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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.

[Read more…]

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

ISIS to U.S.: It’s on

November 14, 2014 by Jeff (ILoveCapitalism)

As noted today on Zero Hedge and The Telegraph, ISIS has released some details of its plans for a gold-backed currency:

#Iraq | #ISIS says the new currency will take the group out of “the oppressors money system” pic.twitter.com/4S4GcM86Jk

— Zaid Benjamin (@zaidbenjamin) November 13, 2014

What does this mean? As I’ve tried to explain before, the U.S. dollar has been the center of world trade and finance since the end of WW2. Oil, among other things, has been traded in dollars. So other countries need dollars (e.g., before they can buy oil). When they invest in bonds, they also like U.S. Treasury bonds.

All that has let the U.S. get away with running large deficits (both trade deficit and fiscal deficit). Other countries send us real goods in exchange for our paper (or electronic) dollars and Treasury bonds. That is why Walmart and Target have been able to supply cheap goods to Americans, all these years.

ISIS is saying, forget that! ISIS will exclude the dollar from its own financial system, and probably from its dealings with other countries. Remember, if these guys are successful, they will sell (or control) a lot of oil. If successful, they will be wealthy and important. Now they’re saying that their financial system will be founded on precious metals – i.e., NOT on the U.S. dollar or the U.S. Treasury bond. I feel certain that, if they aren’t doing so already, ISIS will also be trading oil only in non-U.S. currencies like the Euro or yen, and/or in gold.

If ISIS succeeds as a country, then, it’s another step in the world’s process of “de-dollarization”, or removing the U.S. dollar as the centerpiece of the world system. Although it is arguably an understandable and well-justified act, it is not a friendly act: ISIS is taking aim at (what they perceive to be) the heart of U.S. prosperity and power in the world.

I expect that the alarm bells in Washington are ringing a bit louder. At a minimum, look for President Obama to escalate his rhetoric against ISIS, with bipartisan support. (Which will mean, in the Democrats’ case, going against their own anti-U.S. / pro-Islam instincts; but they will.)

Filed Under: Economy, Iraq, National Security Tagged With: dollar, Economy, gold, Iraq, isis, National Security, oil

Do the Swiss get it?

November 11, 2014 by Jeff (ILoveCapitalism)

We’ll find out on Nov 30th, when the Swiss are set to vote on a citizens’ initiative that will require their central bank to hold 20% of its reserve assets in gold.

As recently as the year 2000, the Swiss National Bank was required by law to hold 40% of its assets in gold. That made the Swiss franc a relatively hard/safe currency. But Swiss voters removed that requirement in a 1999 referendum. Oops.

The SNB soon undertook an orgy of gold-selling, as well as money-printing (keeping the franc pegged to 0.83 Euro). Today, the SNB holds maybe 7-8% of its reserve assets in gold. The new referendum would require the SNB to take it back up to 20% over the next five years. [Read more…]

Filed Under: Economy, Politics abroad Tagged With: Economy, gold, paypal, Politics abroad, swiss gold referendum, switzerland

Alan Greenspan on gold…in 2014

September 30, 2014 by Jeff (ILoveCapitalism)

It’s well-known that the former Federal Reserve chair, Alan Greenspan (KBE, Knight Commander of the British Empire), was a gold-standard advocate in the 1960s. And thereafter muffled his principles, as he rose to become the unofficial king of the world’s banking establishment.

In Greenspan’s multi-decade tenure at the Fed (and, going against his former sound-money principles), he gave us the “bubble economy” we know and love. Including the dot-com bubble of the late 90s and the housing bubble of the mid-Naughties. His intellectual heirs, Ben Bernanke and Janet Yellen, have given us the market bubbles of today.

So his short, new article in Foreign Affairs caught my eye. It promises to explain “Why Beijing is Buying [Gold].” Of course it doesn’t explain any such thing. Its point wanders. Why Greenspan even wrote it is a mystery.

And yet, he did write it. In other words, Alan Greenspan, KBE, felt the need to publicly raise the topic of China buying gold, in Foreign Affairs magazine. And check out his side remarks:

If China were to convert a relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system…For the rest of the world, gold prices would certainly rise…

For more than two millennia, gold has had virtually unquestioned acceptance as payment…Today, the acceptance of fiat money — currency not backed by an asset of intrinsic value — rests on the credit guarantee of sovereign nations…a guarantee that in crisis conditions has not always matched the universal acceptability of gold.

If the dollar or any other fiat currency were universally acceptable at all times, central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute…

In essence, the world’s former top banker has just publicly hinted that:

  • Gold is money.
  • China will start buying it.
  • China will become the world’s new financial powerhouse.

Filed Under: Debt Crisis, Economy Tagged With: alan greenspan, Debt Crisis, Economy, fed, federal reserve bank, gold

Today’s history lesson: Eighty years ago…

June 22, 2013 by Jeff (ILoveCapitalism)

Via The Circle Bastiat. Franklin D. Roosevelt, greedy to increase his power over Americans’ economic lives, confiscated their gold bullion & currency. People who wanted to keep their own money (because gold and gold-backed notes had circulated as U.S. money, until then) were labeled “slackers” and “hoarders”, then prosecuted:

New York Times, 6/12/1933, on gold 'hoarders'
You can see a clearer, larger image of the article here. Those who cooperated received, for the most part, only partial compensation (paper dollars which Roosevelt then devalued, the next year).

Such a confiscation would have been unthinkable to America’s Founders. They revolted against King George III for less. Are property confiscations part of America’s future under Obama? Time will tell.

After establishing the Constitution, the Founders fixed the U.S. dollar as being just under 1/20 oz. of gold, because paper-money experiments during the Revolutionary war had taught them that sound money was a crucial element of a sound, free and prosperous society. That 1/20 oz. value guided the American economy for roughly 140 years, through the greatest net economic expansion in human history.

Beginning with Roosevelt (who, again, confiscated the gold dollars, then devalued the paper ones from an official gold value of 1/20 oz. to around 1/35 oz.), the dollar’s value has dwindled, as the government taxes us all covertly by printing more and more money.

Americans regained the right to own gold bullion in 1974, but the dollar has remained mere paper. On average (or with some ups and downs), its value continues to dwindle. The dollar’s market value in gold was roughly 1/250 oz. when Bush 43 took office, 1/800 oz. when Obama took office, and is near 1/1300 oz. today.

I believe that further depreciation is to come.

Filed Under: Big Government Follies, Debt Crisis, Depression 2.0 Tagged With: Debt Crisis, depression 2.0, fdr, gold, roosevelt gold confiscation, u.s. economic history

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