why."
Baker declined, "I can not explain it."
Untermyer pressed further, "You mean you can give us no reason?"
Baker admitted, "It would be exposing all the details of that business
to the whole world."
After following a sidetrack in questioning, Untermyer returned to this issue,
asking, "Why should the public do business on confidence when it can get
the facts?"
To which Baker proclaimed, "Mr. Untermyer, THE FUNDAMENTAL PRINCIPLE OF
BANKING, perhaps more than some others, is CREDIT." [emphasis added]
It seems that George Baker sensed (rightly?) that the public, familiar with
their Currency being a tangible asset (gold coin), would NOT be readily
comfortable with the truth about Money. That is to say, that they might
struggle to accept the reality that their Money Supply, as represented on the
books of the bank, was created by credit, and existed through the grace of
confidence. In effect, the tangible Currency had become a mere symbol for the
Money (credit) it represented while circulating outside of bank account
ledgers.
If you don't care to believe my assessment, I have another point for you.
When Untermyer had J.P. Morgan on the witness stand, he asked him, "Is
not commercial credit based primarily upon money or property?" [In this
exchange, it appears that Untermyer ignorantly used the word
"money" as equivalent to gold coin, a usage which Morgan plays
similarly until his concluding point about granting CREDIT.]
Morgan responded, "No, sir, the first thing is CHARACTER."
[emphasis added]
Untermyer, shocked, reiterated, "Before money or property?"
Morgan reassured, "Before money or anything else. Money cannot buy it.
[credit]"
Untermyer remained obstinate against this notion, as though there were
communication difficulties, and pressed again on this point.
Morgan then conclusively stated his conviction on the point that commercial
CREDIT is based on character: "Because a man I do not trust could not
get MONEY from me on all the bonds in Christendom."
From two eminent bankers who surely knew their business, you now have it that
the creation or granting of Money (the extension of Credit) has more to do
with the creditworthiness of the borrowers than the collateral that secures
against possible default. And recall, these comments occurred while on a gold
standard AND in total absence of a government-sponsored central bank -- which
was authorized (against Baker's preference) a year later.
As you come to understand how Money and Credit are interrelated, the more you
will understand the separate Wealth of gold and why you need it now more than
ever.
The point here is that our modern understanding of money, or any money
concept for that matter, combined with our modern taste for borrowing,
lending and trading of credit and debt, may not NECESSARILY be a perfect fit
with a pure gold standard. Even a gold standard, with gold as the actual
currency, is manipulated by the banks through confidence-based lending
schemes. Sure, a gold standard somewhat limits the collective in its more
nefarious pursuits, but it also has flaws that always seem to lead to the
same conclusion... failure.
Perhaps it is time for us to consider another alternative, even a natural one
that is happening whether we like it or not. How about a new, de facto, free
market-driven stasis instead of the old de jure (rigged) false parity
relationship... how about Freegold?
The Fourth
Dimension: Time
At any given moment, a snapshot of our world appears to be only three
dimensions; left/right, backwards/forwards, up/down. But with the passage of
each and every moment, the world changes. Values change! People change.
Everything changes. And all of these changes happen as we move through the
fourth dimension, time.
This fourth dimension is very important as we consider the pure concept of
money. For it is in this fourth dimension that our pure concept of money
resides!
If time was not a factor, then anything accepted as a generic medium of
exchange could perfectly perform all the functions commonly linked to
the term 'money'. You do your work (somehow without the passage of time) and
get paid, and then spend your money on anything within that same moment in
which your work's value was judged against the entire universe of real
things. A perfect stasis of values would exist everywhere, all at once.
But here in the real world we must be concerned about how far we carry our
money through the fourth dimension. Without this vital consideration, we
stand to lose everything!
Breaking the
Triangle
In part 1 of this series I used a diagram I created called The Modern Money
Triangle. The three corners of the triangle represented the three primary
functions of our modern understanding of money.
But as we pass through the coming phase transition in which the parity between
paper gold and physical gold will be broken, cracks will start to form in
certain parts of the triangle.
The fractures you see in this diagram are time related. On a short timeline
[length of time is the key variable: "t"] fiat currencies will
perform our necessary monetary functions, medium of exchange and unit of
account. But at some point on the x-axis, 'length of time', we will switch to
a different medium, gold.
On a long timeline, gold will perform our necessary monetary functions
perfectly, store of value and long term unit of account. By the way, there is
no upper limit on the x-axis of 'length of time' when it comes to gold. If
plotted out it runs to infinity!
The outcome will be my new Freegold Quadrangle!
The "x-axis" represents the amount of time you are willing to hang
onto the fiat currency you either earn or receive in payment. If the monetary
authority is printing money, "t" will be shorter and shorter. In a hyperinflationary
situation "t" will slide all the way to the left with a value close
to zero. [1]
As the new Freegold system of natural, pristine balance emerges, the fiat
monetary authority will find its wisest move is to keep the money supply
under control. And with a "wise" CB, gradually the "t"
value will shift back to the right, little by little.
The further "t" moves to the right, meaning the longer people are
willing to hang on to their fiat, the more investment will flow into new
businesses in that currency zone, and the more tax the greedy collective can
grab. This is how it will work.
But even MORE interesting to us physical gold advocates is how we will get
there!
In part 2 of this series I explained that "they" will save the
system at any cost. And that this stance presented them with a dilemma.
You see, if they don't save the system then "all paper will burn"
and gold will "shoot the moon" as the wealth reserve par
excellence. But if they DO save the system, "the cost" will be the
devaluation of the dollar along with all fiat currencies... and gold will
"shoot the moon" as the wealth reserve par excellence.
Q.E.D. [quod erat demonstrandum].
The Catch-22 of
Modern Paper Wealth
The phrase "Catch-22" is common idiomatic usage meaning "a
no-win situation" or "a double bind" of any type. [Wikipedia]
"The catch" in our modern concept of paper wealth is that on one
side it is collapsing from its own unsustainable debt service making it, in
fact, a non-wealth. But on the other side, if we rescue it from its own un
sustainability by guaranteeing or propping up the debt service, we collapse
the very denominator of the wealth itself, the currency, and make it a
non-wealth. It is a lose-lose situation... a Catch-22!
Do you remember the 1985 movie Wall Street? In it Gordon Gekko liked to buy
whole companies through the stock market, shut them down, break them up, and
then sell off the pieces. He had figured out that the pieces were more
valuable than the whole. Remember in the end of the movie he went after Blue
Star Airlines? My, how things have changed in 24 years.
On Friday we learned that Japan Airlines is now completely worthless. Its net
worth is now NEGATIVE $8.8 billion!
JAL faces $8.8 billion excess debt if liquidated: source
TOKYO (Reuters) - Liabilities at Japan Airlines Corp (Tokyo:9205.T - News)
would exceed its assets by as much as $8.8 billion if Asia's largest airline
by revenues were liquidated, a source with direct knowledge of the matter
said on Friday.
The estimate of JAL's negative net worth, calculated by a government-led task
force in charge of its restructuring, underscores the depth of the problems
facing the airline as it seeks aid from banks and the state to avoid
bankruptcy.
Did you know that on Friday people were still buying JAL at a market
capitalization price of $3.4 billion even though it was worth [NEGATIVE]
-$8.8 billion? One thing I know for sure; Gordon Gekko would NOT have been
interested in this one.
Which begs the question, how is the rest of the (publicly traded) economy
doing after 24 years of debt accumulation?
This is where the $-debt regime has left us. With empty, hollow shells of
corporate entities enslaved to produce revenue only to service their
unsustainable debt. What if the owners of JAL decide to leave their vacuous
corporate shell behind like a hermit crab abandoning his home, for the
greener pastures of a fresh start? That debt hole, the $8.8 billion, is what
we hold today as wealth!... inside the financial system! It is gone, not
there, if they walk away. Just like an underwater homeowner walking away from
his home. If the debt-slave quits, the value illusion is gone!
The entire financial industry today is marked to model, myth, illusion,
whatever... just not reality. It is amazing that we even got a story like
this, exposing a small portion of the gap between reality and "high
finance". JAL is a dead man walking.
At least we are getting some honesty with regard to the real value of JAL.
How about the rest of them? How about the banks? Who's debt do YOU hold as
wealth? How is THEIR balance sheet doing? Do you have any idea?
Gold is pure equity... no one's debt. No one to walk away. No one to default
in bankruptcy. Nothing to liquidate in an attempt to recapture 10 cents on
the dollar.
The entire US banking system today is built upon the idea that debt-slaves
will continue servicing their debt on millions of underwater houses marked to
mythical values at which the loans were established. If you hold your wealth
within this freakish system... all I can say is good luck!
The knowledge of the difference between principle and interest must be dead.
Everyone is chasing an imaginary yield from entities with negative equity
today... with their hard earned principle savings. Can you believe it?
But don't worry about JAL. It won't be quitting. It has been deemed too big
to fail! This means that the printing press will guarantee not only its
debt-slave service, but its executive bonuses as well (to keep the slaves in
the field)!
Next up, the idiotic concept of too big to fail is set to bring down all the
imaginary currencies, and with them, the system itself. And once again, gold
is not only immune but highly levered in the OPPOSITE direction.
Consider this: You may not fully understand where we are heading. You may be
figuring it out at your own pace. But the millions of ungodly fortunes in the
world (yes, there are millions of fortunes) don't have that luxury. They must
figure it out FAST... or die.
Survival of the
Fittest
Try to imagine each and every fortune that exists today as a distinct animal.
These "fortunes" can be held by individuals, organizations, by
funds, or even by sovereign collectives. They can also be held in any number
of vessels at this current time. For instance, the Saudis' fortune is largely
held underground in oil deposits. Other fortunes are in paper financial
products, like your pension fund, and others are already in gold.
As we move forward, the law of nature, the survival of the fittest will come
more and more to the forefront. The wholesale creation of new digits is one
way that some of the more inbred fortunes are trying to survive. Will it
work? Others, with a deeper gene pool, are fleeing to the safety of gold.
Imagine this world of TOO MANY "fortunes" vying for survival in the
limited landscape of the real world which is actually too small for them all
to survive. The fortunes that have moved entirely into physical gold have
already staked out their claim to a specific volume of real estate that is
needed to survive in this brutal world. They now own their own territory, a
true slice of the real world pie, on which to live and thrive.
Those that are still trying to increase their claim size by inflating paper
digits may miss out because the landscape of reality is quickly being bought
up by the more clever and observant animals. Survival of the fittest! Those
fortunes that make the right moves in these trying times will be the ones to
survive and thrive. The rest will die.
These "fortunes" are the giants. Their titanic battle for survival
in the limited real world is what will take us where we are going. They need
to figure things out quickly if they want to survive. Natural selection will
pick the winners and kill off the losers. Today this epic battle nears its
climax.
Stake out your own claim today before this final act unfolds. Then spread the
word to as many people as possible. This is the best we can do, Lilliputians
that we are.
Sincerely,
FOFOA
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