FOFOA: Reference Point Revolution!

Reference Point Revolution!

Friday, March 25, 2011

I read a great article from Imprimis, the free publication put out by Hillsdale College in Michigan, titled The Floating Dollar as a Threat to Property Rights. [1] The article started out with the curious case of the incredible shrinking kilo (a problem normally faced only by drug lords that employ users as traffickers). Apparently this one particular metallic cylinder securely housed at the International Bureau of Weights and Measures near Paris, France, is the “reference kilo” for not only the global metric system, but even the U.S. customary system in which 2.2 pounds equals this particular kilo.

The problem is, it’s shrinking! So far it has only shrunk by 50 micrograms, about the weight of a fingerprint on Earth. [2] But even so, this is a big problem for scientists that deal in exacting calculations that require global standardization. The problem boils down to the definition of a kilogram. The global standard definition of a kilo is this particular cylinder! It was cast in platinum and iridium by Johnson Matthey in 1879, adopted by the first general conference for weights and measures in 1889, and has been the global reference point for the measurements of mass ever since. But some scientists are now complaining that with the exacting tolerances of today’s high-tech world, the 21st century kilo needs a new definition. Modern science needs a better reference point for mass. [3]

This got me thinking about reference points, and how they have all—in every single case; temperature, distance, force, pressure, time, etc.—changed and evolved their definitions throughout history to best fit the cutting-edge needs of the time. [4] This is a trend that always faces the opposing forces of inertia—the resistance to change—and progress—the need for change.

Another obvious trend in the evolution of reference points, when viewed in a long-line historical context, is the expansion from local to national to regional and finally to global standardization. This trend, especially, faces the opposition of inertia as national reference points have become part of the national identity of their people. The remnants can be seen everywhere. For temperature we have Fahrenheit and Celsius. For mass we have avoirdupois ounces, troy ounces and metric grams. The world is littered with national currencies. And even foreign languages are a good example of our innate resistance to global standardization.

This trend toward global reference points is a practical—not a moral—evolution. It will continue whether we like it or not. It is an artifact of the human Superorganism. [5] What ends up happening most times is that nations will keep their old reference point for identity purposes, but they will either adopt the best external reference point as a secondary standard or they will affix (peg) to the definition of the most widely used reference point, also known as the focal point. [6] We see this in almost everything. English has become the global standard among many foreign languages. The Imperial pound is pegged to the metric kilogram, as noted above. And prior to 1971, the world’s major national currencies were all pegged to gold through the U.S. dollar, another national currency.

The main point here is that while our symbols of national (or regional) identity will always be with us, the unfolding of future “new and improved” reference points will always be global in scope. Just as time moves in only one direction, it can be no other way. In other words, new global standards will be layered on top of quaint and sentimental artifacts of the past. [7]

But let me be clear about one thing before I move on. It is not sufficient to simply move forward without knowledge of and respect for the path that brought us to the present, which is what “the easy money camp” likes to do. Nor is it advisable to run forward while looking backward, expecting the past to reveal what may be directly in front of us, as we so often see in “the hard money camp.” [8] To properly prepare for the future, we must know the past—know the Trail that we are on—while not looking backward to find objects that lie ahead.

And now, onward…

The point of the Imprimis article was that the U.S. dollar, not unlike the kilogram—being an important reference point for value especially in the United States—has gone through a number of definitions punctuated by abrupt, often painful, degradations. In the beginning the U.S. dollar was defined as 371¼ grains of silver, with the U.S. adopting the Spanish dollar’s definition because of its widespread use as a reference point for value. Later the dollar was redefined as 1/20th of a troy ounce of gold, and then degraded to 1/35th. Then in 1971 the de facto definition of a dollar was removed and the U.S. dollar began to “float” (or more appropriately, “sink”) as a reference point.

Throughout the various definitions above, the dollar was gradually adopted by other nations until it became the de facto global reference point for value. Or so we in America and the West think. In fact, gold was always the global reference point and the U.S. dollar’s definition—a definition that was defended at the U.S. Treasury gold window by spewing gold—became a means to the acquisition of the value reference point itself. If the dollar had been that global reference point, the world would have been happy merely accumulating dollars, and Nixon would have never had to close the gold window.

It turns out that the dollar was always a poor reference point for value because its definition could simply be changed or removed altogether for political expedience, over and over, again and again. Yet some in the U.S., some with a patriotic yet myopic perspective, think that all we need to do is redefine the dollar so that it can once again become the global benchmark of value. Something it never was in the first place. And something it never will be. (All the dollar ever did was adopt the reputation of an external reference point and then fail to live up to it. Over and over, again and again.)

Long in the past, before telephones and air travel, before computers and the Internet, local and national reference points were far more important and relevant than what was happening on the other side of the planet. But today, and moving forward, it matters more how the many national currencies will relate to each other, how they will exchange, on what reference point their exchange will be judged, than what any individual locality or nation does to change or manipulate its own currency. As I wrote above, the trend toward global reference points is a practical—not a moral—evolution. It will continue whether we like it or not. It is an artifact of the human Superorganism.

And this got me thinking about the concept of Purchasing Power Parity, or PPP. With the advent of global air travel, I can take $10,000 out of my bank in the morning, get on a plane, and get off in another country in the evening, exchanging my $10,000 at the airport for the local currency. This little exchange should not cost me anything in purchasing power, it should essentially be free, or else I wouldn’t do it. Or perhaps if I actually gained purchasing power by flying somewhere, I would do it more often! But the fact of the matter is that while the PPP concept works in principle, it doesn’t always work in practice. Especially given a variety of purchasing choices in the marketplace, some of which are more native to one country than another.

The question comes down to the overvaluation or undervaluation of various economic currencies. The way ants—and by ants I mean economists (see footnote #5)—try to deal with this question is by using “baskets” of goods or currencies. But the problem with baskets is that i) they present too many moving parts, and ii) they present the option (temptation) for political manipulation (e.g. CPI “basket” and SDR “basket of currencies”). And for these two (obvious?) reasons, baskets make poor reference points for value.

Just yesterday, Professor Michael Pettis wrote in Is Loan Growth in China Slowing?:

“… a few years ago people suggested that the RMB might be undervalued by 30%. Since then the RMB has appreciated by 20-25%. And yet today people are still arguing that the RMB may be undervalued by 30%. How is it possible that so much appreciation has not seemed to affect the estimates of undervaluation?

“Before answering it is worth pointing out that there is no way that anyone can determine precisely the amount of undervaluation of the RMB, or any other currency, and so any estimate can be nothing more than that – an estimate based on many moving parts. There are plausible reasons for arguing that a currency is undervalued or overvalued, but there is absolutely no way to determine with any precision by how much.

“This difficulty is compounded by the fact that many analysts are simply getting the math wrong. So for example when people say the RMB is undervalued by 30%, they often mean that the dollar is overvalued by 30%. These two claims may sound like the same, but of course they aren’t. If the RMB is undervalued by 30%, it means that the dollar is overvalued by 43%, not 30%. I have seen so much confusion on this issue that I pretty much give up on trying to understand what people mean when they discuss currency changes without seeing their actual numbers.”

That’s right! We need a single moving part! And by we, I mean not just the ants, but the colony, the Superorganism. The human Superorganism desires to streamline the concept of PPP as much as possible, for its own benefit. And the way that is done is by using a single global reference point. But as I wrote in Life in the Ant Farm, we individuals are not nearly as smart as the Superorganism. Case in point—Reference Point: Big Mac!

At any given point in time every currency has a certain purchasing power inside its own legal tender zone, and then it has a different purchasing power outside the zone. The Economist magazine has been publishing the Big Mac Index every year since 1986. The index is a humorous way of looking at the purchasing power parities of various currencies using the McDonald’s Big Mac as the Reference Point.

Other variants of this index have used as the Reference Point, the Apple iPod, a cup of Starbucks coffee, and even Ikea’s Billy Bookshelf. The Economist describes its original, ground-breaking index thusly:

The Big Mac index is based upon the theory of purchasing-power parity (PPP), the notion that a dollar should buy the same amount in all countries. Supporters of PPP argue that in the long run, the exchange rate between two currencies should move towards the rate that would equalise the prices of an identical basket of goods and services in each country.

Our “basket” is a McDonald’s Big Mac, produced in 110 countries. The Big Mac PPP is the exchange rate that would leave hamburgers costing the same in America as abroad. Comparing actual rates with PPPs signals whether a currency is under-or overvalued.

Two of the Economist’s findings for 2010 were that the most expensive place to buy a Big Mac (with U.S. dollars) was in Norway, where it cost US$7.20 (on 7/21/10 after exchanging your dollars into the local Kroner currency), and the cheapest was in the Ukraine at US$1.84. Interpreting this data is where it gets a little tricky.

Click on images to enlarge

Depending on your cognitive agility, there are any number of mental contortions that you can do with this data while extracting whatever value may be hiding in it. For example, you can imagine that Big Macs are a currency and the local currencies are the object of desire. Or that U.S. dollars purchased with Big Macs transported to foreign countries are the goal. You can pretend that Big Macs have the properties of gold, like durability, divisibility and portability, and imagine the arbitrage opportunity based on these charts, and how that arbitrage would affect the currency exchange.

In fact, there is a bit of real value that can be extracted from this little exercise that I’ll get to in a moment. But first, the clearest lesson is that Big Macs make a poor global reference point for value for many obvious reasons.

What makes something a reference point is that everything else in its category is measured against it. Like the cylinder at the top of the page, all mass everywhere is ultimately measured against this one cylinder. For the category of value, the value of anything anywhere would be measured against the value of the reference point. And in the case of value, this reference point should be a thing that can be owned and valued by anyone anywhere, so that it acts properly as a baseline reference point for the value of everything else. It should also, ideally, provide the same utility to anyone anywhere.

The point is that it can’t be something that is only found in Asia, or something that is only made in the US. And it can’t be a product like a Big Mac that would not be valuable to vegetarians or food snobs. It needs to be something that has the same utility to everyone, that utility being that it is only something valuable to buy and store so that later you can redeem that value in some other way. A reference point can be used in its unit of account function even without the presence of the physical item. But the focal point item for a value reference point needs to be something that CAN actually be gotten and used exactly the same by anyone anywhere.

And as we continue on this train of thought, it becomes clear that the ideal reference point for value is, in fact, the single focal point reserve asset chosen by the human Superorganism. It also becomes clear that today the U.S. dollar is filling this role, somewhat haphazardly, and also under the opposing forces of inertia—the resistance to change—and progress—the need for change. It could be said that we in the West are providing the inertia while the rest of the world is pushing for change. At least that’s what I see happening.

Clearly, we in the West still measure the value of anything anywhere against the dollar. Think about it for a second. Can you tell me the value of a condo in Hong Kong? How about the value of a night in a five-star Singapore hotel? And what’s the value of a 50′ yacht in Dubai? You’d likely quote me all three in dollars, especially if you are a Westerner. As FOA pointed out, we assess the relative values of any two things—like an apple versus a banana—by mentally converting them into dollars.

And while our Western minds have been trained to use the dollar quite efficiently in this way, there are a few technical problems with the dollar being the reference point of value. Not unlike the kilo cylinder at the top which is causing problems for some scientists, the dollar, too, is shrinking.

The main problem, which the Imprimis article points to, is that the dollar is no longer defined as anything other than how the market decides to value it on any given day. This could be called a floating definition. So the article proposes that the needed fix is to redefine the dollar. Perhaps we could redefine the dollar to be equal to one Big Mac! The U.S. Treasury could then buy all McDonald’s restaurants everywhere and defend the dollar by globally spewing Big Macs for a buck. Can you think of any problems with this plan?

Okay, let’s imagine they redefined the dollar to be 1/5,000th of an ounce of gold. Can you think of any problems with this? I can. What will be the definition of gold? Does this sound like a silly question? Well, today “gold” is trading at around $1,435 per ounce, and this price is discovered through the dynamics of supply and demand in a market that includes claim checks on unallocated pools of gold, shares of funds that are physically non-divisible below 10,000 ounces, and promises of future delivery of gold from a variety of sources including mines (gold that is still underground), hedgefunds (gold that will have to be sourced if demanded) and banks (gold which is fractionally reserved). These markets all trade (fluctuate) in dollars. If the dollar is suddenly defined as a piece of gold, what will happen to these markets?

Maybe they should just define the dollar as 1/500th of a share of GLD! Then the U.S. Treasury could defend the definition by spewing GLD shares! Or they could define the dollar as 1/500,000th of a COMEX contract! Or better yet, they should just define the dollar as 1/5,000th of a Bullion Bank liability for an ounce of gold. The Treasury could partner with JP Morgan and defend the definition by spewing liabilities!

What we have here is not a problem with the definition of the dollar, the quaint and sentimental reference point artifact of the past. What we have is a problem with the definition of gold, the 21st century (and all others too) reference point of value!

I said earlier that there was a bit of real value to be discovered by thinking about the Big Mac index. And that discovery is that a Big Mac hamburger actually has one characteristic or property that makes it a better reference point for value than either the dollar or even the modern definition of “gold.” That property is physicality! Big Macs only come in one variety, a discrete, physical hamburger. There are no Big Mac futures or forward sales, no unallocated Big Mac pool accounts, and the only way to deliver a Big Mac is to either make it on the spot or physically transport it to where it is demanded. Can you imagine if they handed you a BB (Big Mac Bank) liability at the drive-thru window?

I wrote above, “pretend that Big Macs have the properties of gold, like durability, divisibility and portability, and imagine the arbitrage opportunity based on these charts, and how that arbitrage would affect the currency exchange.” Such an arbitrage would ultimately flatten that first chart, making a Big Mac cost the same number of dollars in any country you traveled to. In fact, gold (under its modern definition) acts just this way.

The definition of “gold” today, at least in financial circles, is completely messed up. Why do you think I have to constantly say physical gold? And not only that, I continuously have to define what I mean by physical whenever I say it! It’s ridiculous. Ask any fund’s manager how much they have in gold. He’ll likely quote you a number around 5-10% that includes mining stocks, paper promises and a host of other precious metal stocks. Ask him about physical gold bullion, specifically, and he’ll quote you a much lower percentage that likely includes only PHYS and GLD. Those are the financial definitions of “gold” and “physical gold” today.

The problem is that the arbitrage that makes PPP work with gold today is too easily and asymmetrically achieved, which ends up favoring some currencies over others. What I mean is that hamburgers are actually a “harder currency” today (harder=more difficult) than “gold” under the common Western understanding of “gold investments.” [9] Like I said, to be delivered Big Macs must either be produced on the spot or physically delivered from another place. Gold, on the other hand, can be sold into demand with the click of a mouse that creates a new liability on the balance sheet of JP Morgan or one of the other Bullion Banks. This is asymmetric in that most Bullion Bank gold liabilities originate from London and New York, and it is a definitional problem that makes it impossible for the term “gold” to be used to define anything else, like the dollar.

So before we can even consider the definition of the dollar, we must first solve the problem with the definition of “gold.” And once solved, we may find the question of redefining the dollar to be a moot point. But whether you believe me or not about it becoming moot, we must still face first things first.

In order for a thing to perform as a reference point for value, when market demand for that thing rises it must be met with the difficulty of the physical, not satiated with the ease of promises. This is the main reason currency makes a poor reference point for value. When demand for currency rises it is hoarded which slows the economy. Value is the output of the economy. It is the opposite of currency. When the demand for currency is collapsing, the demand for value is rising, and vice versa.

This is why Central Banks came into being in the first place; to make sure that rising currency demand does not hurt the economy. This is why the BOJ injected trillions of yen after the earthquake; to protect vital economic activity from the spiking demand for currency.

I know this is a difficult concept to swallow, but value and currency are polar opposites, which is why, if gold is the reference point for value—which it is—it cannot function properly and also be an economic currency—or tied at a fixed parity (price) to currency in any way! To view an economic currency built to function properly alongside the reference point gold, look no further than the architecture of the euro. [10] This is why the first ECB President stated clearly and publicly that the euro “is the first currency that has… severed its link to gold.” [11]

I want to mention one more very significant advantage to physical gold being the global reference point for value. In another recent article by Michael Pettis, who I mentioned earlier, titled The dollar, the RMB and the euro?, talking about the struggles ahead for the RMB, he writes:

“Although China will struggle to bring its current account surplus down, there are only two ways it can do so (remember that the current account surplus is equal to savings less investment).”

The two ways he lists are 1) increase internal investment, a non-starter in China right now, or 2) get the people to spend their money (consume) rather than saving it—decrease savings. It’s a shame that he can’t see that China is already doing this by encouraging its people to buy the physical reference point of value itself. By buying physical gold, Chinese savings don’t raise the current account surplus, they LOWER it. It’s still very real savings, but it acts like consumption on the balance Pettis describes. More correctly, his “accounting identity” should read, “current account surplus is equal to non-gold monetary savings less investment.” Or stated another way, “paper savings = production – consumption (including physical gold purchases).” And surprise-surprise, China is apparently already ahead of the game.

By encouraging savings in gold, this raises demand for gold inside China and uses up some of the dollars that would have otherwise been recycled back to be borrowed and spent by the US Treasury. In other words, every ounce of gold that flows into China today represents $1,430 that Bernanke will have to print via QE rather than borrowing from China.

What it means

What this Reference Point Revolution (RPG/Freegold) means for Western savers like you and me is that at some time this year or next (see footnote #7) perceptions of value will likely be shattered: “like a mirror in pieces on the floor, revealing another mirror standing right behind it, providing another perspective… the perspective will be of necessity, a rude awakening, so to speak… so much value is just perception only, not reality, and that perceived value will go up in flames, to reveal this perspective from which more accurate valuation will spring… the mass of acting humans (aka economy) will better understand money and savings, intuitively, through this perspective… gold will no longer be talked about, treated, and therefore viewed as a commodity, it will cross over to the other side of the fence… most won’t care to really understand in any detail, they will just know that it is reality and will approve of its prospects… The value of gold will change as people’s perception of its utility to them changes.” [12]

“Can you imagine a gold price of AT LEAST $100,000 per ounce? How about a real purchasing power increase, measured in today’s dollar purchasing power, to somewhere between $10,000 and $100,000? In the bell curve below we can see that the most probable PP landing zone is between $25,000 per troy ounce and $85,000 per troy ounce. Can you think of a better reason to invest in physical gold coins right now? How about protection from hyperinflation? $100,000 is the bare minimum in this case. The top is infinite! Imagine $12 trillion per troy ounce… the size of today’s US national debt reduced to one single gold coin you could buy tomorrow! Can you imagine it? It doesn’t really matter if you can’t see it like I do, as long as you buy the coin. As JFK liked to say, ‘a rising tide lifts all boats’, not just the ones that believe in rising tides.” [13]

“So how much of your perceived wealth have you locked into a real, solid, “good as gold” wealth reserve? I shouldn’t have to say this because it is so obvious, but it is clearly better to “cash out” of the paper game and “lock in” your profits BEFORE the two biggest bubbles in history pop. That way you beat the rush, so to speak.” [14]

The demand necessary to perpetually sustain a revaluation of gold at, say, $55,000 per ounce is already present in the gold market. One only has to understand why Giants—people with enough money to actually move the price of gold—do not find it in their best interest to use their money to move the price of gold. “Gold is neither expensive nor cheap today. It is theoretically free. It is a monetary conversion, like buying a Treasury or a money market fund. To the Giants, do you think gold is a game of “how big is my slice of the pie?” Or is it “how much is my slice of the pie worth?” Is it better to have a 15% slice of a commodity pie, or a .4% slice of the global wealth pie? Is it more likely that all the gold in the world combined, when used as a wealth reserve, will be worth a large percentage of everything? Or that it is worth only 30% of the known oil reserves?” [15]

“But right now, for perhaps the first time in history, individuals can join central bankers and the true Giants of the world by participating in the ultimate hedge fund. One that, like modern hedge funds, focuses on the hedge itself as the key investment with the most leverage, with the expectation of life-changing returns. And the main differences between this and traditional hedge funds are 1) much less risk, and 2) it is open to ALL individuals, including you!” [16]

“Freegold is our destination with or without the euro. Even on the outside chance that an SDR or a similar super-sovereign currency is accepted as the new global reserve currency, it would have to contain gold at Freegold valuations in order to be viable, accepted and trusted, in the same vein as Randy’s comment about an EMF. So any way you cut it, the future comes to us with really high value gold by today’s standards.” [17]

“Anyway, this is what Freegold is all about. It is about deducing the inevitable implications of an unstoppable avalanche. And it is about fiat currency finally finding its natural equilibrium with a parallel physical gold wealth reserve. And trust me, fractional paper gold promises won’t work in this new world, so equilibrium will likely be somewhere north of $50,000 per ounce (and that’s from just the functional change, don’t even ask me about the inflation-adjusted price).” [18]

“Take it for whatever it’s worth, which, of course, only you can decide for yourself. The $IMFS is failing. Please don’t let the fears, envy or baseless doubts of others obscure this reality. You can choose to participate in the recapitalization of world finance or you can be a victim of it when the lights go out. The choice is right in front of you. So decide what you’d rather be: a participant in the rebuild, or a victim of the collapse. Amazingly you still have this choice available as I type these words.” [19]

“As ANOTHER and FOA taught us, a time of systemic transition is completely wrong for trading on technicals. Instead, it is the PERFECT time to consolidate on fundamentals, then sit back and wait. The reward, as ANOTHER put it, will be enough for one’s lifetime. And what is gold? Oh yeah, it’s the ultimate wealth consolidator.” [20]

And now, for all you FOFOA noobs, I will close, as I so often do, with another mind-blowing excerpt from FOA’s Gold Trail. [21]

My friends and I are Physical Gold Advocates. We own physical outright and do so employing the same reasoning mankind used in owning gold throughout most of history. However, there is a major difference between our perceptions of this historic reasoning and the current Western perceptions so many of you are attuned to. Our’s is not a mission to unseat the current academic culture concerning money teachings; rather it is to present the historic and present day views of the majority of gold owners around the world. Those of simple thought and not of Western education. Plain people that, in bits and pieces, own and use the majority of above ground gold.

Most contemporary Western thought is centered around gold being money. That is; gold inherently has a money use or money function; built into it as part of the original creation. This thought presents a picture of ancient man grasping a nugget of gold, found on the ground, and understanding immediately that this is a defined “medium of exchange”; money to buy something with. This simple picture and analysis mostly grew in concept during the banking renaissance of the middle ages and is used to bastardize the gold story to this day. Even the term “money”, as it is used in modern Bible interpretations, is convoluted to fit our current understandings.

Much in the same way we watch social understandings of music, literature, culture and dress evolve to fit current lifestyles, so too did gold have a money concept applied to it as it underwent its own evolution in the minds of political men. This is indeed the long running, background story of our Gold Trail; an evolution, not of gold itself, but of our own perceptions of this wealth of ages. A evolving message of gold that is destined to change world commerce as it has never changed before.

Onward my friends

In ancient times there was no concept of money as we know it today. Let me emphasize; “as we perceive money today”. Back then, anywhere and everywhere, all things known to people were in physical form. All trade and commerce was physical and direct; barter was how all trade was done.

If one brought a cart to market, loaded with 20 bowls and 20 gold nuggets, he used those physical items to trade for other valued goods. The bowls and gold had different tradable value; as did every other thing at the market. Indeed, gold brought more in trade than bowls. Also true; if a barrel of olive oil was in short supply, it might bring even more in trade than all the gold in the market square.

The understanding we reach for here is that nothing at the market place was seen as a defined money value. All goods were seen simply as tradable, barterable items. Gold included. Truly, in time, some items found favor for their unique divisible value, greater worth and ease of transport. Gems, gold, silver and copper among others, all fit this description. These items especially, and more so gold, became the most tradable, barterable goods and began to exclusively fill that function.

But the main question is: was there money in that market place? Sure, but it was not in physical form. Money, back then and today, was a remembered value in the minds of men. Cumbersome it may have been, but even back then primitive man had an awesome brain and could retain the memory values of thousands of trades. In every case, able to recall the approximate per item value of each thing traded. That value, on the brain, was the money concept we use today.

Eventually gold climbed to the top of in the most tradable good category. Was gold a medium of exchange? Yes, but to their own degree, so were the bowls. Was gold a store of value? Yes, but to a degree, so were dinner plates. Was gold divisible into equal lesser parts to define lesser barter units? Yes, but to a degree one could make and trade smaller drinking cups and lesser vessels of oil. Perhaps gold became the most favored tradable good because the shear number of goods for good traded made a better imprint on ones memory; the worth of a chunk of gold in trade became the value money unit stored in the brain.

Seeing all of this in our modern basic applications of “money concept”, almost every physical item that naturally existed or was produced then also held, to a lesser degree, gold’s value in market barter. But most of us would have a hard time remembering a bowls value and thinking of a bowl as money. The reason this is such a stretch for the modern imagination is because bowls, like physical gold, never contained or were used in our “concept of money”. Back then, as also today, all physical items are simple barterable, tradable goods; not of the money concept itself. Their remembered tradable value was the money.

Money, or better said “the money concept”, and all physical goods occupy two distinct positions in our universe of commerce and trade. They have an arms length relationship with each other, but reside on different sides of the fence and in different portions of the brain.

For example: say I take a bowl to the mint and place an official government money stamp on the underside. The bowl now is stamped at $1.00. Then I take one tiny piece of gold to the mint; one 290th of an ounce or at today’s market a dollar’s worth. They stamp that gold as $1.00. Which physical item would be money? Answer; neither.

Using ancient historic reasoning and the logic of a simple life; the bowl could be taken to the market square and bartered for another good. Perhaps a dinner plate. In that barter trade, we would most likely reach an understanding; that the “bowl for plate trade” imprinted our memory with what a digital, numeric dollar concept is worth. Again, the 1.00 unit was only stamped on the bottom for reference. While the dollar concept is only a rateable unit number to compare value to; like saying a painting is rated from one to ten when judging appearance.

We could do the exact same thing without 1/ 290th ounce piece of gold as with the bowl above. In the process we again would walk away with the knowledge of what a $1.00 unit of money value was worth in trade. The physical gold itself was not the money in trade; the value of the barter itself created the actual money value relationship. Again, the most important aspect for us to grasp here is this:

—– The use of physical gold in trade is not the use of money in trade. We do not spend or trade a money unit, like the dollar, to define the value of gold and goods: we barter both goods and gold to define the worth of that trade as a remembered association to the dollar money unit. That remembered worth, that value, is not an actual physical thing. A dollar bill nor an ounce of legal tender gold represent money in physical form. Money is a remembered value relationship we assign to any usable money unit. The worth of a money unit is an endless mental computation of countless barter trades done around the world. Money is a remembered value, a concept, that we use to judge physical trading value. —–


Naturally, for gold to advance as the leading tradable good it had to have a numerical unit for us to associate tradable value with. We needed a unit function to store our mental money value in. In much the same way we use a simple paper dollar today to represent a remembered value only. Dollars have no value at all except for our associating remembered trading value with them. A barrel of oil is worth $22.00, not because the twenty two bills have value equal to that barrel of oil: rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 22 units. Money is an associated value in our heads. It’s not a physical item.

The first numerical money was not paper. Nor was it gold or silver; it was a relation of tradable value to weight. A one ounce unit that we could associate the trading value to. It was in the middle ages that bankers first started thinking that gold itself was a “fixed” money unit. Just because its weight was fixed.

In reality, a one ounce weight of gold was remembered as tradable for thousands of different value items at the market place. The barter value of gold nor the gold itself was our money, it was the tradable value of a weight unit of gold that we could associate with that barter value. We do the very same thing today with our paper money; how many dollar prices can you remember when you think a minute?

This political process of fixing money value with the singular weight of gold locked gold into a never ending money vs gold value battle that has ruined more economies, governments and societies than anything. This is where the very first “Hard Money Socialist” began. Truly, to this day they think their ideas are the saving grace of the money world. It isn’t now and never was then.

When investors today speak of using gold coin as their money during a full blown banking breakdown, what are they really speaking of?

In essence, they would be bartering and trading real goods for real goods. The mention of spending gold money is a complete misconception in Western minds. Many would bring their memories of past buying with them and that is where the trading values would begin. Still, it would take millions of trades before the “market place” could associate a real trading value to the various weight units of gold. It took mankind hundreds of years to balance the circulation of gold against its barterable value. Only then could a unit weight value become a known money concept. In that process, in ancient times, gold had a far higher “lifestyle” value than it has seen in a thousand years. This value, in the hands of private owners, is where gold is going next.

If you are following closely, now, we can begin to see how easy it is for the concepts of modern money to convolute our value and understanding of gold. It is here that the thought of a free market in physical was formed. Using the relationship of a free physical market in gold, we will be able to relate gold values to millions to goods and services that are currency traded the world over. Instead of having governments control gold’s value to gauge currency creation; world opinion will be free to associate the values of barter gold against barter currency. In this will be born a free money concept in the minds of men and governments. A better knowledge and understanding of the value of all things.
FOA (2001)


[1] Hillsdale College is a small liberal arts college with a student body of about 1,300. It does not accept federal or state taxpayer subsidies for any of its operations. Imprimis is dedicated to promoting civil and religious liberty by covering cultural, economic, political and educational issues of enduring significance. The content is drawn from speeches delivered at Hillsdale College events. Imprimis is one of the most widely circulated opinion publications in the nation with over 1.9 million subscribers. That’s a lot of readers for this type of monetary article. And this article was the only content in the Feb. edition.
[2] A kilogram is a scientific measure of mass, not weight, because weight is not universal while mass is. An ounce of gold on the moon, for example, would only weigh as much as 5 grams on Earth.
[3] One of the leading alternatives for a 21st-century kilogram is a sphere made out of a Silicon-28 isotope crystal, which would involve a single type of atom and have a fixed mass. Another is to link the kilogram to a fundamental unit of measurement in quantum physics, the Planck constant. This redefinition would bring the kilogram into line with the six other base units that make up the International System of Units (SI) – the metre, the second, the ampere, the kelvin, the mole and the candela. None of these are now based on a physical reference object – the metre is defined in terms of the speed of light, for example, while the second is based on atomic clocks.
[4] An appropriate example is that before the metallic cylinder, a gram was defined as “the absolute weight of a volume of pure water equal to the cube of the hundredth part of a metre, and at the temperature of melting ice.”
[5] For an explanation of the term Superorganism, please see my post Life in the Ant Farm.
[6] For an explanation of the term Focal Point, please see my post Focal Point: Gold.
[7] Punctuated Equilibrium is a good description of how monetary evolution proceeds. Here’s an example of what I mean. Notice the regularity of the cycle. Your homework assignment is to uncover what the dates represent in the monetary evolutionary cycle:

1893-1897 **Punctuation**
1930-1934 **Punctuation**
1968-1971 **Punctuation**
2008-____ **Punctuation**

From the cyclical pattern above, it seems to me like ____ should be either 2011 or 2012. What do you think? Should we ask Marty?

For an explanation of the term Punctuated Equilibrium, please see my post Evolution.
[8] For an explanation of the terms “hard and easy money camps,” please see my post The Debtors and the Savers.
[9] “When we talk about gold money we often use the term “hard money.” And one misconception that pops into most people’s mind is that “hard” money means hard like a rock, or hard like a piece of metal versus “soft” like a piece of paper that folds nicely into my wallet. Or the ultimate soft, a digital electron that moves at the speed of light.

“This may not seem like a big deal, but I think it is. What is actually meant by “hard” money is that it is difficult, or hard to get. The opposite of hard being easy, not soft. Hard money cannot be expanded easily (without risk) because it has an anchor in the physical world.”
From Just Another Hyperinflation Post – Part 2
[10] For more on the euro’s architecture, please see my post Reference Point: Gold – Update #1
[11] The full line was, “It is the first currency that has not only severed its link to gold, but also its link to the nation-state.” See Acceptance speech by Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9 May 2002
[12] Quoted from Julian’s excellent comment.
[13] From Gold is Wealth
[14] From Gold: The Ultimate Un-Bubble
[15] From Gold: The Ultimate Wealth Reserve
[16] From Gold: The Ultimate Hedge Fund
[17] From Synthesis
[18] From Equilibrium
[19] From How Can We Possibly Calculate the Future Value of Gold?
[20] From Gold: The Ultimate Wealth Consolidator
[21] Please see the top of the blog for to whom it is a tribute.

From 44:50 to 47:00 Robert Zoellick discusses his RPG comment. The video will automatically start at 44:50.

Posted by FOFOA at 6:23 PM

This entry was posted in FOFOA. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s