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Why gold is (real) money

Posted by Jeff (ILoveCapitalism) at 6:15 pm - July 1, 2016.
Filed under: Debt Crisis,Economy,Free (or Private) Enterprise

In 1912, testifying before Congress, the banking giant J.P. Morgan famously said “Money is gold, nothing else.” The quote is often repeated in a fake-but-accurate form as “Gold is money, everything else is credit.”

On and off for 15 years, I’ve read/thought about why that is so; especially in view of the people (both Left and Right) who deny it. I thought I would lay out the answer for anyone with eyes to see.

According to the IMF, money is a medium of exchange, a unit of account and a store of value. It arose as an improvement on barter.

Instead of having to directly barter my apples for your oranges, I would trade my perishable apples to some third party for a particular, third good. Wait…Why would I do that? I would do it if the third good is generic, non-perishable, popular (widely admired and valued), limited in supply, and easily handled and stored. Then I can KNOW that you’ll take it trade for your oranges, and the doctor will take it from you in trade for his services, and the baker from the doctor, and so on, forever.

Right there, we can see that real money is some physical good that society’s marketplace finds to be sufficiently generic, non-perishable, popular, supply-limited and easily moved/stored – so that the marketplace will use it as a medium of exchange, and then logically also as a unit of account and a store of value. It could be shells, cattle, salt, cigarettes. But most societies in human history found that silver and gold made the best money, and then mainly gold.

In technical terms, gold is money because it is the good that has the slowest-declining marginal utility.

In layman’s terms (saying much the same thing), gold is the most marketable and hoardable good; the one good that any sane trader would always want a little more of. Oil, apples, wheat, cattle, U.S. Treasury bonds, Bitcoin, Whitney Houston CDs, etc. are not like that.

“But gold is useless!” anti-gold people will say. “It’s a pet rock!” Sorry, but that is a feature not a bug (as they say in software engineering). The fact that gold isn’t needed for some other crucial use is ONE of the reasons why it is so hoardable, and became the most important money.

(Other reasons, shared partly but NOT entirely by silver, are that it’s beautiful and artistic, straight women love it, it’s enduring / corrosion-proof, it’s divisible, it’s ultra-generic as a mere element on the periodic table, it’s compact, it’s user-friendly because almost anyone can hold it and understand what it is, it’s somewhat rare but not too rare – and again, you’re always OK with owning a little more of it. But I digress.)

In the West today, gold is no longer currency. Currency is a representation of money that gets used in a modern country’s daily life. Originally, currency was claim checks (called banknotes) on actual gold or silver at a bank. But today, we use dollars, euro, yen, etc. And what are those things? They’re inventions of certain government-sponsored banks.

They come into existence by decree, or by the mere click of a keyboard; thus the term, “fiat currency”. In effect, a fiat currency is non-redeemable shares in a particular central bank’s assets. (Yes. On each central bank’s balance sheet, the currency + bank reserves that it has created are the major part of the Liabilities + Equity column.)

And what do central banks hold as assets? Lots of financial-system crap – including government bonds, sub-prime mortgage bonds (what caused the 2008 financial crisis), other currencies, and even company stocks (the Swiss central bank is big on Apple). Plus, some gold. The top central banks hold thousands of tons.

And of those central-bank assets, which is the best and most important? Hint: Gold is the only asset in the financial system that can ever be free of “counterparty risk”; that is, the only asset which isn’t also somebody else’s liability.

A bond is somebody else’s liability. It is good only if they stay solvent. A government bond is just the government promising to pay some fiat currency, subject to risks like default or hyperinflation. Central-bank gold does not have those risks. Which is why they value it, and why the “safer” or more-prestigious central banks tend to have larger gold reserves, which adds to their strength.

Thus, although the Western world no longer uses gold as currency, it is still the “pet rock” (or Rock of Gibraltar) upon which rest the key central banks, and so the entire financial system. As such, gold is real money. And everything else – from government bonds, all the way down to your bank account and the cash (the fiat currency) in your pocket – is, in the end, mere credit.

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Discuss

Posted by V the K at 1:53 pm - July 1, 2016.
Filed under: Ideas & Trends

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On a Related Note:  Your friendly Government TSA beats the living crap out of a disabled cancer patient; to keep you safe.

 

Kurt Schlichter on the Left’s Brexit Derangement

Posted by V the K at 8:47 am - July 1, 2016.
Filed under: Unhinged Liberals

Repudiated by Voters, the Globalist Left Goes Nanners

Time to face facts. Democracy is terrible and it must be stopped when it allows other people the ability to control their destiny. Hey, that’s our job.

Take Brexit – they totally got it wrong because they simply failed to understand EU membership was so good for us – by which I mean “us,” as in the important people who live in cities and use terms like “farm-to-table” yet have never been on a farm. Our fellow transnational socialist technocrats in Great Britain tried to explain to the normals why unaccountable bureaucrats in a foreign capital should be dictating the smallest details of their lives, from the shape of their bananas to the size of their condoms. They refused to listen. That’s crazy! I mean, why would anyone need anything but an extra small condom anyway?

And their betters tried to show them how their so-called concerns about unrestricted foreign immigration and its consequences on their incomes, the nature of their communities, and their safety were really just a smokescreen for the rabid racism that lurks beneath the surface of anyone who isn’t an urban elitist like us. Did they listen? They turned down the chance for unrestricted immigration from Turkey! I mean, how could that possibly go wrong? It’s not like there is some kind of looming threat out there from organized groups of foreigners with a murderous ideology that has sworn our destruction.

I cannot help but notice that the Brexpocalypse the Left warned us about has not come to pass. The NYSE is fine. The Euro is fine. The Brent index is fine. The FTSE is fine. The pound sterling declined a bit, but that just makes things cheaper.

And here in America, people are voting for that terrible Donald Trump instead of the wonderful Hillary. It’s crazy – just look at her track record of achievement at being female and raising awareness of stuff!

I will not be voting for Trump myself, but I think one of the main delights of a Trump victory would be watching the left go even more hyperbolically insane than they are now.  It’s difficult to imagine the left becoming even more insane, but it will be fun to watch.

Republican Establishment Turns Its Back on Conservative Senate Candidate

Posted by V the K at 8:07 am - July 1, 2016.
Filed under: Republican Resolve & Rebuilding

Congratulations to Daryl Glenn, a conservative African-American who won the GOP Colorado primary for Senate.

The GOP reaction: The NRSC has decided not to provide funding for his campaign. Glenn beat Republican Establishment’s preferred candidate, and Glenn openly supports the removal of McConnell from Leadership.

Republicans just nominated a candidate who says Donald Trump is a ‘patriot,’ thinks Ted Cruz should be the next Supreme Court justice, and believes the real problem with Washington is that there is too much bipartisanship between Republicans and Democrats.

That was the description provided by Glenn’s Democrat opponent. It’s intended as an attack, but it sounds right to me. Our country’s $20 Trillion National Debt is a monument to bipartisan cooperation.