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2019
Year of the Head Fake
After ten years, I think I finally got one right. You might disagree, but I
think the everything bubble has finally popped. It's so big, however, that it
may take some time to fully deflate. I thought about calling this the year of
the great deflation, but I knew that would send the wrong message. I'm
certainly no deflationist, but as I've said in the past, hyperinflation has a
lot more in common with deflation than with the common understanding of
inflation.
So if you'd like to read "Year of the Head Fake", it's up right now
at the Speakeasy!
As I've done for the past few years, I share a sample post from the Speakeasy
here on the public blog about three times a year, New Year's Day being one of
them. For this one, in celebration of promising recent developments, I
decided to share three posts from the past few months, 'Freegold
is Much Simpler than the $IMFS', 'Money Is Credit Is The Answer',
and 'Apples to Oranges'...
Apples to Oranges
The LBMA yesterday began a new program of regularly releasing trading volume
data related to the London gold market. There was a short Reuters article
about it back on Oct. 29th:
LBMA to reveal size of London's gold market on Nov. 20
BOSTON, Oct 29 (Reuters) - The London Bullion Market Association (LBMA) will
begin publishing data on November 20 that will provide the most accurate
picture yet of the size of London’s gold trade, its chief executive said on
Monday.
London is the world’s largest gold market but because most transactions are done
bilaterally between banks, brokers and traders reluctant to reveal their
activity, its true size remains a mystery.
The closest approximation is clearing data which suggest gold worth around
$25 billion changes hands each day, but this data contains only transactions
which reach settlement in London.
The new LBMA figures will show the total trading activity of LBMA members
which make up the bulk of the London market and are expected to be much
larger than the clearing statistics.
For the first three months after the launch, the LBMA will publish weekly
reports showing total trading activity that week. After that, it will begin
publishing daily reports, it said.
The initiative is part of a push to make the gold market more transparent
after accusations of price manipulation by banks and traders and pressure
from regulators.
Last year, the LBMA began publishing monthly data showing how much gold and
silver is stored in London’s precious metals vaults.
At the end of June, they held 7,684 tonnes of gold worth $309 billion and
34,901 tonnes of silver worth $18 billion, according to the data.
The five banks that settle transactions in London have also changed the rules
of their clearing house to make it easier for newcomers to join. (Reporting
by Peter Hobson; Editing by Jan Harvey)
I included the article because Aaron asked me about it that day, and I wanted
to share my response so that I can add to it now that I've seen what they
released:
Aaron: Subject: How big is the LBMA
Do you think you'll get any new insights from the LBMA data that you don't
already know? This is the one quote that caught my eye making me think there
won't be much if any new information:
"but this data contains only transactions which reach settlement in
London."
Me: I don’t expect to learn anything new. I’ll have to see how
the LBMA itself describes the data once it is released. Until then, whatever
anyone says is really meaningless. The “clearing volume” only containing
London settlement which you quoted is meaningless. It’s written by someone
with very little understanding, who thinks this is physical gold and not gold
credits they’re talking about. The description in the 2011 survey is what
gives the data meaning. It told how many of the banks reported, what they
reported, and what they did with the data (divide by 2 to avoid double
counting). We’ll have to see if they say something similar when they release
the first data. My guess is they’re doing something different this time, and
the data will be less meaningful than the 2011 survey.
Ronan Manly has a good article about it which DI posted in the last thread,
which you can read here. He noted the main thing I noted too, which was an
obvious discrepancy between this new data and the 2011 survey. It's almost
like comparing apples to oranges.
I'll try to explain it as simply as possible. The basic concept is that
whatever data they report is only really going to have meaning when compared
to other data they report using the same method. It's impossible to draw any
real meaning from isolated LBMA data, simply because of what the LBMA is,
which is a bullion banking organization pretending to be a commodity market.
For example, in the 2011 survey, they gave us total sales and purchases
(called "turnover" for short) in both weight and value terms, and
they also gave us the number of trades which made up those numbers. Simple
math gave us the size of the average trade that made up the survey. The
survey covered 385,852 different trades, with a total value of $15.2 TRILLION
representing 10.9 BILLION ounces of gold, or 340,402 tonnes, about twice the
amount mined in all of history.
This was over the course of one quarter, which in Q1 2011 was 63 trading
days. Breaking it down to the daily average, it was 6,125 trades per day with
a total daily value of $240,813,277,059, representing 173,713,000 ounces, or
5,403 tonnes traded per day. No need to halve that, because they already did.
From the survey:
"It should be noted that the figures
provided for trade between members were
divided by two in order to avoid double
counting. This is rather conservative in that
many of the trades reported with members
would be with members that were not
themselves reporting. The figures for sales
and purchases should be added to get an idea
of the total trading turnover."
So with these numbers, we can divide $240,813,277,059 by 6,125 trades, and
5,403 tonnes by 6,125 trades, and we come up with the average trade used in
this survey. The average trade was $39M+, or 9/10ths of a tonne. That's
28,361 ounces per trade, and there were 385,852 of those trades reported by
36 LBMA members covering 63 trading days. With that, we can divide the daily
total by the number of members and get the average number of
39-million-dollar-trades that each member reported for each day, on average.
It comes out to 170 trades per day, per LBMA member, on average, and each of
those trades averaged almost a tonne. So each reporting member traded almost
a tonne, 170 times a day, on average.
Think about it. What does that mean? Were these wholesale trades? Were they
mainly between banks, or between banks and customers? What I think
they might be is the netting out of the bank customer's daily volume.
Imagine that a customer of a bullion bank runs a gold trading platform where
he makes a nice profit from trading fees, but doesn't want to be exposed to
losing money if the price of gold goes the wrong way. He makes money whichever
way it goes, because he gets a small piece of every trade on his platform. So
the way he hedges his price risk is by keeping a gold-denominated account at
the LBMA, and he buys or sells each day to offset his price exposure on his
trading platform.
I don't know if this is what most of those $39M trades are. It's just a
guess. But the point is that each $39M "trade" actually represents
a netted out value from the customer. If he needed to buy or sell $39M at the
end of a day, then his own trading volume was probably ten times that amount.
Now, the point that I'm really trying to get to is that these numbers
are meaningless in isolation, because we don't know enough about where they
came from. Are we just supposed to assume the LBMA is made up of a bunch of
Giants trading a tonne at a time, 6,125 times a day, every day? Or is it
really the de facto central clearing system for global paper gold trading?
Where these numbers do have meaning is by comparing them to other data
they reported using the same method. And thanks to the clearing volume
numbers in the report, we have a consistent stream of data from 1996 – 2018
to use for comparison. They began reporting average daily clearing volume in
1997, going back to October of 1996, and they continue that today. The
numbers change over time, but they are consistent, and because of that, they
make some sense.
The 2011 survey included the clearing numbers from this same series, so we
could compare the "turnover" of 36 LBMA members with the
"clearing volume" of the clearing members. The comparison yielded a
ratio of 9.25 to 1. This means that the trading volume or turnover of the
reporting banks was 9.25 times larger than the clearing volume. And since
only 36 of the 56 LBMA members reported their volume in that survey, most
people just round the multiple up to 10. It could be higher, but 10:1 is
probably a good conservative ratio for estimation purposes.
Even the LBMA itself acknowledged the multiple of 10 in that very survey:
"It can also be seen that there is an
approximately ten to one ratio between the turnover figures and the clearing
statistics. It can be seen that spot transactions form the large majority
of the total (around 90%), with forwards and other transactions each
representing around 5%."
Note also the breakdown in that survey. Of all the trades reported, 90% were
"spot" transactions, 5% were "forwards" (basically the
LBMA OTC equivalent of COMEX futures), and the last 5% were other
derivatives, including "options and bullion-related commodity
swaps."
Now, moving on to the new data, the discrepancy is in the ratio. The clearing
volume series they're using is the same one they've been using since
1996. That's consistent, and the latest numbers are from Sept. 2018. They are
18.9 million ounces or 588 tonnes valued at $22.6B cleared each day, on
average. The new data, however, is supposed to be "Daily Average Turnover", the same as the 2011
survey. But currently, they're reporting $36.9B in daily turnover. Compared
to $22.6B in daily clearing volume, that's a ratio of 1.6 to 1, not
the expected ratio of somewhere around 10 to 1.
Ronan Manly noted this discrepancy, and so did the LBMA itself!
Here's the supporting document released by the LBMA along
with the initial data, and here's what it says about the 1.6 ratio:
"There are two regularly published statistics –
monthly net clearing and vaulting data. With respect to clearing, in October,
the latest available print, 18.7 Moz/day was ‘cleared’. If last week was
similar it would mean volume traded on the London market is around 1.6x
that which is cleared. This ratio will raise some eyebrows given market
lore has suggested the ratio is 3x, or 5x, or even 10x."
Market lore? Market lore??? Again, here's what the LBMA itself wrote
on its own 2011 survey:
"It can also be seen that there is an
approximately ten to one ratio between the turnover figures and the clearing
statistics. It can be seen that spot transactions form the large majority
of the total (around 90%), with forwards and other transactions each
representing around 5%."
Market lore my ass. The LBMA itself said 10 to 1, and now they're releasing a
document that calls that number market lore? The document goes on to make
various excuses for the discrepancy. I will debunk each one here:
"Of course LBMA-i covers only the trade of LBMA
Members (and not quite all Members), whereas clearing is used by Members and
non-members alike..."
The 2011 survey also surveyed only members. In fact, the 2011 survey only
included 36 members, while this new data comes from 42 members, so if
anything, we should expect a slightly higher ratio than 9.2. So this
doesn't explain it.
"And once again having only one week’s data means we
cannot assume this is the normal ratio– next week could be much higher or
lower… It is also possible that the clearing numbers in November, the week
for which we have volume traded data, were much lower than in October, though
they tend to be quite stable."
Applying the expected ratio of 10 would mean the trading and clearing
volume dropped by 84% from September to November. Nothing even remotely close
to this has ever happened before, which is what he means by "they tend
to be quite stable." So this doesn't explain it. Try again?
"But the LBMA-i exercise has also shown that a
reasonable proportion of clearing does not see a trade – transfers within
metal accounts, across customers, novations and so on."
Here we're getting into the meaninglessness of this data. Some things, he
says, are not counted as a trade in this data. Were those things counted in
the 2011 survey? Could they account for an 84% difference? I don't think so,
but something is clearly missing from this data. It's 6 more members
reporting than last time, yet they're reporting only $36.9B per day versus
$240.8B per day in the 2011 survey.
So what's missing? And where is it missing from? Did it come out of forwards,
swaps or derivatives? Apparently not, because in this new data, forwards,
swaps/loans and options are up to 37% of the total, up from 10% in 2011, and
"spot transactions" are down from 90% to 63%. So, best guess,
whatever is missing came out of spot.
Ronan Manly takes a stab at what might be missing:
"It was in a January 2015 letter to the Fair and
Efficient Market Review (FEMR) at the Bank of England, where the LBMA stated
that: “it is worth noting, that the role of the central banks in the bullion
market may preclude ‘total’ transparency, at least at public level…”
Have these or other types of trades, such as sovereign trades been masked or
filtered out of the trade volume data?"
If that were what was missing, it would mean that such CB/sovereign trades
were not only included in the 2011 survey and masked or filtered out of the
new data, but that they made up 84% of the 2011 data. I suspect there might
be a simpler explanation.
I will give you a hypothesis, the reasoning behind it, and the hypothetical
conclusion that can be drawn from it. Don't consider this my theory as to what's
going on here. I don't know what they did to the data, and I don't really
care that much. It doesn't affect my view one bit, one way or the other. But
I can tell you what makes the most sense and why, and show you what it would
mean, hypothetically, which is pretty stunning in my view.
Let's say, hypothetically, that what's missing is the "gold as a FOREX
currency" portion of the volume. If that were the case, why would they
want to exclude it? And how would they exclude it? And if that were the case,
can we deduce how much of the LBMA is actually currency trading? I will
answer these questions now!
If you recall, I published Gold as a FOREX Currency in October of 2013. The 2011
survey had come out in August of 2011, right around the time that the price
of gold peaked. There was much discussion and debate over the volume in that
survey for the next two years, and Gold as a FOREX Currency was
offered as an explanation for such stunning volume.
That post prompted another gold writer, who was writing for The Daily
Reckoning at the time, to write to the LBMA and ask them if gold as a FOREX
currency was included in the survey. Here was that email, dated the same date
as my post:
Sent: Friday, 18 October 2013
To: mail@lbma.org.uk
Subject: Some information please
Hi there,
I am conducting some research into the gold market.
I am trying to gain a little more understanding about LMBA turnover.
According to your 2011 survey, average daily trading volume in the London
market in this period was 5,400 tonnes, equivalent to US$240.8 billion at the
time.
Given that most of this is ‘spot’ gold trading (and its understated given the
lack of full responses from members) and it’s clearly not that much physical
changing hands/ownership (more than annual scrap and mine supply trading per
day would be impossible, despite the large outstanding stock of gold) can you
provide some information as to what accounts for this huge level of trade?
The only thing I can come up with is that it’s related to currency trading.
As you probably know, you can trade gold on a computer screen in the same way
you can trade global currencies. Its currency code is XAU. I’d imagine
XAU/USD long or short is a pretty popular pair trade. Is it this ‘gold as a
FX currency' trade that accounts for the huge amount of daily spot volume?
Would gold as FX trade be reported to you as part of the survey?
Any info you could provide to clear this up would be much appreciated.
Cheers,
It took more than five months of him pestering the LBMA to get an answer. The
email was passed around the office, and ended up with the LBMA Public
Relations Officer at that time, Aelred Connelly, who wrote in January of 2014
that he'd have to do some research in order to answer the question:
From: Aelred Connelly
Sent: Thursday, 30 January 2014 1:32 AM
To: XXXX
Cc: LBMA Mail
Subject: RE: Some information please
Dear XXXX,
I refer to your questions below which have been passed to me. First of all, I
would like to take the opportunity to apologise for the delay in our
response.
This was a one-off survey which was conducted before I joined the LBMA with
36 of the 56 full members involved in gold trading. As I was not directly
involved in the survey I will need to do some research to find answers to
your questions. I will come back to you as soon as I can with a response.
Kind regards,
Aelred
A bit more pestering and he finally came back with an answer, in March:
From: Aelred Connelly
Sent: Monday, 24 March 2014
To: XXXX
Cc: LBMA Mail
Subject: RE: Some information please
Hi XXXX
Apologies for the delay, but I thought that my colleague had already
responded to your questions. The Survey included all forms of gold trading so
certainly included gold currency trading which would have contributed to the
significant numbers that came out of the Survey. We are in the process of
discussing with market participants running more regular surveys. I will keep
you posted on developments. I am not sure if you have seen the article that
accompanied the results of the 2011 Survey, see below. Once again apologies
for the delay in responding to your questions.
http://www.lbma.org.uk/assets/Loco_London_Liq...ty_Surveyrv.pdf
Kind regards,
Aelred
Perhaps it never even crossed their minds before that email what an oversized
portion of the volume would consist of FOREX-style "gold" trading,
i.e., XAU/Whatever, which is so clearly not physical that it could be
somewhat embarrassing to the LBMA that they inadvertently included it in the
survey.
Of course it should be in the survey because it makes up the bulk of
the worldwide "gold" trade, and therefore has the heaviest
influence on the price, but I propose to you that these emails might be
behind their decision to exclude it from the new data. There's a reasonable
argument to be made that this was embarrassing at the very least. Or even
worse, it exposed how the "gold" market is mostly just electronic
FOREX trading.
So perhaps they figured out a way to separate LBMA member "trades"
originating from FOREX trading from other trades. Maybe the members report
all trades, with some kind of notation next to trades with customers who run
FOREX platforms and such, and then the LBMA just excludes those from the
published data. I don't know. I'm only hypothesizing. But it would make sense
to get it all, and then separate FOREX out at the LBMA rather than asking
each member to exclude FOREX-related trades itself. The members might not
even know the LBMA is doing this to their data, since they're only publishing
aggregated data.
So there's the why and the how. The last question is, if this is what they're
doing, can we deduce how much of the LBMA is actually FOREX trading? And the
answer is yes!
First off, the numbers they put out are stunning in their own right, even
without whatever is missing. As Ronan put it, "roughly every three and a
half trading days, trading of ‘gold’ by LBMA members for ‘settlement’ in
London or Zurich exceeds the amount of gold physically mined globally
in an entire year." That's what the numbers they put out say!
So that's not what this is about. It's not that the volume they're showing
isn't shocking enough, it's that it looks like they did something sneaky with
the data. And that implies they have something to hide. I think they do
have something to hide—that the "gold" market is 84% XAU
trading.
Now, one thing that is consistent between the 2011 survey and the new data is
that they break it down into three categories, spot, forwards, and
swaps/loans/options. Here's what the breakdown looks like in the 2011 survey:
And here's what it looks like with the new data:
So, really quickly, here's what I did. Assuming current clearing numbers are
roughly similar to September, and assuming a ratio of 10 to 1 as is
reasonable to assume, then the real volume should have been 10 x $22.6B, or
$226B rather than $36.9B. That leaves us with a missing $189.1B. $189.1B is
84% of $226B. In other words, XAU is 84% of the LBMA trading volume,
hypothetically of course. So here's how the real apple looks:
Happy Thanksgiving! :D
Sincerely,
FOFOA
__________________
Freegold is Much
Simpler than the $IMFS
Koba wrote in the comments:
"Hello fofoa
After reading the warning from Peter Navarro on CTH, I am reading some older
posts of Sundance on CTH, and I wonder what you think of the so called
“Globalist (Wall St.) -vs- Nationalist (Main Street) confrontation.“
It's explained in a lot of posts like these:
target="_blank" https://theconservativetreehouse.com/2018/...d-down-or-else/
target="_blank"
https://theconservativetreehouse.com/20...-winnerslosers/
< target="_blank"br>
https://theconservativetreehouse.com...ns-wall-street/
So my question is, do you think Sundance has a good view of economics and the
way the Trump administration is trying to make things work and trying to
change things?
I think he (and Trump) may be right in things that need to be done and all of
them are good steps, but it's one thing to try to do the right things, but
it's a whole other thing to make things work without the needed bust,
hyperinflation and cleansing of all the malinvestment and without main street
feeling pain...
do you think they underestimate the pain and the cleansing that will come
first before things will be better?"
Hello Koba,
I think you said it pretty well there! :D
Sundance understands things well from a certain starting point, but what he's
missing is the most fundamental underlying cause. For example, he is right
that Wall Street and Main Street are disconnected. What's good for Wall
Street is not good for Main Street, and that one is not a reflection of the
other. Wall Street is rather a reflection of the $IMFS, which is the use of
dollars and US assets as global savings and monetary reserves, which
overvalues the dollar for imports, and therefore sends manufacturing abroad.
That last part is the fundamental underlying cause that he's missing.
To end the bad stuff, you simply take away the cause. You take away the
$IMFS. And you do that by ending the use of dollars and US assets as global
savings and monetary reserves, which will collapse the dollar's overvaluation
and naturally bring manufacturing back to the US.
Interestingly, if you really think about it, the things we're doing are
likely to help that process along. So, even if you don't know the primary
cause, if you purposely restrict or reverse the primary effects
thinking they are themselves the cause, you may be unknowingly undermining
the already-crumbling real foundation.
This may just seem like dumb luck, but is there really any other way, even if
you knew exactly how foreign support for the dollar over the last 40 years
built up Wall Street while eroding Main Street? Would people understand it
better if you tried to explain the real primary cause rather than explaining
primary effects as causes? Would people be more understanding if you went
directly after the primary cause rather than attacking its effects? Would you
be hailed as a genius, or locked up as a lunatic, for explicitly blocking a
main form of your own government's financing, while explicitly destroying
peoples pension funds and retirement nest eggs along with your own national
currency?
Wouldn't it make more sense, even if you had perfect knowledge, to go about
things more in the way Trump is doing it, than to try to attack the $IMFS
head on?
And then for someone like Sundance, wouldn't it make more sense to explain it
the way he is, even if he had perfect knowledge of the real underlying cause?
He has a large audience, much larger than I ever had, well over a hundred
thousand. Then again, economics and money aren't his main topic. But can you
imagine if he tried to add a deeper layer on the money and economics part, a
layer basically equivalent to what you've learned at my blog? Would that make
his audience larger or smaller?
I'm not saying he knows Freegold. I'm just saying, if such an all-knowing
perfect genius blogger even existed, wouldn't he need to separate things kind
of the way the Speakeasy and CTH are separate?
The true big picture is really not that complicated. In fact, I believe all
of this stuff that we at the Speakeasy know now, will be common knowledge in
Freegold, and it'll be difficult to explain to anyone then, how impossible it
was to explain to most people now, before it happened. It's because, due to
inherent biases, we are basically wired to resist understanding the primary
cause while it is still causing its effects.
We are wired to resist understanding that our financial domination and the
perks that go with it are mostly the result of an exorbitant privilege that
was given to us by foreigners, mainly beginning—for a specific purpose—in
1979, and not something we earned. We are wired to resist understanding that
a lot of our privileged lifestyle is due to foreigners overvaluing our
currency by saving in it and pegging their currencies to it. We are wired to
resist understanding that the financial world as we know it today is not how
it would naturally evolve. That it is not something real. That it is merely
an outgrowth, like a tumor, of something very specific that happened over the
last 40+ years. It is not what would have naturally evolved without that
something we call the $IMFS.
And we are therefore wired to resist understanding that our savings in this
system—the fishbowl in which we swim—are an illusion, which could disappear
in a flash. If it was possible to get them all out, then we wouldn't be wired
to resist that notion. But it is not possible. At this late point, it is only
possible for a little bit at the margins to escape. And that's why Freegold
could never be widely understood before it happened, even if a genius blogger
or godlike president with perfect knowledge of everything could exist, we
still couldn't get more than just a little bit of a few people's savings at
the margins out.
You might wonder, then, how do we know our view is more fundamental
than what's at CTH? How can we objectively judge this apparent difference of
opinion by apparently smart people, when we ourselves are on one of the
sides? I'll tell you the way I know, and then you can judge for yourself.
I can appreciate what Sundance writes, even the economics part, and I can see
clearly what he's missing. You can too, Koba. I can tell you can because you
basically nailed it in your comment. But I also know from experience that the
opposite isn't true, that Sundance or someone from his blog would not be able
to appreciate the economics that I explain. With the foundation of Freegold,
the various other schools of thought out there are quite easily understood,
in my experience, both personally and secondhand, yet the opposite is never
true. In fact, the more committed one is to another school of thought, the
more resistant he will be to the idea that a deeper, more fundamental
explanation even exists. And then there's the whole gold part, which makes
Freegold easy to dismiss at only a superficial glance. The name alone turns
some people off, which is fine.
Like I said, however, it's not all that complicated. It's quite simple
actually, because when you get down to any true foundation, it usually is
simple. It's the additional levels that get built on top of one another that
get increasingly complex. That's why solutions you see other people write
about, even someone like Sundance, seem so complicated compared to Freegold.
It's because they are trying to fix things at a more complicated level, not
realizing there's a simpler foundation below.
A lot of the stuff that is problematic today is simply going to cease to
exist when the $IMFS collapses, because it wouldn't exist in the first place
without the $IMFS. Remember, this is not what would have naturally evolved
without the $IMFS. It's kind of like the Matrix, only most of what you see
around you is real. It's just the monetary and financial stuff, and the
beliefs people hold due to the monetary and financial stuff, that's an
illusion.
Now, with that in mind, here's a section from Sundance's post. He's
explaining the disconnect between Wall Street and Main Street, as well as
what he sees as Trump's solution. Notice how complicated it is. That's
because it's constructed with the existing $IMFS as its foundation. (I'm only
including this as an example to help you see the point I'm making. There's
nothing of particular value in this excerpt):
"President Trump and Treasury Secretary Mnuchin
have already begun assembling and delivering a new banking system.
Instead of attempting to put Glass-Stegal regulations back into massive
banking systems, the Trump administration is creating a parallel financial
system of less-regulated small commercial banks, credit unions and
traditional lenders who can operate to the benefit of Main Street without the
burdensome regulation of the mega-banks and multinationals. This really is
one of the more brilliant solutions to work around a uniquely American
economic problem.
♦ When U.S. banks were allowed to merge their investment divisions with their
commercial banking operations (the removal of Glass Stegal) something changed
on Wall Street.
Companies who are evaluated based on their financial results, profits and
losses, remained in their traditional role as traded stocks on the U.S. Stock
Market and were evaluated accordingly. However, over time investment
instruments -which are secondary to actual company results- created a sub-set
within Wall Street that detached from actual bottom line company results.
The resulting secondary financial market system was essentially ‘investment
markets’. Both ordinary company stocks and the investment market stocks
operate on the same stock exchanges. But the underlying valuation is tied to
entirely different metrics.
Financial products were developed (as investment instruments) that are
essentially wagers or bets on the outcomes of actual companies traded on Wall
Street. Those bets/wagers form the hedge markets and are [essentially] people
trading on expectations of performance. The “derivatives market” is the
‘betting system’.
♦Ford Motor Company (only chosen as a commonly known entity) has a stock
valuation based on their actual company performance in the market of
manufacturing and consumer purchasing of their product. However, there can be
thousands of financial instruments wagering on the actual outcome of their
performance.
There are two initial bets on these outcomes that form the basis for
Hedge-fund activity. Bet ‘A’ that Ford hits a profit number, or bet ‘B’ that
they don’t. There are financial instruments created to place each wager. [The
wagers form the derivatives] But it doesn’t stop there.
Additionally, more financial products are created that bet on the outcomes of
the A/B bets. A secondary financial product might find two sides betting on
both A outcome and B outcome.
Party C bets the “A” bet is accurate, and party D bets against the A bet.
Party E bets the “B” bet is accurate, and party F bets against the B. If it
stopped there we would only have six total participants. But it doesn’t stop
there, it goes on and on and on…
The outcome of the bets forms the basis for the tenuous investment markets.
The important part to understand is that the investment funds are not
necessarily attached to the original company stock, they are now attached to
the outcome of bet(s). Hence an inherent disconnect is created.
Subsequently, if the actual stock doesn’t meet it’s expected P-n-L outcome
(if the company actually doesn’t do well), and if the financial investment
was betting against the outcome, the value of the investment actually goes
up. The company performance and the investment bets on the outcome of that
performance are two entirely different aspects of the stock market. [Hence
two metrics.]
♦Understanding the disconnect between an actual company on the stock market,
and the bets for and against that company stock, helps to understand what can
happen when fiscal policy is geared toward the underlying company (Main
Street MAGAnomics), and not toward the bets therein (Investment Class).
The U.S. stock markets’ overall value can increase with Main Street policy,
and yet the investment class can simultaneously decrease in value even though
the company(ies) in the stock market is/are doing better. This detachment is
critical to understand because the ‘real economy’ is based on the company,
the ‘paper economy’ is based on the financial investment instruments betting
on the company.
Trillions can be lost in investment instruments, and yet the overall stock
market -as valued by company operations/profits- can increase.
Conversely, there are now classes of companies on the U.S. stock exchange
that never make a dime in profit, yet the value of the company increases.
This dynamic is possible because the financial investment bets are not
connected to the bottom line profit. (Examples include Tesla Motors, Amazon
and a host of internet stocks like Facebook and Twitter.) It is this
investment group of companies that stands to lose the most if/when the underlying
system of betting on them stops or slows.
Specifically due to most recent U.S. fiscal policy, modern multinational
banks, including all of the investment products therein, are more closely
attached to this investment system on Wall Street. It stands to reason they
are at greater risk of financial losses overall with a shift in fiscal
policy.
That financial and economic risk is the basic reason behind Trump and Mnuchin
putting a protective, secondary and parallel, banking system in place for Main
Street.
Big multinational banks can suffer big losses from their investments, and yet
the Main Street economy can continue growing, and have access to capital,
uninterrupted."
Glimpsing the Hereafter
Realizing just how much of the financial sphere that we live inside of is a
result of the $IMFS, and not how things would have evolved naturally without
it, reveals some surprising predictions about the future. But when I dare to
tread here, which isn't very often, at least not publicly, I encounter
resistance even from Freegolders, usually based on their own biases.
For example, when I talk about trading in the hereafter, $IMFS traders are
sometimes resistant to the obvious. Or when I talk about real estate
investing in the hereafter, those with plans to jump back into real estate
investing in Freegold are resistant to the obvious. If I talk about banks in
the hereafter, those who really hate banks in the $IMFS are resistant to the
obvious. And the same goes for central banks.
But these are just predictions based on the concept that things that are
obvious outgrowths of the $IMFS will die off due to lack of support and
incentive once it is gone. Yes, I do consider that inertia and old habits
might keep certain things going even after they become obvious losers, so my
predictions don't necessarily mean things will change immediately. They are
really only observations that certain things we take for granted today we
probably shouldn't, because they are effects of the $IMFS.
A big one that I think about often is the idea that most big companies today
are owned mostly by stock market shareholders ("investors", but
really savers). This idea is so pervasive and entrenched today that I'm sure
a lot of you will be resistant to the obvious.
If you have a big company today, the goal is generally to IPO. When you IPO,
you sell off a good portion of your company to the public, and that's when
you become a billionaire and your employees become millionaires. IPOs have
really taken over the financial landscape, and most big companies are now
publicly traded.
The reason for this is that almost all of the savers' savings is in the
financial markets just waiting to buy companies that savers don't understand,
and make the people running them millionaires and billionaires while
incentivizing them to do things they probably wouldn’t do if they didn't take
their companies public.
In the olden days, companies were owned by families, by titans of industry,
and banks were owned by the likes of JP Morgan and the Rothschilds. I don't
think we'll go that far back, but I do think that company ownership, like
real estate ownership, will consolidate and come off the exchanges in the
hereafter, and IPOs will become the exception rather than the goal.
Another one that I like to think about but almost never write about (because
almost everyone is resistant to it and I find arguing about it to be a waste
of time) is how we will store, trade and transport gold in the hereafter. Now
bear with me, because all of these points are thought out over many years of
consideration. I could write 50 pages on this topic (although I won't because
it would be a waste of time), it's that well thought out. But I'm only giving
you the abstract here.
In Freegold, maybe not immediately, but this is how things will develop, we
will store our gold at the bank, buy and sell it through the bank, and when
we move or want to move our gold or send it to someone, it will be done via
unallocated pools at the bank, not unlike the way central banks use the BIS
(fully reserved) unallocated today. Now before you knee-jerk me on this, I'm
telling you now that all the reasons you wouldn't trust a bank with your gold
today will be gone, and with the globally centralized bullion banking credit
system of the LBMA dissolved, there will be no systemic risk to Freegold.
Buying, selling, storing and transporting gold today is a complicated
process, by necessity. And it's very different for different people,
depending on where you live. As I have discussed many times, the moment of
revaluation is the moment of "peak risk" to your gold, or at least
to your gain. Some of us have gone to great and complicated lengths to secure
that gain against that moment of "peak risk", but once that moment
has passed, what then?
Many ideas have been discussed over the years, and companies have come and
gone based on some of them. But after much contemplation, I'm here to tell
you that the simplest solution is what will ultimately come to pass, and
that's your local bank vault.
When a little gold suddenly becomes extremely valuable, I don't want to have
to store it, transport it or trade it by mail or over the internet the way I
have in the past. I want to stick it in my local bank, in the main vault,
knowing it's secure and fully insured, which it will be very cheaply, at
virtually no cost to me. And that's how it will be. Maybe not immediately,
but give it some time for things to settle.
Banks are the obvious solution. The infrastructure, vaults and networks are
already in place. And at $55K per ounce, your local bank could hold $100M in
local customer savings in a small corner of the vault. $100M would be about
90 of these mint tubes of gold Eagles:
Four of these mint "monster boxes" would be $110M in savings, and
it would be fully insured against bank robbers:
The actual gold pieces that you have today will be stored for you, unless you
choose to have them standardized in which case they will be assayed (tested),
and exchanged for something standardized. If you want to sell them, you will
sell them to the bank and they will be tested. If you want to buy some, you
will likely buy pre-tested standardized gold from the bank. If you want to
move your gold because you're moving, or you want to send it to someone, or
just to another locale, you'll probably choose to exchange it with the bank
for standardized gold in the new location, because that will be the cheapest
option. If you want the bank to transport your actual pieces, it will do that
for a fee, and your gold will be insured by the bank during transport.
This will all seem quite mundane in the future, as hard as it is to imagine
right now. But if you want to argue against it, be sure to explain how the
way things are today is not just an effect of the $IMFS. And keep in mind
that fractional reserve bullion banking, which is simply a carryover from
regular London commercial banking during the gold standard, will be no more.
It only exists as a carryover from Bretton Woods. It cannot spontaneously
reappear again simply because the banks will be securely holding people's
Freegold. And if fully insured physical bank storage was an option, where
else would you store it? Nowhere else would make sense.
Most of the industrial gold trade will no longer exist. It won't be
profitable. And gold will be too dear for most of today's uses. Your local
coin dealers, and dealers like APMEX and Kitco, will no longer exist. It will
no longer be profitable. And you'll keep your gold where everyone else does,
where it's most secure and fully insured at almost no cost.
As far as fraud goes, of course there will be fraud. There's always someone
committing some fraud somewhere. But that's all it will be, an isolated
crime. It won't be systemic.
So there you have it. Someone brand new who just joined the Speakeasy a week
ago, his first search after getting in was "what do we do with our gold
after Freegold?" He probably doesn't even know I saw that. Ha! I see
everything. ;D
Sincerely,
FOFOA
__________________
Money Is Credit Is
The Answer
I found this instructive and stimulating, so I thought I'd put it up as a
post since only a few of you watched it in the comments. In the comments I
wrote:
This was good. Who here knows what he’s missing. ;D
I got some good answers!
MdV pointed to the Debtors and Savers dichotomy. He wrote, "Obviously
his comments on Marx are not what you wrote about in Debtors and Savers.
Marx’s error was an incorrect assessment of the groups in conflict." In
the video, George Gilder said, "Marx's great error, his real
mistake," was thinking that the 19th century industrial revolution was
the pinnacle of human productivity, so all that was left to do was not the
creation of more productivity, but just the redistribution of what we already
had.
That's basically what he said. And then the continuation of Marxism is each
generation constantly thinking the same thing; that we've finally reached the
pinnacle of human productivity, and now we redistribute rather than create.
Creativity, he says, is the foundation of Capitalism, and Marxism stifles
creativity by trying to plan the future. Creativity cannot be planned.
Creativity requires unplanned surprise. He says this is really what Socialism
is all about; saying that, what we have now is all we're ever gonna get, and
that we know as much as we need to know to plan the entire future. That, he
says, is fundamentally hostile to human creativity, and antithetical to
Capitalism.
I can't really disagree with that, so maybe Marx got more than one thing
wrong! ;D
Jand79 pointed out that, in discussing his new blockchain-based financial
system, the thought doesn't seem to have crossed his mind that money and
savings have different primary functions. Money's primary function is
transactional, while savings' is storing value. Jand79 wrote, "Even if
blockchain will be a new global, distributed financial database, we still
need something to store our excess in, to be used later when needed."
Bravo, Jand79! :D
In the video, George Gilder explains something he target="_blank"calls the cryptocosm. As he describes it, it's going to be an
entirely new internet architecture, unseating Google et. al., an entirely new
financial system, displacing the $IMFS which is dying, and an entirely new
basis for money, displacing fiat currency itself. It's important to
understand the sweeping nature of what he's imagining, because it's like a
pyramid of layers, one built on top of another, and all built upon the
original foundation, which in this case is Bitcoin, circa 2008.
The new blockchain-economy cryptocosm internet will be made possible by the
new cryptocurrency financial system, and the new cryptocurrency financial system
will be made possible by cryptocurrency unseating fiat currency. Not Bitcoin,
however, which he explains has various flaws that mean it will not be the
foundation for the new currency. He likes Ethereum, which he says has
produced $20 billion in new ICO's, initial coin offerings of various
Ethereum-based coins, over the past year.
The financial system, he says, has come to the end of the line. Its sole
function today, he says, is to endow central banks with the capability of
generating money and imposing a "doomsday pod" of $250T of debt on
the world economy. Right here he appears to be missing something big.
Central banks don't impose debt. They create base money, and the presence of
passive savers saving in the central bank's base money-based financial system
gives that money the stored value that enables governments and the rest of
the debtor class to impose the "doomsday pod" on the world. So his
causation is off. You can't have $250T in debt without a currency collapse
unless someone is supporting the currency by saving in it. So it's the system
that encourages saving in bonds and other assets denominated in fiat currency
that "imposes the doomsday pod," not the currency itself or the
central banks.
He also points to the prevalence of currency trading in the current financial
system, and how it doesn't even produce stable currency values. But its
prevalence is due to perpetual imbalances in the system, that produce the
instability necessary for currency trading. Take the imbalances away and the
exchange rates will stabilize and the currency traders will have to find some
other way to game the system.
But what it all boils down to is savers saving in fiat currency. The PBoC
hoard of $1.165T in US Treasuries, and all CB foreign currency reserves for
that matter, do act as a proxy for savers saving in fiat currency. But it’s
really the private sector that carries the lion's share globally. This is
the imbalance that enables massive currency trading and the massive debt
burden.
What it really comes down to is FOFOA's dilemma: "When a single
medium is used as both store of value and medium of exchange it leads to a
conflict between debtors and savers. FOFOA's dilemma holds true for both gold
and fiat, the solution being Freegold, which incidentally also resolves
Triffin's dilemma."
The point is, you can't fix the financial system without addressing the most
fundamental flaw in it, and you can't address that flaw if you haven't even
identified it. And he hasn't.
He apparently comes from the Lewis Lehrman hard money camp, so we can guess
what he's thinking. He's probably thinking that a financial system based on a
more gold-like currency, arbitrarily limited in supply, will somehow be
better than what we have now. It's shallow thinking really, because it
doesn't address anything financial. Either you're going to have savers hoard
the currency unit itself, which is deflationary and causes economic
depressions, or you're going to have savers lending hard currency to debtors,
and saving in their promissory notes.
The point of FOFOA's dilemma is to identify the most fundamental flaw that
has plagued all monetary systems in the past, both hard and easy money
systems. When you use the same medium as a transactional currency and for
storing value for savers, it ultimately leads to a conflict between the two
real classes of people, the debtors and the savers. In essence, the debtors
require an easy money currency that depreciates over time, and the savers
want a hard money currency that appreciates over time. So when you have a
hard money, the debtors get screwed, and when you have an easy money, the
savers get screwed. It doesn't matter whether it's gold, fiat or
cryptocurrency.
So Jand79 is right! "Even if blockchain will be a new global,
distributed financial database, we still need something to store our excess
in, to be used later when needed."
All of the things Gilder says sound good. A lot of it actually sounds great.
But the question is: Is he right? If he's wrong, that doesn't mean good
things aren't coming, positive changes, a new monetary and financial system,
the decline of Google, etc. It just means that they aren't coming in the way
he says they're coming.
I think the same things are coming, but I don't think they're coming the way
he says they're coming.
Joevanderbilt hit the nail on the head when he wrote: "My take is that
the main thing Gilder is missing is the nature of money. Money is
credit."
In the video, Gilder says, "The great miracle of Capitalism was founded
on money which was identified as gold." He also says that money should
be a measuring stick rather than a magic wand. I think that both of these
statements reveal how wrong he is about the very nature of money. And
remember, that is the foundation upon which he is building his cryptocosm
pyramid.
Money is not a measuring stick. The master proxy for wealth and savings could
be a measuring stick of sorts, but money actually should be a kind of
magic wand. In terms of money being credit, it shouldn't be something that
needs to be earned first and saved by someone else before it can be lent. It
should instead be something that enables true credibility whenever it comes
along, makes it fungible and spendable such that it can fulfill its promise,
it's potential. True credibility should not be at the mercy of a past
producer's savings. That's why we have banks. Banks don't need your savings
in order to lend money.
Don't think about what banks have become in the $IMFS. That's not what this
is about. It's about what banks are supposed to be. It's the bank's
job to judge the credibility of potential borrowers. Banks are not always
going to make the perfect judgment, but a prudent bank will make enough good
judgments to turn a profit and stay in business.
After that, the bank has a special license which allows it to make loans that
become real money when lent. In essence, it allows the bank to issue
liabilities that become real money in the system. No other kind of business
can do this. It's what makes banks special, and it's what makes modern money
so great.
Money always was credit, even before banks existed. But banks make this
modern world possible. Fiat currency is so much better than gold currency,
and there's only one step left in the long evolution of money… Freegold, in
which we'll finally solve the conflict between debtors and savers by using
separate media for the transactional currency and savings. Easy money for the
debtors, hard "money" for the savers.
This is not a new co target="_blank"ncept. In The Return to Honest Money, I quoted hard money campers
Menger (1840-1921) and Mises (1881-1973):
Menger: "It appears to me to be just as certain that
the functions of being a "measure of value" and a "store of
value" must not be attributed to money as such, since these
functions are of a merely accidental nature and are not an essential part
of the concept of money.
[…]
Money is the most appropriate medium for accumulating that portion of a
person’s wealth by means of which he intends to acquire other goods
(consumption goods or means of production).
[…]
But the notion that attributes to money as such the function of also
transferring “values” from the present into the future must be designated as
erroneous. Although metallic money, because of its durability and low
cost of preservation, is doubtless suitable for this purpose also, it is
nevertheless clear that other commodities are still better suited for
it."
Mises: "Money is a medium of exchange. It is the
most marketable good which people acquire because they want to offer it in
later acts of interpersonal exchange. Money is the thing which serves as the
generally accepted and commonly used medium of exchange. This is its only
function. All the other functions which people ascribe to money are merely
particular aspects of its primary and sole function, that of a medium of
exchange.
[…]
One no longer compares the marketability of the various vendible goods
with the perfect marketability of money. One merely compares the degree of
marketability of the various commodities. One may speak of the secondary
marketability of the vendible goods.
He who owns a stock of goods of a high degree of secondary marketability
is in a position to restrict his cash holding. He can expect that when one
day it is necessary for him to increase his cash holding, he will be in a
position to sell these goods of a high degree of secondary marketability
without delay at the highest price attainable at the market.
[…]
Consequently there emerges a specific demand for such goods on the part of
people eager to keep them in order to reduce the costs of cash holding. The
prices of these goods are partly determined by this specific demand; they
would be lower in its absence. These goods are secondary media of exchange,
as it were, and their exchange value is the result of two kinds of demand:
the demand related to their services as secondary media of exchange, and the
demand related to the other services they render.
[…]
One must not confuse secondary media of exchange with
money-substitutes. Money-substitutes are in the settlement of payments
given away and received like money. But the secondary media of exchange
must first be exchanged against money or money-substitutes if one wants
to use them--in a roundabout way--for paying…
Government bonds and treasury bills which can be used as secondary media
of exchange can be floated on conditions more favorable to the debtor than
loans not suitable for this purpose. The debtors concerned are therefore
eager to organize the market for their certificates of indebtedness in such a
way as to make them attractive for those in search of secondary media of
exchange."
And easy money camper Silvio Gesell (1862- target="_blank"1930), in The
Value of Gold:
Silvio Gesell: "And it is clear that money cannot be
simultaneously the medium of exchange and the medium of saving -
simultaneously spur and brake.
[…]
I therefore propose a complete separation of the medium of exchange
from the medium of saving. All the commodities of the world are at the
disposal of those who wish to save, so why should they make their savings in
the form of money? Money was not made to be saved!"
It's not a new idea, but it's an idea whose time has finally come!
Joevanderbilt continues: "Money is credit, cryptocurrencies can never be
credit, they are more akin to a commodity, they can be used in a
money-lending kind of way, but that’s no viable solution for a modern
economy." We should discuss this, because it might not be obvious to
everyone why it's true.
Hypothetically, I can imagine a cryptocurrency being used as base money and
the unit of account for a credit money system. What I can't imagine is a
plausible path from here to there.
Right now, cryptocurrency is a secondary medium of exchange as Mises
explained it, i.e., a store of value. Secondary media of exchange, as he
explained, must first be exchanged for real money if one wants to use them
for something like paying, or spending. Even in situations where someone is
"accepting" bitcoin, fiat currency is still the unit of account. In
other words, the prices in bitcoin are still calculated using bitcoin's
exchange rate with fiat currency at the time of purchase. This is no small
deal.
For Bitcoin, or any cryptocurrency for that matter, to become the primary
medium of exchange and unit of account, you'd need to have a shift in the way
all people think about relative values, from fiat currency to whatever
cryptocurrency everyone agrees on. It would have to be on the order of the
shift from national currencies to euros in Europe. Think about what that
entailed. Decades of preparation, massive exchange rate manipulation and
central planning, and a gradual rollout over many years. It's simply not
going to happen for a decentralized cryptocurrency.
You may think you can imagine it happening, when the system finally
collapses and the dollar hyperinflates, but that's simply not the way these
things happen. As FOA said, the US dollar will not be the same as it is
today, but it will still be in use, "just like all those Pesos around
the world! […] My point is that we will all be doing just as in Mexico;
spending pesos while holding dollars and gold. Only in America we will be
saving gold… and spending inflating dollars."
There's something called Mises' Regression Theorem which explains the
evolution of money as a process of human nature. We can have monetary changes
forced on us by edict, but if we're talking about a spontaneous and natural
change, then the Regression Theorem comes into play. Here is Robert P. Murphy
explaining it, a target="_blank"gain from The Return to Honest Money:
Robert P. Murphy: "People value units of money because
of their expected purchasing power; money will allow people to receive real
goods and services in the future, and hence people are willing to give up
real goods and services now in order to attain cash balances. Thus the
expected future purchasing power of money explains its current purchasing power.
But haven't we just run into the same problem of an alleged circularity?
Aren't we merely explaining the purchasing power of money by reference to the
purchasing power of money?
No, Mises pointed out, because of the time element. People today expect
money to have a certain purchasing power tomorrow, because of their memory of
its purchasing power yesterday. We then push the problem back one step.
People yesterday anticipated today's purchasing power, because they
remembered that money could be exchanged for other goods and services two
days ago. And so on.
So far, Mises's explanation still seems dubious; it appears to involve an
infinite regress. But this is not the case, because of Menger's explanation
of the origin of money. We can trace the purchasing power of money back
through time, until we reach the point at which people first emerged from a
state of barter."
Understand that this holds true even when the purchasing power of money is
changing rapidly. Just look at Zimbabwe or Venezuela for a current example.
People will hold something else as a store of value if it's available, but
they'll keep using the same currency for paying and spending. The monetary
unit can change by edict, as I said, but it doesn't change spontaneously just
because its purchasing power changes rapidly.
Sometimes people will gradually adopt a different currency that's already in
use somewhere else if it becomes available, but never has a commodity, let
alone a hard or deflationary one, been spontaneously adopted as money,
without or even against the wishes of the government. It just doesn't happen,
and there's no plausible reason to believe it ever could happen.
And that's why Joevanderbilt's statement is true: "Money is credit,
cryptocurrencies can never be credit, they are more akin to a commodity, they
can be used in a money-lending kind of way, but that’s no viable solution for
a modern economy."
I have said this many times since I first learned about Bitcoin back in 2010,
but Bitcoin and cryptocurrencies in general are all fundamentally based on a
common misunderstanding of money, what money is, and of the properties that
make a good base money. We need easy money. We need banks. We need bank
money, credit money, easy money. Today's monetary and financial problems stem
from savers saving money, not from the properties of modern money. We don't
need to fix modern fiat easy central bank money, we just need to stop saving
in it.
I don't really want to try to tackle blockchain technology or AI in this
post, but I will give you what a few of you said, and tell you what I thought
of the comments. Then you can all battle it out in the comments:
On a new blockchain-based internet, Joevanderbilt said: "The idea of
securing the internet with blockchain technology sounds sexy, but I see that
as a sure way to end online anonymity (even more than now) and having logged
in the chain every single thing you do online. Perfect setup for the PC
police to crack down on your “hate speech” and thought crimes."
I agree, and not just the PC police, how about any police. There are
so many laws and regulations on the books that it's practically impossible
not to break some of them, no matter how honest or good you are. And that's
the way the state likes it. If they want to get someone, all they have to do
is find the crime.
I'm not a criminal. I go out of my way to not break even the smallest of
laws, because I sleep better that way. But I do enjoy being able to be
anonymous online. In fact, I have more than one anonymous identity online.
Different ones for different purposes. Anonymity is not just for criminals.
And I'll gladly forego the convenience of a single password or even no
password to keep the ability to have multiple accounts. But that's just me.
:D
On AI, he said: "I like his views on AI though, the ongoing hysteria
that the machines will outsmart us, become self-aware, take over and create
mass unemployment, is beyond ridiculous. We can’t even explain consciousness
in humans, let alone reproduce it in a machine."
Again, I agree!
One Traveler wrote: "When we hear blockchain we should avoid the
inclination to immediately associate it with crypto currency and try to
imagine possibilities like direct democracy, distributed ledgers, online
security, smart contracts, anonymity etc. As an accountant one of the
traditional roles is to provide record keeping and transparency. Would you
prefer an investment where you could see all the transactions on a
distributed ledger? Would you prefer a contract where payment was
automatically executed? Not perfect for all instances but the possibilities
are very interesting to me."
My understanding is that distributed ledgers are basically copied
ledgers. Distributed means there are lots of copies "distributed"
out there, and they all automatically run comparisons so that they all agree
they are the same. That way, you can't fabricate something or change the
ledger, because it would be nearly impossible to change all of the copies, or
at least more than half of the copies which is what I understand is required
with Bitcoin.
These ledgers can contain different types of information, things other than
just currency codes and exchanges, which makes a whole world of possibilities
seem plausible. Things like voting ("direct democracy", which is
arguably not as good as it sounds), real estate transactions and records, and
all kinds of financial transactions and records, thus the idea of a new
blockchain-based financial system.
But I don't think you can just disassociate it with cryptocurrency as One Traveler
said. This type of distributed system is highly inefficient as you can
imagine, due to all the repetition and copies that must be generated,
maintained and stored. And each distributed ledger is supposed to be run by
an independent operator, making the network decentralized and unhackable.
Therefore, there needs to be a financial incentive built into the process of
running and maintaining these ledgers, and that's where the cryptocurrency is
the necessary foundation.
I don't follow this space closely—at all really—so I'm sure there are some
counterarguments out there. I'm curious to hear any that don't include some
form of corporate centralization or corporate cooperation.
One Traveler asks if I would prefer an investment where I could see all the transactions
on a distributed ledger. My answer is no. The reason for that question is all
the fraud present in the $IMFS. But absent that, no, I prefer privacy and
trust. There's a good reason why the 300-year-old London gold market is so
opaque.
Also, would you prefer a contract where payment was automatically executed?
He's talking about Ethereum's smart contracts, but that doesn't really tickle
my fancy. I avoid automatically executed payments like the plague myself,
your Speakeasy subscriptions notwithstanding. ;D
MdV had a good question: "So how does blockchain work when goods must be
delivered? How are both parties satisfied?" And: "Then there is the
energy question. Will it always require enough power to run a small town just
to pay for a burger?"
Haha! A few weeks ago, Aaron sent me the following video. Five minute later,
he sent me another email: "I'm 5 minutes in and this must be the MOST
inefficient ledger system ever devised by man. I recall the videos you sent
me about how data throughput for distributed ledger reconcilation does not
scale, but this is just another way of saying the same thing. Bitcoin
millennials. Too bad. I guess they'll have to learn the hard way."
I'm really not a Luddite. I was saying the same stuff about Bitcoin from the
very beginning, back when I had at least 30 BTC, was still accepting
donations in them, and was still learning about the technology. I'll be the
first to admit I'm not an expert in this stuff, but the same gut that
informed me on A/FOA and Freegold which I had no idea about previously, also
informed me on this. So for anyone who cares what my gut says about this
stuff, it agrees with MdV. ;D
But enough about that, right? Here's a good target="_blank"snip from Moneyness 2: Money is Credit:
"Blondie once asked me how I would describe money in as few words as
possible. My answer was: "Money is credit." I followed that up with
a little more detail: "More specifically, it is the recording of current
balances of credit. It can be recorded in your head, represented on an
institutional ledger, or carried in your pocket as pieces of paper or metal
with numbers recorded on them. But notice that it's the recorded numbers and not
the paper/metal in your pocket that constitutes the money."
But you can't possibly understand the pure money concept without also
understanding the wealth concept. The pure concept of wealth is really
simple. Its only attribute is possession (or at least unambiguous ownership
of something tangible, if it's not in your immediate possession). Your wealth
includes all of your owned possessions, from the air you breathe down to your
comfy, worn-out slippers. Value is subjective—it's in the eye of the
beholder. Value comes from utility (usefulness) to the user. If something in
your possession has no use to you, no value, then it is likely that you won't
go to the hassle and expense of continuing to possess it. You'll probably
just throw it away. So possession is the distinguishing characteristic of
wealth, which also puts wealth squarely in the physical plane.
What sets your gold apart from your stinky slippers and other items you
possess is that it is the most tradable. Tradable wealth! Imagine that! It's
tradable because someone else values it too, unlike your slippers. But not
only does someone else value it, almost anyone anywhere in the world values
it nearly equally, even the Giants! How many of your other possessions would
measure up to the quality standards of a Giant? None, I imagine. This is what
FOA meant by "equal footing".
That's basically it in a nutshell. Those who have been following the
comments know that Blondie prefers the term "credibility" more than
"credit". It's a fine line, and I could go either way. In this post
I'll use both words almost interchangeably, but I think I'll stick
with "credit" as the closest proxy for the pure concept of money.
Think of it like this. Value is subjective—it's in the eye of the
beholder. You value your slippers, but no one else does. Gold is the
one item in the world that comes closest to having a relatively objective
value because your knowledge that others value it for the same reasons you do
is the very reason you value it in the first place. It's the reason behind
gold's utility as a store of value or, phrased another way, a wealth reserve.
Salience is a good descriptor.
Credibility, like value, is also subjective. But unlike value, it's not
something you can claim for yourself. Only someone else can judge you
credible. Ergo, credibility must be earned. It is subject to the judgment of
others. Credit is like spendable credibility. Money is the fungible exercise
of credit (accepted everywhere, even by those who don't understand why you're
so darn credible when you're wearing such ugly slippers). A bank doesn't
really give you credit. You earn it before you ever walk into the bank.
If you want to buy a house, you don't need to have saved the full price of
the house. All you need to have is earned credit/credibility. You walk into
the bank, the bank checks your credit and, if it's not found wanting,
facilitates the fungible exercise of your credit/credibility. And then,
because it's now fungible, it circulates!
The real world operates on massive amounts of credit. And by real world, I
mean the businesses that make everything in your life. Credit is not just
about consumer credit cards, evil speculators maxing out their margin and
housing bubbles. And the hard money view of "money" as something we
all want to hoard is just as pedestrian a view as thinking credit (or debt)
is something intrinsically bad. Money has always—ALWAYS—been credit/debt.
That's not bad at all. Debt is simply credit (or credibility) fungibly
facilitated and then exercised!"
You can read more of my thoughts on this s target="_blank"ubject in Moneyness 2: Money is Cr target="_blank"edit, Money
or Wealth target="_blank", and Is Bitcoin Money? But for now, I'll leave you with this:
FOA: In this light we should know that our real things in
life will not change all that much. Your tools, chairs, clothes and cars will
remain yours. Houses and land, TVs and boats, all will retain the exact same
"value" they always had. What will change is our ability to use our
currency and paper assets as a medium to measure the "real value"
that's always so inherent in these items, yet so well hidden in our
perception of today. Yes, the currency price of things will greatly change,
even as their "use value" moves little. Such is the nature of dying
paper money systems. Such is the ending of a currency timeline!
Trail Guide
ARI: So you see, learning how the world works is all about
each man coming to the understanding about the real wealth we all require to
best ensure our survival. Knowing that Gold is the master proxy for
our life's day-to-day and year-to-year shifting requirements for food,
clothing, shelter, and energy, it simply makes more sense to gather in Gold
for later use than to gather in clothes (that we may outgrow,) food (that may
spoil,) houses which are more than our needs, or energy (that we can't
store.) You see, time bears witness to this undeniable fact: Gold can be
called wealth because it is an enduring wealth proxy in exchange for our
life's needs. Currency, on the other hand, serves a specific modern economic
purpose--to be borrowed and inflated in placation of man's immediate
desires. It is not wealth, it fails as a proxy for the Gold it tries to
imitate. Do not confuse the two.
Understanding how the world works is easy as soon as you understand the
Wealth Hierarchy. Like this: Earn money/currency, buy what you need, save
Gold, enjoy what life has to offer.
Real wealth. Get you some. ---Aristotle
Sincerely,
FOFOA
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