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Why gold is (real) money

July 1, 2016 by Jeff (ILoveCapitalism)

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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Filed Under: Debt Crisis, Economy, Free (or Private) Enterprise Tagged With: banking, Debt Crisis, Economy, Free Enterprise, gold, jp morgan, money, silver

When nations, companies or movements throw vengeful tantrums

June 27, 2016 by Jeff (ILoveCapitalism)

Every grownup knows what a temper tantrum looks like. The kid didn’t get his way. It’s time to make the grownups pay – by causing obstacles, by screeching about anything and everything, by hitting, and so forth. The kid might still not win on the immediate issue X. But who knows, the grownups might just try to mollify him on another issue Y. It’s part revenge, part blackmail. We can expect a lot of tantrums now over Brexit.

Brexit doesn’t change much, “in the now”. First, it hasn’t even happened. (It will be weeks or months before Britain invokes Article 50.) Second, if and when it happens, it need not affect the existing terms of European trade, finance or hardly anything other than British border control. All that it will take to keep the existing trade going is a few new pieces of paper with a few new signatures.

No, Brexit is more of a matter for the future. Assuming it happens, it will mean that the UK’s -future course- is to avoid a full-on political merger with the rest of Europe; avoid the destruction of its borders and sovereignty; etc.

And, to the various socialist cronies of Europe, that’s unforgivable. And for years, vast problems (unrelated to Brexit) have been piling up for them. And for years, they’ve tried to not admit the full extent of their problems. Problems which they have caused and/or failed to deal with.

Guess what? Now that they didn’t get their way on Brexit, they’re going to blame everything on Brexit. Even though Brexit is mostly unrelated.

It’s as if termites have eaten away at your home for years. Your home is ready to crash. You have failed to deal with it. Now your partner insists that you stay home on Saturday night and don’t go to that casino. Guess what? Your plan is to light a little fire to help your termite-eaten home crash faster; and when the cops arrive, you’ll blame your partner for everything. Now that’s a tantrum.

It’s already begun. Earlier we had the credit downgrades on the UK. It’s pure payback, of course. Nothing fundamental has changed about the UK’s finances. The ratings companies became political, some years ago. Governments can and will torture the ratings companies; therefore, they do the bidding of governments. The downgrades then add to market turmoil. In other words: Kid throws tantrum.

Another example is, crashing Italian banks that demand massive new bailouts. European banks’ finances have been rotten for years. Their stocks were inevitably going to crash at some point, when the world admitted the reality. But guess what? Brexit! So give us new bailouts!

It’s the new Climate Change, or maybe the new Salted Caramel. Everything this year is going to be Brexit. Decaying art? Brexit! Venezuelan collapse? Brexit! Fukushima radiation levels? Brexit! Solar flares? Brexit! U.S. recession? Personal negativity? Brexit!

Why not? The world – or at least, the media-socialist-crony world – hates UK Independence (and border control) that much. Everyone will agree to join the fun and not be honest about the longstanding, real causes of a great many problems.

UPDATE – it continues: The European Central Bank’s leader, Mario Draghi, predicts low economic growth and currency devaluations from Brexit. Let’s be clear.

  • Europe was already going to be stuck in years of low growth.
  • Currency devaluation is what Draghi has already been wanting and attempting, for years.

But guess what? The new scapegoat, Brexit!

Filed Under: Liberal Hypocrisy, Liberal Lies, Politics abroad, Shiny Objects & Squirrels Tagged With: banking, blackmail, brexit, britain, ecb, eu, european central bank, european union, italian banks, Liberal Hypocrisy, Liberal Lies, mario draghi, Politics abroad, revenge, temper tantrum, uk, uk independence party

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